1
As filed with the Securities and Exchange Commission on April 16, 1998
Registration No. 333-44723
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-----------------------
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
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D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(Name and complete address of agent for service)
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Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration Statement.
TITLE OF SECURITIES BEING REGISTERED:
Last survivor flexible premium adjustable benefit variable
life insurance policies.
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 the
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), may determine.
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2
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
THE NATIONAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------
1 Cover Page
2 Cover Page
3 Not applicable
4 Distribution of Policies
5 The Separate Account
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Matters
10 Summary Description of the Policy; Payment and Allocation of Premiums; Policy Rights; Other Policy
Provisions; Changes in Applicable Law, Funding or Otherwise; Voting Rights
11 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II;
American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust;
J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc.
and Strong Opportunity Fund II, Inc.; Van Eck Worldwide Insurance Trust
12 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II;
American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust;
J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc.
and Strong Opportunity Fund II, Inc.; American Century Investment Management, Inc.; Neuberger & Berman
Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust;
13 Charges and Deductions
14 Payment and Allocation of Premiums
15 Payment and Allocation of Premiums
16 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II;
American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust;
J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc.
and Strong Opportunity Fund II, Inc.; American Century Investment Management, Inc.; Neuberger & Berman
Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust;
17 Surrender Privilege; Withdrawal of Cash Surrender Value
18 The Separate Account
19 Policy Reports
20 Not Applicable
21 Loan Privileges
22 Not applicable
23 Not applicable
24 Not applicable
25 National Life Insurance Company
26 Not applicable
27 National Life Insurance Company
28 Officers and Directors of National Life
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
3
35 Not applicable
36 Not applicable
37 Not applicable
38 Distribution of Policies
39 Distribution of Policies
40 Distribution of Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Accumulated Value
45 Not applicable
46 Not applicable
47 National Life Insurance Company, The Separate Account, The Funds
48 Not applicable
49 Not applicable
50 The Separate Account
51 Payment and Allocation of Premiums; Death Benefit; Distribution of Policies
52 Changes in Applicable Law, Funding and Otherwise
53 Not applicable
54 Not applicable
55 Appendix A - Illustration of Death Benefits, Accumulated Values and Cash Surrender Values
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
4
PART I
Information Required in Prospectus
5
PROSPEC 6
ALL CHANGES SINCE JANUARY 22, 1998 SEC FILING
R:2DTODIE:PROSPEC5
(logo) PROSPECTUS
SENTINEL ESTATE PROVIDER
LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE BENEFIT VARIABLE LIFE INSURANCE
POLICY
ISSUED BY
NATIONAL LIFE INSURANCE COMPANY
One National Life Drive, Montpelier, Vermont 05604
Telephone: (800) 537-7003
This Prospectus describes the Sentinel Estate Provider Policy, a last
survivor flexible premium adjustable benefit variable life insurance policy
(the "Policy") offered by National Life Insurance Company ("National Life").
The Policy has an insurance component and an investment component. The primary
purpose of the Policy is to provide insurance coverage which will provide a
death benefit on the death of the last to die of two specified Insureds. It is
designed to provide considerable flexibility in connection with premium
payments, investment options, and death benefits. It does so by giving the
owner of a Policy (the "Owner") the right, within limits, to vary the frequency
and amount of premium payments (after the initial premium), to allocate Net
Premiums among investment alternatives with different investment objectives and
(after the first Policy Year) to increase or decrease the Death Benefit payable
under the Policy.
After certain deductions are made, Net Premiums are allocated to the
National Variable Life Insurance Account, a separate account of National Life
(the "Variable Account") or to the Fixed Account (which pays interest at
declared rates guaranteed to equal or exceed 4%) or both. The Variable Account
has twenty-two Subaccounts, the assets of which are used to purchase shares of
a designated corresponding mutual fund portfolio (each, a "Portfolio") that is
part of one of the following funds (each, a "Fund"): the Market Street Fund,
Inc. (the "Market Street Fund"), managed by Sentinel Advisors Company, except
as to the International Portfolio which is managed by Providentmutual
Investment Management Company, the American Century Variable Portfolios, Inc.,
managed by American Century Investment Management, Inc., the Variable Insurance
Products Fund and the Variable Insurance Products Fund II, managed by Fidelity
Investments, the Goldman Sachs Variable Insurance Trust, managed by Goldman
Sachs Asset Management and Goldman Sachs Asset Management International, the
J.P. Morgan Series Trust II, managed by J.P. Morgan Asset Management Inc., the
Neuberger & Berman Advisers Management Trust, managed by Neuberger & Berman
Management Incorporated, and the Strong Growth Fund II and Strong Opportunity
Fund II, managed by Strong Capital Management, Inc.
The portion of the Accumulated Value in the Subaccounts will vary with
the investment experience of the corresponding Portfolios. The Owner bears the
entire investment risk for all amounts allocated to the Variable Account; there
is no guaranteed minimum Accumulated Value for the Variable Account, and Cash
Surrender Value may be more or less than premiums paid.
The accompanying Prospectuses for the Funds describe the investment
objectives and the attendant risks of the Portfolios.
The Accumulated Value will reflect the Monthly Deductions, including
the Variable Account Charge, and certain other fees and charges. Also, a
Surrender Charge may be imposed if, during the first 10 Policy Years, the
Policy lapses or is surrendered. Generally, during the first five Policy Years
the Policy will remain in force as long as the Cumulative Minimum Monthly
Premium is paid or the Cash Surrender Value is sufficient to pay Monthly
Deductions imposed in connection with the Policy. After the fifth Policy Year,
whether the Policy remains in force depends upon whether the Cash Surrender
Value is sufficient to pay the Monthly Deductions under the Policy, unless the
optional Guaranteed Death Benefit Rider has been purchased and Cumulative
Guarantee Premium has been paid in accordance with such Rider.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance or as a means to obtain additional protection if
the purchaser already owns a life insurance policy.
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THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES OR
PROSPECTUS PROFILES FOR THE FUNDS LISTED ABOVE.
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6
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
SHARES OF THE FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND
INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
Prospectus dated
7
TABLE OF CONTENTS
PAGE
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Description of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Policy Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexibility to Adjust Amount of Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges Assessed in Connection with the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Policy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Expense Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Lapse and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optional Benefits
Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illustrations of Death Benefits, Accumulated Value and Cash Surrender Value . . . . . . . . . . . . . .
National Life Insurance Company, The Variable Account, and The Funds . . . . . . . . . . . . . . . . . . . . . .
National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Market Street Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Sentinel Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Aggressive Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Bond Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Managed Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The International Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Money Market Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Century Variable Portfolios, Inc.
VP Value Portfolio
VP Income & Growth Portfolio
Variable Insurance Products Fund and Variable Insurance Products Fund II . . . . . . . . . . . . . . . .
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index 500 Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contrafund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii
8
PAGE
Goldman Sachs Variable Insurance Trust
International Equity
Global Income
CORE Small Cap Equity
Mid Cap Equity
J.P. Morgan Series Trust II
International Opportunities Portfolio
Small Company Portfolio
Neuberger & Berman Advisers Management Trust
Partners Portfolio
Strong Variable Insurance Funds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strong Opportunity Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolving Material Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detailed Description of Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Death Benefit Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Which Death Benefit Option to Choose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in Death Benefit Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How the Death Benefit May Vary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ability to Adjust Face Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How the Duration of the Policy May Vary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Determination of Number of Units for the Variable Account . . . . . . . . . . . . . . . . . . .
Determination of Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Investment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment and Allocation of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of a Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount and Timing of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Lapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized Uses of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Expense Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Insurance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Account Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optional Benefit Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
9
PAGE
Policy Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Loans and Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Credited to Amounts Held as Collateral . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Policy Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse With Loans Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telephone Transaction Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Transfer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Right for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Right for Change in Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . .
Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dollar Cost Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Rebalancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum Guaranteed and Current Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of Non-loaned Accumulated Value in the Fixed Account . . . . . . . . . . . . . . . .
Transfers from Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite Policy Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change of Owner and Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Split Dollar Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Misstatement of Age and Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Interest Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for a Stated Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iv
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PAGE
Payments of a Stated Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint and Two Thirds Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50% Survivor Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optional Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Protection Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Split Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estate Protector Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Continuing Coverage Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enhanced Death Benefit Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automatic Increase Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Treatment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Modified Endowment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from Policies Classified as Modified Endowment Contracts . . . . . . . . . . . . .
Distributions from Policies Not Classified as Modified Endowment Contracts . . . . . . . . . . .
Policy Loan Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multiple Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Possible Charge for National Life's Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Possible Changes in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in Applicable Law, Funding and Otherwise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Officers and Directors of National Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preparing for Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A-Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED ON.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR
OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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DEFINITIONS
ACCUMULATED VALUE The sum of the Policy's values in
the Variable Account and the
Fixed Account.
ADDITIONAL COVERAGE One of the two types of coverage
of which the Face Amount is
comprised, which is provided by
the Additional Protection Benefit
Rider; the other type of coverage
is Basic Coverage.
ADDITIONAL PROTECTION BENEFIT RIDER An optional benefit that may be
included in the Policy at the
Owner's option, which provides
Additional Coverage.
ATTAINED AGE The Issue Age of the Insured plus
the number of full Policy Years
which have passed since the Date
of Issue.
BASIC COVERAGE One of the two types of coverage
of which the Face Amount is
comprised; the other type is
Additional Coverage, provided by
the Additional Protection Benefit
Rider.
BENEFICIARY The person(s) or entity(ies)
designated to receive all or some
of the Death Benefit on the death
of the last to die of the two
Insureds. The Beneficiary is
designated in the application or
if subsequently changed, as shown
in the latest change filed with
National Life. The interest of
any Beneficiary who dies before
the last to die of the two
Insureds shall vest in the Owner
unless otherwise stated.
CASH SURRENDER VALUE The Accumulated Value minus any
applicable Surrender Charge, and
minus any outstanding Policy loans
and accrued interest on such
loans.
COLLATERAL The portion of the Accumulated
Value in the Fixed Account which
secures the amount of any Policy
loan.
CODE The Internal Revenue Code of 1986,
as amended.
CUMULATIVE GUARANTEE PREMIUM The sum of the Monthly Guarantee
Premiums in effect on each Monthly
Policy Date since the Date of
Issue (including the current
month), plus all Withdrawals and
outstanding Policy loans and
accrued interest.
CUMULATIVE MINIMUM MONTHLY
PREMIUM The sum of the Minimum Monthly
Premiums in effect on each Monthly
Policy Date since the Date of
Issue (including the current
month), plus all Withdrawals and
outstanding Policy loans and
accrued interest.
DAC TAX A tax attributable to Specified
Policy Acquisition Expenses under
Section 848 of the Code.
DATE OF ISSUE The date on which the Policy is
issued, which is set forth in the
Policy. It is used to determine
Policy Years, Policy Months and
Monthly Policy Dates, as well as
to measure suicide and contestable
periods.
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DEATH BENEFIT The Policy's Unadjusted Death
Benefit, plus any dividends
payable, plus any relevant
additional benefits provided by a
supplementary benefit Rider, less
any outstanding Policy loan and
accrued interest, and less any
unpaid Monthly Deductions.
DURATION The number of full years the
insurance has been in force; for
the Initial Face Amount, measured
from the Date of Issue; for any
increase in Face Amount, measured
from the effective date of such
increase.
FACE AMOUNT The Initial Face Amount plus any
increases in Face Amount and minus
any decreases in Face Amount. The
Face Amount is the sum of the
Basic Coverage and the Additional
Coverage.
FIXED ACCOUNT The account which holds the assets
of National Life which are
available to support its insurance
and annuity obligations.
GRACE PERIOD A 61-day period measured from the
date on which notice of pending
lapse is sent by National Life,
during which the Policy will not
lapse and insurance coverage
continues. To prevent lapse, the
Owner must during the Grace Period
make a premium payment equal to
the sum of any amount by which the
past Monthly Deductions have been
in excess of Cash Surrender Value,
plus three times the Monthly
Deduction due the date the Grace
Period began.
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will
guarantee that the Policy will not
lapse, either prior to the end of
the year that the younger
Insured attains Age 80, or for the
entire lifetimes of the Insureds,
whichever is elected by the Owner,
regardless of investment
performance, if the Cumulative
Guarantee Premium has been paid as
of each Monthly Policy Date.
HOME OFFICE National Life's Home Office at
National Life Drive, Montpelier,
Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on
the Date of Issue. The Face
Amount may be increased or
decreased after the first Policy
Year.
INSUREDS The two persons upon whose lives
the Policy is issued.
ISSUE AGE The age of an Insured at his or
her birthday nearest the Date of
Issue. The Issue Ages of the two
Insureds are stated in the Policy.
JOINT AGE The age assigned to the Policy,
based on characteristics of the
two Insureds, used in the
calculation of the Target Premium
and the Surrender Charge. The
Joint Age is set forth in the
Policy, and is discussed in
Appendix B of this Prospectus.
MINIMUM BASIC COVERAGE AMOUNT The Minimum Basic Coverage Amount
is $100,000.
MINIMUM INITIAL PREMIUM The minimum premium required to
issue a Policy. It is equal to
two times the Minimum Monthly
Premium, or if the Guaranteed
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13
Death Benefit Rider applies to the
Policy, two times the Monthly
Guarantee Premium.
MINIMUM MONTHLY PREMIUM The monthly premium which, if
paid, will guarantee that the
Policy will stay in force during
the first five Policy Years. This
amount, which includes any
substandard charges and any
applicable Rider charges, is
determined separately for each
Policy, based on the requested
Initial Face Amount, and the Issue
Ages, sexes and Rate Classes of
the two Insureds. This premium is
stated in the Policy, and will be
restated upon changes in coverage.
MONTHLY ADMINISTRATIVE CHARGE A charge included in the Monthly
Deduction, which is intended to
reimburse National Life for
ordinary administrative expenses
and distribution expenses.
MONTHLY DEDUCTION The amount deducted from the
Accumulated Value on each Monthly
Policy Date. It includes the
Variable Account Charge, the
Monthly Administrative Charge, the
Cost of Insurance Charge, and the
monthly cost of any benefits
provided by Riders.
MONTHLY GUARANTEE PREMIUM The monthly premium level which
will keep the Guaranteed Death
Benefit Rider in force. If the
Guaranteed Death Benefit Rider
applies only until the younger
Insured's Attained Age 81, then
the Monthly Guarantee Premium will
be less than if the Owner elects
to have the Guaranteed Death
Benefit Rider apply for the entire
lifetimes of the two Insureds. If
the Guaranteed Death Benefit Rider
applies to a Policy, the Monthly
Guarantee Premium will be stated
in the Policy.
MONTHLY POLICY DATE The day in each calendar month
which is the same day of the month
as the Date of Issue, or the last
day of any month having no such
date, except that whenever the
Monthly Policy Date would
otherwise fall on a date other
than a Valuation Day, the Monthly
Policy Date will be deemed to be
the next Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted
Death Benefit exceeds the
Accumulated Value.
NET PREMIUM The remainder of a premium after
the deduction of the Premium
Expense Charge.
OWNER The person(s) or entity(ies)
entitled to exercise the rights
granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner
plans to pay at the frequency
selected. The Owner may request a
reminder notice and may change the
amount of the Planned Periodic
Premium. The Owner is not
required to pay the designated
amount.
POLICY ANNIVERSARY The same day and month as the Date
of Issue in each later year.
POLICY YEAR A year that starts on the Date of
Issue or on a Policy Anniversary.
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14
PREMIUM EXPENSE CHARGE A charge deducted from each
premium payment which has two
parts: one to cover the cost of
state and local premium taxes, and
the federal DAC Tax, and the other
to cover distribution expenses
incurred in connection with the
Policies.
RATE CLASS The classification of an Insured
for cost of insurance purposes.
The Rate Classes are: preferred
nonsmoker; nonsmoker; preferred
smoker; smoker; substandard and
uninsurable.
RIDERS Optional benefits that an Owner
may elect to add to the Policy at
an additional cost.
SURRENDER CHARGE The amount deducted from the
Accumulated Value of the Policy
upon lapse or surrender during the
first 10 Policy Years or 10 years
following an increase in Basic
Coverage. The Surrender Charge is
shown in the Policy and is
discussed in Appendix B to this
Prosepctus.
TARGET PREMIUM The premium used in the
determination of the amount of the
Premium Expense Charge. This
amount is shown in each Policy and
is discussed in Appendix B to this
Prospectus.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the
Face Amount or the applicable
percentage of the Accumulated
Value; under Option B, the greater
of the Face Amount plus the
Accumulated Value, or the
applicable percentage of the
Accumulated Value. The Death
Benefit Option is selected at time
of application but may be later
changed.
VALUATION DAY Each day that the New York Stock
Exchange is open for business
other than the day after
Thanksgiving and any day on which
trading is restricted by directive
of the Securities and Exchange
Commission. Unless otherwise
indicated, whenever under a Policy
an event occurs or a transaction
is to be effected on a day that is
not a Valuation Date, it will be
deemed to have occurred on the
next Valuation Date.
VALUATION PERIOD The time between two successive
Valuation Days. Each Valuation
Period includes a Valuation Day
and any non-Valuation Day or
consecutive non-Valuation Days
immediately preceding it.
WITHDRAWAL A payment made at the request of
the Owner pursuant to the right in
the Policy to withdraw a portion
of the Cash Surrender Value of the
Policy. The Withdrawal Charge
will be deducted from the
Withdrawal Amount.
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15
SUMMARY DESCRIPTION OF THE POLICY
The following summary of the Policy provisions should be read in
conjunction with the detailed information appearing elsewhere in this
Prospectus. Unless otherwise noted, this Prospectus assumes at least one of
the Insureds is alive.
THE POLICY OFFERED
The Sentinel Estate Provider last survivor flexible premium adjustable
benefit variable life insurance policy offered by this Prospectus is issued by
National Life. The Policy allows the Owner, subject to certain limitations, to
make premium payments in any amount and at any frequency. As long as the
Policy remains in force, it will provide for:
(1) Life insurance coverage which will provide a death benefit on
the death of the last to die of two named Insureds;
(2) A Cash Surrender Value;
(3) Surrender and Withdrawal rights and Policy loan privileges; and
(4) A variety of additional insurance benefits.
The Policy described in this Prospectus is designed to provide
insurance coverage to help lessen the economic loss resulting from the deaths
of the two Insureds. It is not offered primarily as an investment. Life
insurance is not a short-term investment. Prospective Owners should consider
their need for survivorship insurance coverage and the Policy's investment
potential on a long-term basis.
The Policy is called "flexible premium" because there is no fixed
schedule for premium payments, even though the Owner may establish a schedule
of Planned Periodic Premiums. The Policy is described as "adjustable benefit"
because the Owner may, after the first Policy Year and within limits, increase
or decrease the Face Amount and may change the Death Benefit Option. The
Policy is called "last survivor" because it pays its Death Benefit on the death
of the last to die of two named Insureds. The Policy is called "variable"
because, unlike a fixed benefit whole life insurance policy, the Death Benefit
under the Policy may, and its Accumulated Value will, vary to reflect the
investment performance of the chosen subaccounts of the Variable Account, and
the crediting of interest to the Fixed Account, as well as other factors.
The failure to pay Planned Periodic Premiums will not itself cause the
Policy to lapse. Conversely, the payment of premiums in any amount or
frequency will not necessarily guarantee that the Policy will remain in force.
In general, the Policy will lapse if the Cash Surrender Value is insufficient
to pay the Monthly Deduction. During the first five Policy Years, the Policy
will not lapse, even if the Cash Surrender Value is insufficient to pay the
Monthly Deductions, so long as the Cumulative Minimum Monthly Premium has been
paid. In addition, if the optional Guaranteed Death Benefit Rider has been
purchased, the Policy will not lapse, either prior to the younger Insured's
Attained Age 81, or for the entire lifetimes of the two Insureds, as the Owner
elects, even if the Cash Surrender Value is insufficient to pay the Monthly
Deductions, so long as the Cumulative Guarantee Premium has been paid. The
Monthly Guarantee Premium, and therefore the Cumulative Guarantee Premium, will
be higher for Guaranteed Death Benefit Riders which apply for the entire
lifetimes of the two Insureds, than for such Riders which apply until the
younger Insured's Attained Age 81.
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A prospective Owner who already has life insurance coverage should
consider whether or not changing or adding to existing coverage would be
advantageous. It may not be advisable to purchase another policy as a
replacement for an existing policy.
THE VARIABLE ACCOUNT
The Variable Account is divided into Subaccounts, twenty two of which
are available under the Policy. The assets of each Subaccount are used to
purchase shares of a designated corresponding Portfolio that is part of one of
the following Funds: the Market Street Fund, the American Century Variable
Portfolios, Inc., the Variable Insurance Products Fund, the Variable Insurance
Products Fund II, the Goldman Sachs Variable Insurance Trust, the J.P. Morgan
Series Trust II, the Neuberger & Berman Advisers Management Trust, the Strong
Variable Insurance Funds, Inc., and the Strong Opportunity Fund II. There is
no assurance that the investment objectives of a particular Portfolio will be
met. The Owner bears the entire investment risk of amounts allocated to the
Variable Account.
AVAILABILITY OF POLICY
This Policy can be issued for Insureds from Issue Ages 0 to 90, as
long as the Joint Age is 15 to 90. The minimum amount of Basic Coverage for a
Policy is $100,000. Before issuing a Policy, National Life will require that
the proposed Insureds meet certain underwriting standards satisfactory to
National Life. The Rate Classes available are Preferred Nonsmoker, Nonsmoker,
Preferred Smoker, Smoker, Substandard and Uninsurable. An Insured may be
assigned to an Uninsurable Rate Class where he or she would not be insurable
for single life coverage. (See "Issuance of a Policy," Page ___.)
THE DEATH BENEFIT
As long as the Policy remains in force, National Life will pay the
Death Benefit to the Beneficiary upon receipt of due proof of the death of both
of the two Insureds. The Death Benefit will consist of the Policy's Unadjusted
Death Benefit, plus any dividends payable, plus any relevant additional
benefits provided by a supplementary benefit Rider (other than the Additional
Protection Benefit Rider, the benefit from which is included in the Face Amount
of the Policy), less any outstanding Policy loan and accrued interest, and less
any unpaid Monthly Deductions.
There are two Death Benefit Options available. Death Benefit Option A
provides for the greater of (a) the Face Amount and (b) the applicable
percentage of the Accumulated Value. Death Benefit Option B provides for the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
applicable percentage of the Accumulated Value. (See "Death Benefit Options,"
Page ___.)
There are two types of coverage available under the Policy - Basic
Coverage and Additional Coverage. (See "Death Benefit", Page .)
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After the first Policy Year, the Owner has significant flexibility to
adjust the Death Benefit by changing the Death Benefit Option or by increasing
or decreasing the Face Amount of the Policy. (See "Change in Death Benefit
Option," Page ___, and "Ability to Adjust Face Amount," Page ___.)
Any change in Death Benefit Option or in the Face Amount may affect
the charges under the Policy. Any increase in the Face Amount will result in
an increase in the Monthly Deductions. A decrease in Face Amount may also
affect the Monthly Deductions. (See "Cost of Insurance Charge," Page ___.)
To the extent that a requested decrease in Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable under
the Code for life insurance, National Life will not effect the decrease.
6
17
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It equals the sum of the amounts held in the Variable
Account and the Fixed Account. (See "Calculation of Accumulated Value," Page
___.)
The Accumulated Value in the Variable Account will reflect the
investment performance of the chosen Subaccounts of the Variable Account, any
Net Premiums paid, any transfers, any Withdrawals, any loans, any loan
repayments, any loan interest paid or credited and any charges assessed in
connection with the Policy. The Owner bears the entire investment risk for
amounts allocated to the Variable Account. There is no guaranteed minimum for
the portion of the Accumulated Value in the Variable Account. Accumulated
Value in the Variable Account may be greater or less than the Net Premiums
allocated to the Variable Account.
The Fixed Account earns interest at rates National Life declares in
advance for specific periods. The rates are guaranteed to equal or
exceed 4%. The principal, after all deductions and charges, is also guaranteed.
The value of the Fixed Account will reflect any amounts allocated or
transferred to it plus interest credited to it, less amounts deducted,
transferred or withdrawn from it. (See "The Fixed Account," Page ___.)
The Collateral portion of the Accumulated Value in the Fixed Account
will reflect any amounts transferred from the Variable Account and/or
non-loaned portion of the Fixed Account as collateral for Policy loans, plus
interest at rates National Life declares of at least 4%. The Collateral will be
reduced by loan repayments. (See "Loan Privileges," Page ___.)
The Accumulated Value is relevant to the computation of the Death
Benefit and the Monthly Deduction.
ALLOCATION OF NET PREMIUMS
Except as described below, Net Premiums will generally be allocated to
the Subaccounts of the Variable Account and the Fixed Account in accordance
with the allocation percentages which are in effect for such premium when
received at National Life's Home Office. These percentages will be those
specified in the application or as subsequently changed by the Owner. Owners
of Policies may choose among all twenty-two available Subaccounts of the
Variable Account; however, National Life reserves the right to limit the number
of different Subaccounts used in any Policy over its entire life to 17.
Any portion of the initial Net Premium and any Net Premiums received
during the free-look period that are designated to be allocated to the
Variable Account will be allocated instead to the Money Market Subaccount. At
the end of such period, the amount in the Money Market Subaccount (including
investment experience) will be allocated to each of the chosen Subaccounts
based on the proportion that the allocation percentage for such Subaccount
bears to the sum of the Variable Account premium allocation percentages. For
this purpose, National Life will assume that the free-look period ends 20 days
after the date the Policy is issued. (See "Allocation of Net Premiums," Page
___.)
TRANSFERS
The Owner may make transfers of the amounts in the Subaccounts of the
Variable Account and Fixed Account between and among such accounts. Transfers
between the Subaccounts of the Variable Account or into the Fixed Account will
be made on the Valuation Day National Life receives the request. Transfers out
of the Fixed Account are limited to the greater of $1000 and 25% of Accumulated
Value in the Fixed Account, and to one transfer per Policy Year. Currently
transfers may be made without charge
7
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regardless of their frequency, and National Life has no present intent to
impose a charge for transfers in the foreseeable future; however, National Life
reserves the right, upon prior notice to Policy Owners, to impose in the future
a charge of $25 on each transfer in excess of twelve transfers in any one
Policy Year. (See "Transfers," Page ___.)
FREE-LOOK PRIVILEGE
The Policy provides for an initial "free-look" period, during which
the Owner may cancel the Policy and receive a refund equal to the gross
premiums paid on the Policy. This free-look period ends 10 days after the
Owner receives the Policy, or at the end of such longer period provided by
state law. To cancel the Policy, the Owner must return the Policy to National
Life or to an agent of National Life within such time with a written request
for cancellation. (See "Free-Look Privilege," Page ___.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses
Transaction Expenses
Premium Expense Charge (as a
percentage of premiums paid) . . . . . . . . . . . . 3.40%, plus: for Policy
Years 1 to 10: 7% up to Target Premium,
4% for premiums in excess of Target
Premium
After Policy Year 10: 4%(1)
Surrender Charge . . . . . . . . . . . . . . . . . . See below
Withdrawal Charge . . . . . . . . . . . . . . . . . Lesser of 2% or $25
- ----------------------
(1)National Life reserves the right to raise the Premium Expense Charge as a
percentage of premiums paid in excess of the Target Premium to 3.40%, plus 5%.
National Life also reserves the right after Policy Year 10 to charge a Premium
Expense Charge of up to the maximum permitted during the first 10 Policy Years.
MONTHLY DEDUCTIONS
Accumulated Value Charge Policy Years 1-10: . . . . Basic Coverage less than $1 million: annual rate
. . . . . . . . . . . . . . . . . . . . . . . . . . of 0.90%(2)
Basic Coverage of $1 million to $2,999,999: annual
rate of .80%(2)
Basic Coverage $3 million and over: annual
rate of 0.75%(2)
After Policy Year 10: Basic Coverage less than $1 million: 0.35%(3)
Basic Coverage of $1 million to $2,999,999: 0.30%(3)
Basic Coverage $3 million and over: 0.25%(3)
Cost of Insurance Charge Varies by Issue Age, sexes, Rate Class, duration of the
Policy-See below
Administrative Charge Policy Years 1 to 10: $15 plus $0.08(4) per $1000 of
Basic Coverage per month(5)
After Policy Year 10: $7.50 per month(6)
Rider Charges . . . . . . . . . . . . . . . . . . . See "Optional Benefits" on page for charges
applicable to optional Riders elected for a Policy
- ----------------------
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(2)The charge shown is the annual equivalent of the monthly charge. The
Variable Account Charge applies to Accumulated Value held in the Variable
Account. This charge does not apply to amounts held in the Fixed Account.
(3)This reduction is not guaranteed, except as required by the state of issue.
(4)This rate is lower for Joint Ages 38 and below.
(5)This charge is increased by $.005 per $1000 of Basic Coverage per month for
each Insured who is a smoker.
(6)National Life reserves the right to increase the Monthly Administrative
Charge for Policy years after Policy Year 10 up to an amount not to exceed $15
plus $0.08 per $1000 of Basic Coverage, plus $0.005 per $1000 of Basic Coverage
per month for each smoker. In addition, the $0.08 per $1000 of Basic Coverage
portion of the Monthly Administrative Charge will apply to increases in Basic
Coverage for 10 years after an increase in Basic Coverage.
Annual Charges of Underlying Funds (for the year ended
December 31, 1997):
Management Other Total
Fee, after expense Expenses, Expenses,
reimbursement after expense after expense
reimbursement reimbursement
Market Street Fund, Inc.:
Money Market Portfolio .25% .14% .39%
Bond Portfolio .35% .22% .57%
Managed Portfolio .40% .18% .58%
Aggressive Growth Portfolio .45% .18% .63%
International Portfolio .75% .27% 1.02%
Growth Portfolio .33% .10% .43%
Sentinel Growth Portfolio .50% .40% .90%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0 1.00%
VP Income & Growth Portfolio .70% 0 .70%
Fidelity: Variable Insurance Products Fund I:
Growth Portfolio .60% .07% .67%
High Income Portfolio .59% .12% .71%
Fidelity: Variable Insurance Products Fund II:
Index 500 Portfolio .24% .04% .28%
Contrafund Portfolio .60% .08% .68%
Goldman Sachs Variable Insurance Trust
International Equity 1.00% .25% 1.25%
Global Income .90% .15% 1.05%
CORE Small Cap Equity .75% .15% .90%
Mid Cap Equity .80% .15% .95%
J.P. Morgan Series Trust II
International Opportunities Portfolio .60% .60% 1.20%
Small Company Portfolio .60% .55% 1.15%
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Neuberger & Berman Advisers Management Trust
Partners Portfolio .86% 0 .86%
Strong Variable Insurance Funds, Inc.
Growth Fund II 1.00% .20% 1.20%
Strong Opportunity Fund II 1.00% .15% 1.15%
National Life has agreed to reimburse a portion of the expenses of the
Sentinel Growth Portfolio. Without this reimbursement, the Sentinel Growth
Portfolio's management fee, other expenses and total expenses would have been
%, % and % respectively.
Fidelity Investments agreed to reimburse a portion of Index 500
Portfolio's expenses during the period. Without this reimbursement, the fund's
management fee, other expenses and total expenses would have been %,
% and % respectively.
Strong Capital Management, Inc. has agreed to reimburse a portion of
the expenses of the Growth Fund II Portfolio. Without this reimbursement the
management fee, other expenses and total expenses of the Growth Fund II
Portfolio would have been . %, . % and . % respectively.
Premium Expense Charge. A Premium Expense Charge will be deducted
from each premium payment, which includes a charge in the amount of 3.40% of
each premium, to cover the cost of state and local premium taxes, and the
federal DAC Tax. National Life reserves the right to change the amount of the
charge deducted from future premiums if the applicable law is changed. (See
"Premium Expense Charge," Page ___.)
The Premium Expense Charge will also include, during the first 10
Policy Years, a deduction of 7.0% of each premium paid up to the Target
Premium, and 4.0% of premiums paid in excess of the Target Premium, from each
premium payment prior to allocation of Net Premiums, to compensate National
Life for the expenses incurred in distributing the Policies, including
commissions to selling agents. National Life reserves the right to increase
the charge for premiums in excess of the Target Premium from 4.0% to 5.0% of
such premiums. National Life currently intends to reduce this deduction from
premiums paid after the tenth Policy Anniversary to 4.0% of all premiums,
although it reserves the right to make a deduction of up to the maximum
permitted during the first ten Policy Years.
Surrender Charge. A Surrender Charge is imposed if the Policy is
surrendered or lapses at any time before the end of the tenth Policy Year, or
the ten years after an increase in the Basic Coverage. The initial Surrender
Charge varies by Joint Age and is shown in Appendix B of this Prospectus.
The Surrender Charge will be level for up to five Policy Years, and then
decline each month by one sixtieth of the initial Surrender Charge until it is
zero at the beginning of Policy Year 11 (or if the level Surrender Charge
period ends earlier than the end of Policy Year 5, declining each month by an
amount equal to the initial Surrender Charge multiplied by a fraction of which
the numerator is one and the denominator is the number of months from the end
of the level Surrender Charge period to the beginning of Policy Year 11). For
increases in Basic Coverage, the Surrender Charge will be determined in a like
fashion and will decline each month by one sixtieth of the initial Surrender
Charge following the five-year level period until it is zero at the beginning
of the eleventh year after the date of the increase (or if the level Surrender
Charge period ends earlier than the fifth anniversary of the increase,
declining each month by an amount equal to the initial Surrender Charge
multiplied by a fraction of which the numerator is one and the denominator is
the number of months from the end of the level Surrender Charge period to the
beginning of the eleventh year after the effective date of the increase). The
Surrender Charge will not decrease in the event of a decrease in Basic
Coverage. (See "Surrender Charge," Page .)
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Withdrawal Charge. A charge equal to the lesser of 2% of the amount
withdrawn or $25 will be deducted from each Withdrawal amount paid. (See
"Withdrawal Charge," Page .)
Monthly Deductions. On the Date of Issue and on each Monthly Policy
Date thereafter, the Accumulated Value will be reduced by a Monthly Deduction
equal to the sum of the monthly Cost of Insurance Charge, Variable Account
Charge, Monthly Administrative Charge, and a charge for any additional benefits
added by rider. The monthly Cost of Insurance Charge will be determined by
multiplying the Net Amount at Risk (that is, the Unadjusted Death Benefit less
Accumulated Value) by the applicable cost of insurance rate(s), which will
depend upon the Issue Ages, sexes, and Rate Classes of the Insureds, the
Duration of the coverage, whether the coverage is Basic Coverage or Additional
Coverage, and on National Life's expectations as to future mortality and
expense experience, but which will not exceed the guaranteed maximum cost of
insurance rates set forth in the Policy based on the Insureds' Issue Ages,
sexes, substandard or uninsurable status, the coverage's Duration, whether the
coverage is Basic Coverage or Additional Coverage, and the "1980 Commissioners
Standard Ordinary Mortality Table." (See "Cost of Insurance Charge," Page
___.).
The Variable Account Charge varies by the amount of Basic Coverage in
the Policy. It is a percentage of the Accumulated Value in the Variable
Account, and does not apply to Accumulated Value in the Fixed Account. During
the first 10 Policy Years, for Policies with Basic Coverage less than
$1,000,000, the current annual charge is 0.90%; for Policies with Basic
Coverage from $1,000,000 to $2,999,999, the current annual charge is 0.80%, and
for Policies with Basic Coverage of $3 million or more, the current annual
charge is 0.75%. In all cases, National Life reserves the right to increase
this charge to an amount not to exceed 0.90%. After Policy Year 10, National
Life currently intends to reduce this charge to the following rates: for
Policies with Basic Coverage of less than $1 million, an annual charge of
0.35%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, an
annual charge of 0.30%, and for Policies with Basic Coverage of $3 million or
more, an annual charge of 0.25%. However, National Life reserves the right to
continue to charge a Variable Account Charge in an annual amount up to 0.90%
after Policy Year 10. (See "Variable Account Charge, page ).
The Monthly Administrative Charge during the first 10 Policy Years is
$15.00 plus $0.08 per $1000 of Basic Coverage. This charge is increased during
the first ten Policy Years by $0.005 per $1000 of Basic Coverage for each
Insured who is a smoker, and is reduced if the Joint Age of the Insureds is 38
or less. After the end of Policy Year 10, National Life currently intends to
assess a reduced Monthly Administrative Charge of $7.50, with no additional
amount per $1000 of Basic Coverage, but National Life reserves the right to
increase the Monthly Administrative Charge after Policy Year 10 to an amount
not to exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 for each
smoker. The $0.08 per $1000 of Basic Coverage portion of the Monthly
Administrative Charge will also apply to the increase in Basic Coverage for 10
years after an increase in Basic Coverage. (See "Monthly Administrative
Charge," Page ___.)
Transfer Charge. Currently an unlimited number of transfers are
permitted in each Policy Year without charge, and National Life has no current
intent to impose a transfer charge in the foreseeable future; however, National
Life reserves the right to impose in the future a charge of $25 for each
transfer in excess of twelve transfers in any one Policy Year. (See "Transfer
Charge," Page ___.)
Projection Report Charge. National Life may impose a charge for each
projection report requested by the Owner. (See "Projection Report Charge,"
Page __.)
Other Charges. Shares of the Portfolios are purchased by the Variable
Account at net asset value, which reflects management fees and expenses
deducted from the assets of the Portfolios. These management fees and expenses
are shown above under "Annual Charges of Underlying Funds".
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POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, the Policy will not lapse if
premiums in an amount at least equal to the Cumulative Minimum Monthly Premium
have been paid, regardless of the amount of Cash Surrender Value. If, however,
total premiums paid are less than the Cumulative Minimum Monthly Premium, and
the Cash Surrender Value on a Monthly Processing Date is insufficient to cover
the Monthly Deduction then due, the Policy will lapse after a 61-day Grace
Period unless a sufficient premium has been paid.
An optional Guaranteed Death Benefit Rider is available which will
guarantee that the Policy will not lapse, either prior to the end of the year
that the younger Insured attains Age 80, or for the entire lifetimes of the two
Insureds, as the Owner elects, regardless of investment performance, if total
premiums paid are at least equal to the Cumulative Guarantee Premium. (See
"Optional Benefits - Guaranteed Death Benefit," Page ___.)
Subject to certain conditions, including evidence of insurability
satisfactory to National Life and the payment of a sufficient premium, a Policy
may be reinstated at any time within five years (or such longer period as may
be required in a particular state) after the beginning of the Grace Period.
(See "Reinstatement," Page ___.)
LOAN PRIVILEGE
After the first Policy Year, the Owner may obtain Policy loans in an
amount not exceeding, in the aggregate, the Cash Surrender Value less three
Monthly Deductions.
Policy loans will bear interest at a fixed rate of 6% per year,
payable at the end of each Policy Year. At the end of the Policy Year, the
loan interest will be added to the outstanding loan balance. Any payments made
by the Owner to cover loan interest will be applied to the repayment of the
outstanding loan balance. Policy loans may be repaid at any time and in any
amount. Policy loans outstanding when the Death Benefit becomes payable or the
Policy is surrendered will be deducted from the proceeds otherwise payable.
When a Policy loan is taken, Accumulated Value will be held in the
Fixed Account as Collateral for the Policy loan. Accumulated Value is taken
from the Subaccounts of the Variable Account based on the instructions of the
Owner at the time a loan is taken. If specific allocation instructions have
not been received from the Owner, the Policy loan will be allocated to the
Subaccounts based on the proportion that each Subaccount's value bears to the
total Accumulated Value in the Variable Account. If the Accumulated Value in
one or more of the Subaccounts is insufficient to carry out the Owner's
instructions, the loan will not be processed until further instructions are
received from the Owner. Accumulated Value will be taken from the non-loaned
portion of the Fixed Account as Collateral for a loan only to the extent that
the Accumulated Value in the Variable Account is insufficient. This amount
held in the Fixed Account as Collateral will earn interest at an effective
annual rate National Life will determine prior to each calendar year. This
rate will not be less than 4%. National Life currently intends, but is not
obligated to continue, to make preferred loans available beginning in Policy
Year 11. At such time, the interest rate charged on all loans will be 4.25%,
and the amount held in the Fixed Account as Collateral will be credited with
interest at an annual rate of 4.0%. (See "Loan Privileges," Page ___.)
Depending upon the investment performance of Cash Surrender Value and
the amount of a Policy loan, the loan may cause a Policy to lapse. If a Policy
is not a Modified Endowment Contract, lapse of the Policy with Policy loans
outstanding may result in adverse tax consequences. (See "Tax Treatment of
Policy Benefits," Page ___.)
WITHDRAWAL OF CASH SURRENDER VALUE
After the first Policy Anniversary, the Owner may, subject to certain
restrictions, request a Withdrawal of Cash Surrender Value. The minimum amount
for such Withdrawal is $500, and the
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maximum is the Cash Surrender Value minus three Monthly Deductions. The
Withdrawal amount will be taken from the Subaccounts of the Variable Account
based on instructions provided by the Owner at the time of the Withdrawal. If
specific allocation instructions have not been received from the Owner, the
Withdrawal will be allocated to the Subaccounts based on the proportion that
the value in each account bears to the total Accumulated Value in the Variable
Account. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out the Owner's instructions, the Withdrawal will not be processed
until further instructions are received from the Owner. Withdrawal amounts
will be taken from the Fixed Account only to the extent that the Accumulated
Value in the Variable Account is insufficient. If Death Benefit Option A is in
effect, National Life will reduce the Face Amount by an amount equal to the
lesser of (a) the amount of the withdrawal and (b) the excess of the Face
Amount divided by the applicable percentage over the Accumulated Value just
after the Withdrawal, but in any case not less than zero. (See "Withdrawal of
Cash Surrender Value," Page ___.)
A Withdrawal Charge will be deducted from the amount of each
Withdrawal. (See "Charges and Deductions - Withdrawal Charge," Page ___.)
SURRENDER OF THE POLICY
The Owner may at any time fully surrender the Policy and receive the
Cash Surrender Value, if any. The Cash Surrender Value will equal the
Accumulated Value less any Policy loan with accrued interest and any applicable
Surrender Charge. (See "Surrender Privilege," Page ___.)
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
National Life currently offers, at no charge to Policyowners, two
automated fund management programs, Dollar Cost Averaging and Portfolio
Rebalancing. (For a description of these features, see "Available Automated
Fund Management Features," Page ___.)
OPTIONAL BENEFITS
Several optional benefits are available in connection with the
Policies, including the Guaranteed Death Benefit Rider, the Additional
Protection Benefit Rider, the Policy Split Option, the Estate Preservation
Rider, the Term Rider, the Continuing Coverage Rider, the Enhanced Death
Benefit Rider and the Automatic Increase Rider. (See "Optional Benefits", page
.)
TAX TREATMENT
Under current federal tax law, life insurance contracts receive
tax-favored treatment. Assuming that a Policy qualifies as a life insurance
contract for federal income tax purposes, an Owner should not be taxed on any
increase in Cash Surrender Value while the Policy remains in force. Moreover,
death benefits payable under a Policy should be completely excludable from the
gross income of the Beneficiary. As a result, the Beneficiary generally should
not be taxed on these proceeds. (See "Tax Status of the Policy," Page ___.)
Under certain circumstances, a Policy may be treated as a "Modified
Endowment Contract." If the Policy is a Modified Endowment Contract, then
certain pre-death distributions, including Policy loans, will be treated first
as a distribution of taxable income and then as a return of basis or investment
in the contract. In addition, prior to age 59-1/2 any such distributions
generally will be subject to a 10% penalty tax. (For further discussion on the
circumstances under which a Policy will be treated as a Modified Endowment
Contract, See "Tax Treatment of Policy Benefits," Page ___.)
If the Policy is not a Modified Endowment Contract, distributions
generally will be treated first as a return of basis or investment in the
contract and then as disbursing taxable income. Moreover, loans will
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24
not be treated as distributions. Finally, neither distributions nor loans from
a Policy that is not a Modified Endowment Contract are subject to the 10%
penalty tax. (See "Distributions from Policies Not Classified as Modified
Endowment Contracts," Page ___.)
Generally, the proceeds of the Policy are includible in the gross
estate of the Insured if the Insured posses any "incidents of ownership" over
the Policy at death. "Incidents of ownership" generally includes the right to
receive economic benefits of the Policy as defined in Section 2042 of the Code
and applicable Treasury regulations. If the Insured never held incidents of
ownership over the Policy, or irrevocably transferred all interests in the
Policy to a third party (e.g., an irrevocable life insurance trust) more than
three years before death, the proceeds should be excluded from the Insured's
gross estate.
ILLUSTRATIONS OF DEATH BENEFITS, ACCUMULATED VALUE AND CASH SURRENDER VALUE
Illustrations of how investment performance of the Variable Account
may cause the Death Benefit, the Accumulated Value and the Cash Surrender Value
to vary are included in Appendix A commencing on Page A-1.
These projections of hypothetical values may be helpful in
understanding the long-term effects of different levels of investment
performance, of charges and deductions, of electing one or the other death
benefit option, and generally comparing and contrasting this Policy to other
life insurance policies. Nonetheless, the illustrations are based on
hypothetical investment rates of return and are not guaranteed. Illustrations
are illustrative only and are not a representation of past or future
performance. Actual rates of return may be more or less than those reflected
in the illustrations and, therefore, actual values will be different from those
illustrated.
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life, a mutual life insurance company chartered in 1848 under
Vermont law, is authorized to transact life insurance and annuity business in
Vermont and in 50 other jurisdictions. National Life assumes all insurance
risks under the Policy and its assets support the Policy's benefits. On
December 31, 1997, National Life's consolidated assets were over $8 billion.
(See "Financial Statements," Page F-1.)
THE VARIABLE ACCOUNT
The Variable Account was established by National Life on February 1,
1985 under the provisions of the Vermont Insurance Law. It is a separate
investment account to which assets are allocated to support the benefits
payable under the Policies, other variable life insurance policies National
Life currently issues, and other variable life insurance policies National Life
may issue in the future. Owners of Policies may choose among all the
Subaccounts of the Variable Account available under the Policies; however,
National Life reserves the right to limit the number of different Subaccounts
used in any Policy over its entire life to 17.
The Variable Account's assets are the property of National Life. Each
Policy provides that the portion of the Variable Account's assets equal to the
reserves and other liabilities under the Policies (and other policies)
supported by the Variable Account will not be chargeable with liabilities
arising out of any other business that National Life may conduct. The portion
of the Variable Account's assets equal to the reserves and other liabilities
under the Policies may, however, be chargeable with liabilities arising from
other subaccounts of the Variable Account that fund other variable life
insurance policies. In addition to the net assets and other liabilities for
the Policies (and other policies), the Variable Account's net assets
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25
include amounts derived from expenses charged to the Policies (and the other
policies) by National Life which it currently holds in the Variable Account,
and may in the future include amounts held to support other variable life
insurance policies issued by National Life. From time to time these additional
amounts will be transferred in cash by National Life to its Fixed Account.
The Variable Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies
of the Variable Account by the SEC. The Variable Account meets the definition
of a "separate account" under federal securities laws.
THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Variable Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which is
registered with the SEC under the 1940 Act as a diversified open-end management
investment company. The Market Street Fund currently issues seven "series" or
classes of shares, each of which represents an interest in a separate portfolio
within the Fund, and which are purchased and redeemed by the corresponding
Subaccounts of the Variable Account: the Growth Portfolio, the Sentinel Growth
Portfolio, the Aggressive Growth Portfolio, the Bond Portfolio, the Managed
Portfolio, the International Portfolio and the Money Market Portfolio. The
Market Street Fund sells and redeems its shares at net asset value without a
sales charge.
The investment objectives of the Market Street Fund's Portfolios
eligible for purchase by the Variable Account are set forth below. The
investment experience of each of the Subaccounts of the Variable Account
depends on the investment performance of the corresponding Portfolio. There is
no assurance that any Portfolio will achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio
seeks to achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level
of current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high
a level of long-term total rate of return as is consistent with prudent
investment risk by investing in stocks, bonds, money market instruments or a
combination thereof.
The International Portfolio. The International Portfolio seeks
long-term growth of capital principally through investments in a diversified
portfolio of marketable equity securities of established non-United States
companies.
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The Money Market Portfolio. The Money Market Portfolio seeks to
provide maximum current income consistent with capital preservation and
liquidity by investing in high-quality money market instruments.
With respect to the Growth, Sentinel Growth, Aggressive Growth, Bond,
Managed and Money Market Portfolios, the Market Street Fund is advised by
Sentinel Advisors Company ("SAC"), which is registered with the SEC as an
investment adviser under the Investment Advisers Act of 1940. SAC is a
partnership whose partners are affiliates of National Life, Provident Mutual
Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance
Company. National Life's affiliate is currently the managing partner of SAC
and is entitled to the majority share of SAC's profit or loss. With respect to
the International Portfolio, the Market Street Fund is advised by
Providentmutual Investment Management Company ("PIMC"), which is also
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940. PIMC has employed The Boston Company Asset Management, Inc. to
provide investment advisory services in connection with the Portfolio.
A full description of the Market Street Fund, its investment
objectives and policies, its risks, expenses, and all other aspects of its
operation is contained in the attached Prospectus for the Market Street Fund,
which should be read together with this Prospectus.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the VP Value fund, and one Subaccount which invests exclusively in
shares of VP Income & Growth fund, each of which are series of American Century
Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is a
"series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares,
each of which represents an interest in a fund of American Century Variable
Portfolios, Inc..
The American Century VP Value Subaccount and the American Century VP
Income & Growth Subaccount of the Variable Account invest in shares of the VP
Value fund and the VP Income & Growth fund, respectively, of the American
Century Variable Portfolios, Inc.. Shares of these Funds are purchased and
redeemed by the Variable Account at net asset value without a sales charge.
The investment objectives of the Funds of American Century Variable
Portfolios, Inc. in which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Fund. There is no assurance that either Fund
will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The fund will seek to achieve its investment objective by investing
in securities that management believes to be undervalued at the time of
purchase.
VP Income & Growth. To seek dividend growth, current income and
capital appreciation. The fund will seek to achieve its investment objective
by investing in common stocks.
The VP Value fund and the VP Income & Growth fund of the American
Century Variable Portfolios, Inc. are managed by American Century Investment
Management, Inc. A full description of these Funds, their investment
objectives and policies, and the risks, expenses and all other aspects of their
operation is contained in the attached Prospectuses for VP Value and VP Income
& Growth.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Variable Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in
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27
shares of Portfolios of the Variable Insurance Products Fund II ("VIP Fund
II"). Like the Market Street Fund, the VIP Fund and the VIP II Fund are
"series" type mutual funds registered with the SEC as diversified open-end
management investment companies issuing a number of series or classes of
shares, each of which represents an interest in a Portfolio of the VIP Fund or
VIP Fund II.
The Fidelity Growth Subaccount and Fidelity High Income Subaccount of
the Variable Account invest in shares of the Growth Portfolio and the High
Income Portfolio, respectively, of the VIP Fund. The Fidelity Index 500
Subaccount and the Fidelity Contrafund Subaccount of the Variable Account
invest in shares of the Index 500 Portfolio and the Contrafund Portfolio,
respectively, of the VIP Fund II. Shares of these Portfolios are purchased and
redeemed by the Variable Account at net asset value without a sales charge.
The investment objectives of the Portfolios of the VIP Fund and the
VIP Fund II in which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the corresponding Portfolio. There is no assurance that any
Portfolio will achieve its stated objective.
Growth Portfolio. This Portfolio seeks to achieve capital
appreciation. The Growth Portfolio normally purchases common stocks, although
its investments are not restricted to any one type of security. Capital
appreciation may also be found in other types of securities, including bonds
and preferred stocks.
High Income Portfolio. This Portfolio seeks to obtain a high level
of current income by investing primarily in high-yielding, lower-rated,
fixed-income securities, while also considering growth of capital. The risks
of investing in these high-yielding, high-risk securities is described in the
attached Prospectus for the VIP Fund, which should be read carefully before
investing.
Index 500 Portfolio. This portfolio seeks to match the total return
of the Standard & Poors' Composite Index of 500 Stocks ("S&P 500") while
keeping expenses low. Fidelity Management & Research Company, the VIP Fund II
Fund Manager, normally invests at least 80% of the fund's assets in equity
securities of companies that compose the S&P 500.
Contrafund Portfolio. This Portfolio seeks capital appreciation by
investing primarily in companies that the Fund manager believes to be
undervalued due to an overly pessimistic appraisal by the public. This
strategy can lead to investments in domestic or foreign companies, small and
large, many of which may not be well known. The Fund primarily invests in
common stock and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
The Growth and High Income Portfolios of the VIP Fund and the Index 500 and
Contrafund Portfolios of the VIP Fund II are managed by Fidelity Management &
Research Company. A full description of the VIP Fund and VIP Fund II, the
investment objectives and policies of the Portfolios, the risks, expenses and
all other aspects of their operation is contained in the attached Prospectuses
for the VIP Fund and VIP Fund II.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which invest exclusively in shares of
the following four Funds of Goldman Sachs Variable Insurance Trust: the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity
Fund and the Mid Cap Equity Fund. Goldman Sachs Variable Insurance Trust is a
"series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares,
each of which represents an interest in a Fund of Goldman Sachs Variable
Insurance Trust.
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The Goldman Sachs International Equity Subaccount, the Goldman Sachs
Global Income Subaccount, the Goldman Sachs CORE Small Cap Equity Subaccount
and the Goldman Sachs Mid Cap Equity Subaccount invest in shares of the the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity
and the Mid Cap Equity Fund, respectively, of Goldman Sachs Variable Insurance
Trust. Shares of these Funds are purchased and redeemed by the Variable
Account at net asset value without a sales charge.
The investment objectives of the Funds of Goldman Sachs Variable
Insurance Trust which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Fund. There is no assurance that either Fund
will achieve its stated objective.
Goldman Sachs International Equity Fund. Seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded outside
the U.S.
Goldman Sachs Global Income Fund. Seeks a high total return,
emphasizing current income and, to a lesser extent, providing opportunities for
capital appreciation. The Fund invests primarily in a portfolio of high
quality fixed-income securities of U.S. and foreign issuers and foreign
currencies.This Fund seeks capital appreciation through investments in a
diversified portfolio of equity securities.
Goldman Sachs Core Small Cap Equity Fund. Seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of U.S.
issuers which are included in the Russell 2000 Index at the time of investment.
Goldman Sachs Mid Cap Equity Fund. Seeks long-term capital
appreciation primarily through investments in equity securities of companies
with public stock market capitalizations of between $500 million and $10
billion at the time of investment.
The International Equity and Global Income Funds are managed by
Goldman Sachs Asset Management International, and the Core Small Cap Equity and
Mid Cap Equity Funds are managed by Goldman Sachs Asset Management. A full
description of the International Equity Fund, the Global Income Fund, the CORE
Small Cap Equity Fund and the Mid Cap Equity Fund series of Goldman Sachs
Variable Insurance Trust. their investment objectives and policies, and the
risks, expenses and all other aspects of their operation is contained in the
attached Prospectuses for the Goldman Sachs Variable Insurance Trust.
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P.
Morgan Series Fund II is a "series" type mutual fund registered with the SEC as
a diversified open-end management investment company issuing a number of series
or classes of shares, each of which represents an interest in a Portfolio of
J.P. Morgan Series Trust II.
The J.P. Morgan International Opportunities Subaccount and the J.P.
Morgan Small Company Subaccount of the Variable Account invest in shares of the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio, respectively, of the J.P. Morgan Series Trust II. Shares of
these Funds are purchased and redeemed by the Variable Account at net asset
value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II
Portfolios in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment
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performance of the underlying Fund. There is no assurance that either Fund
will achieve its stated objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a
high total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total
return from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less
than $1 billion. The Portfolio is designed for investors who are willing to
assume the somewhat higher risk of investing in small companies in order to
seek a higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P.
Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed
by J.P. Morgan Investment Management Inc. A full description of these Funds,
their investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger & Berman Advisers
Management Trust. Neuberger & Berman Advisers Management Trust is a "series"
type mutual fund registered with the SEC as a diversified open-end management
investment company issuing a number of series or classes of shares, each of
which represents an interest in a Portfolio of Neuberger & Berman Advisers
Management Trust.
The Neuberger & Berman Partners Subaccount of the Variable Account
invests in shares of the Partners Portfolio of Neuberger & Berman Advisers
Management Trust. Shares of this Portfolio are purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Partners Portfolio are set forth
below. The investment experience of each Subaccount depends upon the
investment performance of the underlying Fund. There is no assurance that the
Fund will achieve its stated objective.
Partners Portfolio. To seek capital growth. This Portfolio will seek
to achieve its objective by investing primarily in the common stock of
established companies. Its investment program seeks securities believed to be
undervalued based on fundamentals such as low price-to-earnings ratios,
consistent cash flows, and support from asset values. The objective of the
Partners Portfolio is not fundamental and can be changed by the Trustees of the
Neuberger & Berman Advisers Management Trust without shareholder approval.
Shareholders will, however, receive at least 30 days prior notice thereof.
The Partners Portfolio of Neuberger & Berman Advisers Management Trust
is managed by Neuberger & Berman Management Incorporated. A full description
of this Fund, its investment objectives and policies, and the risks, expenses
and all other aspects of its operation is contained in the attached Prospectus
for the Partners Portfolio of Neuberger & Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the Growth Fund II, a series of Strong Variable Insurance Funds,
Inc., and one Subaccount which invests exclusively in shares of Strong
Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series"
type mutual fund
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registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a Fund of Strong Variable Insurance Funds, Inc., and Strong
Opportunity Fund II is a single series mutual fund also registered with the SEC
as a diversified open-end management investment company.
The Strong Growth Subaccount and the Strong Opportunity Subaccount of
the Variable Account invest in shares of the Growth Fund II series of the
Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II,
respectively. Shares of these Funds are purchased and redeemed by the Variable
Account at net asset value without a sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount
depends upon the investment performance of the underlying Fund. There is no
assurance that either Fund will achieve its stated objective.
Growth Fund II. This Fund seeks capital growth. It invests primarily
in equity securities that the advisor believes have above-average growth
prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Growth Fund II series of Strong Variable Insurance Funds, Inc.,
and Strong Opportunity Fund, Inc. are managed by Strong Capital Management,
Inc.
A full description of the Growth Fund II series of Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their investment
objectives and policies, and the risks, expenses and all other aspects of their
operation is contained in the attached Prospectuses for the Growth Fund II and
Strong Opportunity Fund II, Inc.
National Life has entered into or may enter into agreements with Funds
pursuant to which the advisor or distributor pays National Life a fee based
upon an annual percentage of the average net asset amount invested by National
Life on behalf of the Variable Account and other separate accounts of National
Life. These percentages may differ, and National Life may be paid a greater
percentage by some investment advisors or distributors than other advisors or
distributors. These agreements reflect administrative services provided by
National Life.
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Variable Account contain varying provisions
regarding termination. In general, each party may terminate at its option with
specified advance written notice, and may also terminate in the event of
specific regulatory or business developments.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase additional
shares of such Fund. In that event, Owners will no longer be able to
transfer Accumulated Values or allocate Net Premiums to Subaccounts
investing in Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or
a Portfolio of a Fund may refuse to sell its shares to a Subaccount despite
the fact that the participation agreement between the Fund and National Life
has not been terminated. Should a Fund or Portfolio of such Fund decide not
to sell its shares to National Life, National Life will not be able to honor
requests by Owners to allocate cash values or net premiums to Subaccounts
investing in shares of that Fund or Portfolio.
RESOLVING MATERIAL CONFLICTS
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The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a
material conflict may arise between the interests of Owners with Accumulated
Value allocated to the Variable Account and the owners of life insurance
policies and variable annuities issued by such other companies whose values
are allocated to one or more other separate accounts investing in any one of
the Funds.
In the event of a material conflict, National Life will take any
necessary steps, including removing the Variable Account from that Fund, to
resolve the matter. The Board of Directors or Trustees of the Funds intend
to monitor events in order to identify any material conflicts that possibly
may arise and to determine what action, if any, should be taken in response
to those events or conflicts. See the individual Fund Prospectuses for more
information.
The investment objectives and policies of certain Portfolios are
similar to the investment objectives and policies of mutual fund portfolios
other than the Portfolios that may be managed by the investment adviser or
manager. The investment results of the Portfolios, however, may be higher or
lower than the results of such other portfolios. There can be no assurance,
and no representation is made, that the investment results of any of the Funds
will be comparable to the investment results of any other portfolio, even if
the other portfolio has the same investment adviser or manager.
THE FIXED ACCOUNT
For information on the Fixed Account, see page .
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Death Benefit of
the Policy will, upon due proof of the death of both of the Insureds (and
fulfillment of certain other requirements), be paid to the named Beneficiary
in accordance with the designated Death Benefit Option, unless the claim is
contestable in accordance with the terms of the Policy. The proceeds may be
paid in cash or under one of the Settlement Options set forth in the Policy.
(See "Payment of Policy Benefits," Page ___.) The Death Benefit payable
under the designated Death Benefit Option will be the Unadjusted Death
Benefit under that Death Benefit Option, increased by any additional
benefits and any dividend payable, and decreased by any outstanding Policy
loan and accrued interest and any unpaid Monthly Deductions. The Face
Amount of a Policy, on which the Unadjusted Death Benefit is based, may be
made up of either Basic Coverage or Additional Coverage. Additional
Coverage is provided by the Additional Protection Benefit Rider.
The Owner must notify National Life as soon as reasonably possible of
the death of each Insured. National Life may require proof of whether both
Insureds are living two years from the Date of Issue. On the death of the
first Insured to die National Life will require the Owner to provide it with
evidence of death and proof of age and, if the death is within two years from
the Date of Issue, the cause of death.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. The Owner designates the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit Option,"
Page ___.
Option A. The Unadjusted Death Benefit is equal to the greater of
(a) the Face Amount of the Policy and (b) the Accumulated Value , multiplied by
the specified percentage shown in the table below:
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Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
of Younger of Younger
---------- ----------
Insured Insured
------- -------
40 and under 250% 75-90 105%
45 215% 91 104%
50 185% 92 103%
55 150% 93 102%
60 130% 94+ 101%
65 120%
70 115%
For Attained Ages of the younger Insured not shown, the percentages will
decrease by a ratable portion of each full year.
Illustration of Option A -- For purposes of this illustration, assume
that the younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000. Assuming the specified
percentage for a particular Policy for a particular Attained Age of the younger
Insured is 250%, then, because the Unadjusted Death Benefit must be equal to or
greater than 2.50 times the Accumulated Value, any time the Accumulated Value
exceeds $80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each
additional dollar added to the Accumulated Value will increase the Unadjusted
Death Benefit by $2.50. Thus, an Accumulated Value of $90,000 for this Policy
at this Attained Age for the younger Insured will result in an Unadjusted Death
Benefit of $225,000 (2.50 x $90,000), and an Accumulated Value of $150,000 will
result in an Unadjusted Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Accumulated Value exceeds $80,000, each dollar taken
out of the Accumulated Value will reduce the Unadjusted Death Benefit by $2.50.
If at any time, however, the Accumulated Value multiplied by the specified
percentage is less than the Face Amount, the Unadjusted Death Benefit will be
the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of (a)
the Face Amount of the Policy plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage shown in the table
above.
Illustration of Option B -- For purposes of this illustration, assume
that the younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a Face Amount of $200,000 will generally
pay an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times
the Accumulated Value. As a result, if the Accumulated Value exceeds $133,333,
the Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Accumulated
Value of $150,000 will result in an Unadjusted Death Benefit of $375,000 (2.50
x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted
Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the
Accumulated Value exceeds $133,333, each dollar taken out of the Accumulated
Value will reduce the Unadjusted Death Benefit by $2.50. If at any time,
however, the Accumulated Value multiplied by the specified percentage is less
than the Face Amount plus the Accumulated Value, the Unadjusted Death Benefit
will be the Face Amount plus the Accumulated Value.
At Attained Age 100 of the younger of the two Insureds (even if the
younger of the two Insureds is not then living), Option B automatically becomes
Option A.
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Which Death Benefit Option to Choose. If an Owner prefers to have
premium payments and favorable investment performance reflected partly in the
form of an increasing Death Benefit, the Owner should choose Option B. If an
Owner is satisfied with the amount of the Insureds' existing insurance
coverages and prefers to have premium payments and favorable investment
performance reflected to the maximum extent in the Accumulated Value, the Owner
should choose Option A.
Change in Death Benefit Option. After the first Policy Year, the
Death Benefit Option in effect may be changed by sending National Life a
written request. No charges will be imposed to make a change in the Death
Benefit Option. The effective date of any such change will be the Monthly
Policy Date on or next following the date National Life receives the written
request. Only one change in Death Benefit Option is permitted in any one
Policy Year.
If the Death Benefit Option is changed from Option A to Option B, on
the effective date of the change, the Death Benefit will not change and the
Face Amount will be decreased by the Accumulated Value on that date. However,
this change may not be made if it would reduce the Basic Coverage to less than
the Minimum Basic Coverage Amount.
If the Death Benefit Option is changed from Option B to Option A, on
the effective date of the change, the Death Benefit will not change and the
Face Amount will be increased by the Accumulated Value on that date.
A change in the Death Benefit Option may affect the Net Amount at Risk
over time which, in turn, would affect the monthly Cost of Insurance Charge
(see "Monthly Deductions," Page ___). Changing from Option A to Option B will
generally result in a Net Amount at Risk that remains level. Such a change
will result in a relative increase in the Cost of Insurance Charges over time
because the Net Amount at Risk will, unless the Unadjusted Death Benefit is
based on the applicable percentage of Accumulated Value, remain level as cost
of insurance rates increase over time, rather than the Net Amount at Risk
decreasing as the Accumulated Value increases. Changing from Option B to
Option A will, if the Accumulated Value increases, decrease the Net Amount at
Risk over time, thereby potentially offsetting the effect of increases and over
time in the cost of insurance rates.
The effects of these Death Benefit Option changes on the Face Amount,
Unadjusted Death Benefit and Net Amount at Risk can be illustrated as follows.
Assume that a contract under Option A has a Face Amount of $500,000 and an
Accumulated Value of $100,000 and, therefore, an Unadjusted Death Benefit of
$500,000 and a Net Amount at Risk of $400,000 ($500,000 - $100,000). If the
Death Benefit Option is changed from Option A to Option B, the Face Amount will
decrease from $500,000 to $400,000 and the Unadjusted Death Benefit and Net
Amount at Risk would remain the same. The decrease will apply to Basic
Coverage and Additional Coverage in the order described under "Ability to
Adjust Face Amount - Decreases" on page . Assume that a contract under
Option B has a Face Amount of $500,000 and an Accumulated Value of $50,000 and,
therefore, the Unadjusted Death Benefit is $550,000 ($500,000 + $50,000) and
the Net Amount at Risk is $500,000 ($550,000 - $50,000). If the Death Benefit
Option is changed from Option B to Option A, the Face Amount will increase to
$550,000, and the Unadjusted Death Benefit and Net Amount at Risk would remain
the same. The $50,000 increase in Face Amount will be Basic Coverage.
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Code for life
insurance, National Life will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page ___.)
How the Death Benefit May Vary. The amount of the Death Benefit may
vary with the Accumulated Value in the following circumstances. The Death
Benefit under Option A will vary with the Accumulated Value whenever the
specified percentage of Accumulated Value exceeds the Face Amount of the
Policy.
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The Death Benefit under Option B will always vary with the Accumulated Value
because the Unadjusted Death Benefit equals the greater of (a) the Face Amount
plus the Accumulated Value and (b) the Accumulated Value multiplied by the
specified percentage.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, an Owner may generally, at any time
after the first Policy Year, increase or decrease the Policy's Face Amount by
submitting a written application to National Life. The effective date of an
increase will be the Monthly Policy Date on or next following National Life's
approval of the request, and the effective date of a decrease is the Monthly
Policy Date on or next following the date that National Life receives the
written request. An increase or decrease in Face Amount may have federal tax
consequences. (See "Tax Treatment Of Policy Benefits," Page ___.) The effect
of changes in Face Amount on Policy charges, as well as other considerations,
are described below.
Increase. A request for an increase in Face Amount may not be for
less than $50,000, or such lesser amount required in a particular state.
The Owner may not increase the Face Amount after the older of the two
Insureds' Attained Age 90 or if the Joint Age is greater than 90. To obtain
the increase, the Owner must submit an application for the increase and
provide evidence satisfactory to National Life of both Insureds'
insurability. The increase may be either an addition of Basic Coverage or
Additional Coverage. An increase in Basic Coverage will result in increased
Surrender Charges. An increase in Basic Coverage will also begin a new ten
year period for purposes of applying the Monthly Administrative Charge to
the new amount of Basic Coverage. If an increase in Basic Coverage would
move the Policy into a new size band for purposes of the Variable Account
Charge, the Variable Account Charge percentage rate may be reduced as a
result of the increase. In the event that an increase simultaneously adds
both Basic Coverage and Additional Coverage, the Basic Coverage is assumed
to have been added first.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be equal to the Monthly Deductions
then due, and the Surrender Charge associated with the increase, in the case
of an increase in Basic Coverage. If the Cash Surrender Value is not
sufficient, the increase will not take effect until the Owner makes a
sufficient additional premium payment to increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk which will increase the monthly Cost of Insurance Charges.
In addition, the Insureds may be in different Rate Classes as to the
increase in insurance coverage. An increase in premium payment or frequency
may be appropriate after an increase in Face Amount. (See "Cost of Insurance
Charge," Page ___.)
After an increase, part of the Net Amount at Risk will be attributable
to the initial coverage under the Policy and part will be attributable to the
increase. For purposes of allocating Accumulated Value to each coverage to
determine the Net Amount at Risk and Cost of Insurance Charge by coverage
segment, the Accumulated Value is first considered part of the initial segment.
If the Accumulated Value exceeds the initial segment's Face Amount, then it is
allocated to increases in Face Amount in the order that such increases took
effect.
Decrease. The amount of the Face Amount after a decrease cannot be
less than 75% of the largest Face Amount in force at any time in the twelve
months immediately preceding National Life's receipt of the request. The
Basic Coverage after any decrease may not be less than the Minimum Basic
Coverage Amount, which is currently $100,000. To the extent a decrease in
the Face Amount could result in cumulative premiums exceeding the maximum
premium limitations applicable for life insurance under the Code, National
Life will not effect the decrease.
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35
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease an Owner's monthly Cost of Insurance
Charges. If a decrease in Basic Coverage would move the Policy into a new
size band for purposes of the Variable Account Charge, the Variable Account
Charge percentage rate may be increased as a result of the decrease.
For purposes of determining the Monthly Deductions, any decrease in
the Face Amount will reduce the Face Amount in the following order: (a) the
increase in Face Amount provided by the most recent increase; (b) the next
most recent increases, in inverse chronological order; and (c) the Initial
Face Amount. If an increase involved the simultaneous addition of Basic
Coverage, Additional Coverage and Face Amount added through the operation of
the Automatic Increase Rider, a decrease in the Face Amount will reduce
automatic increase first, the Additional Coverage second, and then the Basic
Coverage.
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Cash Surrender Value is insufficient to pay the charges
and the Grace Period expires without an adequate premium payment by the Owner,
the Policy will lapse and terminate without value. Notwithstanding the
foregoing, during the first five Policy Years the Policy will not lapse if, as
of the Monthly Policy Date that the Cash Surrender Value of the Policy first
becomes insufficient to pay the charges, the Cumulative Minimum Monthly Premium
has been paid. The Owner has certain rights to reinstate the Policy, if it
should lapse. (See "Reinstatement," Page ___.)
In addition, an optional Guaranteed Death Benefit Rider is available
which will guarantee that the Policy will not lapse prior to a time specified
in such Rider, regardless of investment performance, if the Cumulative
Guarantee Premium has been paid as of each Monthly Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Variable Account and the Fixed Account. The Accumulated Value minus any
applicable Surrender Charge, and minus any outstanding Policy loans and accrued
interest, is equal to the Cash Surrender Value. There is no guaranteed minimum
for the portion of the Accumulated Value in any of the Subaccounts of the
Variable Account and, because the Accumulated Value on any future date depends
upon a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect the Net
Premiums paid, investment performance of the chosen Subaccounts of the Variable
Account, the crediting of interest on non-loaned Accumulated Value in the Fixed
Account and amounts held as Collateral in the Fixed Account, any transfers, any
Withdrawals, any loans, any loan repayments, and charges assessed in
connection with the Policy.
Determination of Number of Units for the Variable Account. Amounts
allocated, transferred or added to a Subaccount of the Variable Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of units a Policy
has in a Subaccount equals the number of units purchased minus the number of
units redeemed up to such time. For each Subaccount, the number of units
purchased or redeemed in connection with a particular transaction is determined
by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal
to the unit value on the immediately preceding Valuation Day multiplied by the
Net Investment Factor for that Subaccount on that Valuation Day.
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Net Investment Factor. Each Subaccount of the Variable Account has
its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or
decrease, as appropriate, to reflect net investment income and capital gains or
losses, realized and unrealized, for the securities of the underlying portfolio
or series.
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date
of Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the
Date of Issue. On each Valuation Day after the Date of Issue, the Accumulated
Value will be:
(1) The aggregate of the values attributable to the Policy in the
Variable Account, determined by multiplying the number of
units the Policy has in each Subaccount of the Variable
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Fixed Account (See
"The Fixed Account," Page ___.)
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. In order to purchase a Policy, an individual
must make application to National Life through a licensed National Life
agent who is also a registered representative of Equity Services, Inc.
("ESI") or a broker/dealer having a Selling Agreement with ESI or a
broker/dealer having a Selling Agreement with such a broker/dealer. If the
Minimum Initial Premium is not submitted with the application, it must be
submitted when the Policy is delivered. Prior to the Issue Date, National
Life will accept amounts less than the Minimum Initial Premium as long as
they are at least equal to the Minimum Monthly Premium. If the amount paid
by the Issue Date is not at least the Minimum Initial Premium, then all
premiums paid will be refunded, and the Policy will not be issued. If the
first premium is submitted when the Policy is delivered, and the premium is
less than the Minimum Initial Premium, the balance of the Minimum Initial
Premium must be received within five days, or all premiums will be refunded.
The minimum amount of Basic Coverage of a Policy under National Life's rules
is $100,000.
National Life reserves the right to revise its rules from time to time
to specify a different minimum amount of Basic Coverage for subsequently
issued Policies. A Policy will be issued only on two Insureds each of whom
has an Issue Age from 0 to 90 and whose Joint Age is from 15 to 90, and who
provide National Life with satisfactory evidence of insurability.
Acceptance is subject to National Life's underwriting rules. National Life
reserves the right to reject an application for any reason permitted by law.
(See "Cost of Insurance Rate", Page , and "Distribution of Policies,"
Page ___.)
From the time the application for a Policy is signed until the time
the Policy is issued, an applicant can, subject to National Life's
underwriting rules, obtain temporary survivorship insurance protection,
pending issuance of the Policy, by answering "no" with respect to both
Insureds to the Health Questions of the Receipt & Temporary Life Insurance
Agreement and submitting (a) a complete Application including any medical
questionnaire required, and (b) payment of the Minimum Monthly Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000
($100,000 in the case that the younger of the two proposed Insureds is age
70 or over). Coverage under the agreement will end on the earliest of (a)
the 90th day from the date of the agreement; (b) the date that insurance
takes effect under the Policy; (c) the date a policy, other than as applied
for, is offered to the Applicant; (d) three days from the date National Life
mails a notice of termination of coverage; (e) the time the Applicant first
learns that the Company has terminated the temporary life insurance; or (f)
the time the Applicant withdraws the application for life insurance.
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National Life will offer a one time credit to Home Office employees
who purchase a Policy, as both Owner and one of the two Insureds. This one
time credit will be 50% of the Target Premium on the Policy. The amount of the
credit will be added to the initial premium payment submitted by the Owner.
Thus, the credit will be included in premium payments for purposes of
calculating and deducting the Premium Tax Charge. If the Policy is
surrendered, the credit will not be recaptured by National Life. The amount of
the credit will not be included for purposes of calculating agent compensation
for the sale of the Policy.
Amount and Timing of Premiums. Each premium payment must be at least
$100. Subject to certain limitations described below, an Owner has
considerable flexibility in determining the amount and frequency of premium
payments.
At the time of application, each Owner will select a Planned Periodic
Premium schedule, based on a periodic billing mode of annual, semi-annual,
or quarterly payments. The Owner may request National Life to send a
premium reminder notice at the specified interval. The Owner may change the
Planned Periodic Premium frequency and amount. Also, under a
"Check-O-Matic" plan, the Owner can select a monthly payment schedule
pursuant to which premium payments will be automatically deducted from a
bank account or other source, rather than being "billed." National Life may
allow, in certain situations, Check-O-Matic or group billing payments of
less than $100. National Life reserves the right to require that
Check-O-Matic be set up for at least the Minimum Monthly Premium.
The Owner is not required to pay the Planned Periodic Premiums in
accordance with the specified schedule. The Owner may pay premiums in any
amount (subject to the $100 minimum and the limitations described in the
next section), frequency and time period. Payment of the Planned Periodic
Premiums will not, however, guarantee that the Policy will remain in force
(except that if such premiums are at least equal to the Cumulative Minimum
Monthly Premium, then the Policy will remain in force for at least 5 years,
or for the period covered by the Guaranteed Death Benefit Rider if such
Rider is purchased and premiums equal to or greater than the Cumulative
Guarantee Premium have been paid). Instead, the duration of the Policy
depends upon the Policy's Cash Surrender Value. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Cash
Surrender Value is insufficient to pay the Monthly Deductions and any other
charges under the Policy and if a Grace Period expires without an adequate
payment by the Owner (unless the Policy is in its first five years, or the
Guaranteed Death Benefit Rider has been purchased and remains applicable, so
long as the Cumulative Minimum Monthly Premium, or the Cumulative Guarantee
Premium, respectively, has been paid).
Any payments made while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless National Life
is notified in writing that the amount is to be applied as a loan repayment.
No premium payments may be made after the younger of the Insureds reaches
Attained Age 100. However, loan repayments will be permitted after the younger
of the Insureds Attained Age 100.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. (However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.)
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher
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Cost of Insurance Charges. Lower premium payments will result in a lower Net
Amount at Risk, and lower Cost of Insurance Charges.
Premium Limitations. With regard to a Policy's inside build up, the
Code provides for exclusion of the Death Benefit from gross income if total
premium payments do not exceed certain stated limits. In no event can the
total of all premiums paid under a Policy exceed such limits. If at any
time a premium is paid which would result in total premiums exceeding such
limits, National Life will only accept that portion of the premium which
would make total premiums equal the maximum amount which may be paid under
the Policy. The excess will be promptly refunded, and in the cases of
premiums paid by check, after such check has cleared. If there is an
outstanding loan on the Policy, the excess may instead be applied as a loan
repayment. Even if total premiums were to exceed the maximum premium
limitations established by the Code, the excess of (a) a Policy's Unadjusted
Death Benefit over (b) the Policy's Cash Surrender Value plus outstanding
Policy loans and accrued interest, would still generally be excludable from
gross income under the Code.
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Unadjusted Death Benefit at any time. As a result,
any Policy changes which affect the amount of the Unadjusted Death Benefit
may affect whether cumulative premiums paid under the Policy exceed the
maximum premium limitations. To the extent that any such change would
result in cumulative premiums exceeding the maximum premium limitations,
National Life will not effect such change. (See "Federal Income Tax
Considerations," Page ___.)
Unless the Insureds provide satisfactory evidence of insurability,
National Life reserves the right to limit the amount of any premium payment
if it increases the Unadjusted Death Benefit more than it increases the
Accumulated Value. However, premiums will not be limited to the extent that
they are Planned Periodic Premiums.
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Expense Charge. In the application for the Policy, the
Owner will indicate how Net Premiums should be allocated among the
Subaccounts of the Variable Account and/or the Fixed Account. These
allocations may be changed at any time by the Owner by written notice to
National Life at its Home Office, or if the telephone transaction privilege
has been elected, by telephone instructions (See "Telephone Transaction
Privilege," Page ___.) The percentages of each Net Premium that may be
allocated to any Subaccount must be in whole numbers of not less than 5%,
and the sum of the allocation percentages must be 100%. Except in the
circumstances described in the following paragraph, National Life will
allocate the Net Premiums as of the Valuation Date it receives such premium
at its Home Office, based on the allocation percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums
received by National Life before the end of the free-look period which are
to be allocated to the Variable Account will be allocated to the Money
Market Subaccount. For this purpose, National Life will assume that the
free-look period will end 20 days after the date the Policy is issued. On
the first Valuation Date following 20 days after issue of the Policy,
National Life will allocate the amount in the Money Market Subaccount to
each of the Subaccounts selected in the application based on the proportion
that the allocation percentage set forth in the application for such
Subaccount bears to the sum of the Variable Account premium allocation
percentages then in effect.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50%
to the Fixed Account. During the period stated above, 50% (25% + 25%) of
the Net Premiums will be allocated to the Money Market Subaccount. At the
end of such period, 50% (25% / 50%) of the amount in the Money Market
Subaccount will be transferred to the Managed Subaccount and 50% to the Bond
Subaccount.
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The values of the Subaccounts will vary with their investment
experience and the Owner bears the entire investment risk. Owners should
periodically review their allocation percentages in light of market
conditions and the Owner's overall financial objectives.
Transfers. The Owner may transfer the Accumulated Value between and
among the Subaccounts of the Variable Account and the Fixed Account by making a
written transfer request to National Life, or if the telephone transaction
privilege has been elected, by telephone instructions to National Life. (See
"Telephone Transaction Privilege," Page ___.) Transfers between and among the
Subaccounts of the Variable Account and the Fixed Account are made as of the
Valuation Day that the request for transfer is received at the Home Office.
The Owner may, at any time, transfer all or part of the amount in one of the
Subaccounts of the Variable Account to another Subaccount and/or to the Fixed
Account. (For transfers from the Fixed Account to the Variable Account, see
"Transfers from Fixed Account," Page ___.)
Currently an unlimited number of transfers is permitted without
charge, and National Life has no current intent to impose a transfer charge in
the foreseeable future. However, National Life reserves the right, upon prior
notice to Policy Owners, to change this policy so as to deduct a $25 transfer
charge from each transfer in excess of the twelfth transfer during any one
Policy Year. All transfers requested during one Valuation Period are treated
as one transfer transaction. If a transfer charge is adopted in the future,
transfers resulting from Policy loans, the operation of the dollar cost
averaging or portfolio rebalancing features, the exercise of Special Transfer
Rights (see "Policy Rights - Special Transfer Rights," Page ___), and the
reallocation from the Money Market Subaccount following the 10-day period after
the Date of Issue, will not be subject to a transfer charge and will not count
against the twelve free transfers in any Policy Year. Under present law,
transfers are not taxable transactions.
Policy Lapse. The failure to make a premium payment will not itself
cause a Policy to lapse. Lapse will only occur when the Cash Surrender Value is
insufficient to cover the Monthly Deductions and other charges under the Policy
and the Grace Period expires without a sufficient payment. During the first
five Policy Years, the Policy will not lapse so long as the Cumulative Minimum
Monthly Premium has been paid, regardless of whether the Cash Surrender Value is
sufficient to cover the monthly Deductions and other charges. In addition, if
the Owner has elected at issue the Guaranteed Death Benefit Rider, and has paid
the Cumulative Guarantee Premium as of each Monthly Policy Date, the Policy will
not lapse, either prior to the end of the year that the younger Insured attains
Age 80 or for the entire lifetimes of the two Insureds, whichever is elected by
the Owner, regardless of whether the Cash Surrender Value is sufficient to cover
the Monthly Deductions. (See "Optional Benefits - Guaranteed Death Benefit,"
Page ___.)
The Policy provides for a 61-day Grace Period that is measured from
the date on which notice is sent by National Life. The Policy does not lapse,
and the insurance coverage continues, until the expiration of this Grace
Period. In order to prevent lapse, the Owner must during the Grace Period make
a premium payment equal to the sum of any amount by which the past Monthly
Deductions have been in excess of Cash Surrender Value, plus three times the
Monthly Deduction due the date the Grace Period began. The notice sent by
National Life will specify the payment required to keep the Policy in force.
Failure to make a payment at least equal to the required amount within the
Grace Period will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated
at any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period by submitting evidence of both
Insureds' insurability satisfactory to National Life and payment of an amount
sufficient to provide for two times the Monthly Deduction due on the date the
Grace Period began plus three times the Monthly Deduction due on the effective
date of reinstatement, which is, unless otherwise required by state law, the
Monthly Policy Date on or next following the date the reinstatement application
is approved. Upon reinstatement, the Accumulated Value will be based upon the
premium paid to reinstate the Policy and the Policy will be reinstated with the
same Date of Issue as it had prior to the lapse. Neither the five year no
lapse guarantee nor the Death Benefit Guarantee Rider may be reinstated.
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Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing
the Policy in part for such purposes entails certain risks. For example, if
the investment performance of Subaccounts to which Policy Value is allocated is
poorer than expected or if sufficient premiums are not paid, the Policy may
lapse or may not accumulate sufficient Accumulated Value or Cash Surrender
Value to fund the purpose for which the Policy was purchased. Withdrawals and
Policy loans may significantly affect current and future Accumulated Value,
Cash Surrender Value, or Death Benefit proceeds. Depending upon Subaccount
investment performance and the amount of a Policy loan, the loan may cause a
Policy to lapse. Because the Policy is designed to provide benefits on a
long-term basis, before purchasing a Policy for a specialized purpose a
purchaser should consider whether the long-term nature of the Policy is
consistent with the purpose for which it is being considered. Using a Policy
for a specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page ___.)
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) issuing and administering the Policy; (c) assuming certain
mortality and other risks in connection with the Policy; and (d) incurring
expenses in distributing the Policy including costs associated with printing
prospectuses and sales literature and sales compensation. National Life may
realize a profit from any charges. Any such profit may be used for any
purpose, including payment of distribution expenses.
PREMIUM EXPENSE CHARGE
The Premium Expense Charge consists of two portions. The first is
that a deduction of 3.40% of the premium will be made from each premium payment
prior to allocation of Net Premiums, to cover state premium taxes and the
federal DAC Tax.
The federal DAC Tax is a tax attributable to certain "policy
acquisition expenses" under Section 848 of the Code. Section 848 in effect
accelerates the realization of income National Life receives from the Policies,
and therefore the payment of federal income taxes on that income. The economic
consequence of Section 848 is, therefore, an increase in the tax burden borne by
National Life that is attributable to the Policies.
The Premium Expense Charge will also include, during the first 10
Policy Years, a deduction of 7.0% of the premium up to the Target Premium, and
4.0% of premium in excess of the Target Premium, from each premium payment prior
to allocation of Net Premiums, to compensate National Life for the expenses
incurred in distributing the Policies, including commissions to selling agents.
National Life reserves the right to increase the the charge for premiums in
excess of the Target Premium from 4.0% to 5.0% of such premiums. National Life
currently intends to reduce this deduction from premiums paid after the tenth
Policy Anniversary to 4.0% of all premiums, although it reserves the right to
make a deduction of up to the maximum permitted during the first ten years.
SURRENDER CHARGE
A Surrender Charge is imposed if the Policy is surrendered or lapses
at any time before the end of the tenth Policy Year, or the ten years after an
increase in the Basic Coverage. The Surrender Charge rate depends on the Joint
Age at issue or at the time of increase in Basic Coverage. The initial
Surrender Charge per $1,000 of Basic Coverage is shown in Appendix B to this
Prospectus. The Surrender Charge will be level for up to five years, and then
decline each month by one sixtieth of the initial Surrender Charge until it is
zero at the beginning of Policy Year 11, or at the beginning of the eleventh
year after the date of an increase in Basic Coverage (or, for those cases in
which the level Surrender Charge period is
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less than five years from the Date of Issue or the effective date of the
increase, declining each month by an amount equal to the initial Surrender
Charge multiplied by a fraction of which the numerator is one and the
denominator is the number of months from the end of the level Surrender Charge
period to the beginning of Policy Year 11, or the beginning of the eleventh
year from the effective date of the increase). The Surrender Charge will not
decrease in the event of a decrease in Basic Coverage. The actual Surrender
Charge for your Policy will be stated in the Policy.
MONTHLY DEDUCTIONS
Charges will be deducted from the Accumulated Value on the Date of
Issue and on each Monthly Policy Date. The Monthly Deduction consists of four
components - (a) the Cost of Insurance Charge, (b) the Variable Account Charge,
(c) the Monthly Administrative Charge, and (d) the cost of any additional
benefits provided by Rider. Because portions of the Monthly Deduction, such as
the Cost of Insurance Charge, can vary from Policy Month to Policy Month, the
Monthly Deduction may vary in amount from Policy Month to Policy Month. The
Monthly Deduction will be deducted on a pro rata basis from the Subaccounts of
the Variable Account and the Fixed Account, unless the Owner has elected at the
time of application, or later requests in writing, that the Monthly Deduction be
made from the Money Market Subaccount. If a Monthly Deduction cannot be made
from the Money Market Subaccount, where that has been elected, the amount of the
deduction in excess of the Accumulated Value available in the Money Market
Subaccount will be made on a pro rata basis from Accumulated Value in the
Subaccounts of the Variable Account and the Fixed Account.
Cost of Insurance Charge. Because the Cost of Insurance Charge
depends upon several variables, the cost for each Policy Month can vary.
National Life will determine the monthly Cost of Insurance Charge by
multiplying the applicable cost of insurance rate or rates by the Net Amount at
Risk for each Policy Month.
The Net Amount at Risk on any Monthly Policy Date is the amount by
which the Unadjusted Death Benefit on that Monthly Policy Date, adjusted by a
factor, exceeds the Accumulated Value. This factor is 1.00327234, and is used
to reduce the Net Amount at Risk, solely for purposes of computing the Cost of
Insurance Charge, by taking into account assumed monthly earnings at an annual
rate of 4%. The Net Amount at Risk is determined separately for the Initial
Face Amount and any increases in Face Amount. In determining the Net Amount at
Risk for each increment of Face Amount, the Accumulated Value is first
considered part of the Initial Face Amount. If the Accumulated Value exceeds
the Initial Face Amount, it is considered as part of any increases in Face
Amount in the order such increases took effect.
If the Policy includes Basic Coverage, Additional Coverage and
coverage added through the operation of the Automatic Increase Rider, the Net
Amount at Risk is separated into portions applicable to each type of coverage.
For this purpose, Accumulated Value is applied against Basic Coverage first,
Additional Coverage second and automatic increase third if they began
simultaneously. Any change in the Net Amount at Risk will affect the total
Cost of Insurance Charges paid by the Owner.
A cost of insurance rate is also determined separately for the
Initial Face Amount and any increases in Face Amount. In calculating the Cost
of Insurance Charge, a rate based on the Rate Classes of the two Insureds on the
Date of Issue is applied to the Net Amount at Risk for the Initial Face Amount.
For each increase in Face Amount, a rate based on the Rate Classes of the two
Insureds applicable at the time of the increase is used. If, however, the
Unadjusted Death Benefit is calculated as the Accumulated Value times the
specified percentage, the rate based on the Rate Classes for the Initial Face
Amount will be used for the amount of the Unadjusted Death Benefit in excess of
the total Face Amount. Again, if any time segment includes both Basic Coverage
and Additional Coverage, separate cost of insurance rates are applied to each
type of coverage.
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Cost of Insurance Rate. The guaranteed maximum cost of insurance
rates are set forth in the Policy, and will depend on each Insured's Issue Age,
sex, substandard or uninsurable status, the coverage's Duration, and the 1980
Commissioners Standard Ordinary Mortality Table. Guaranteed maximum cost of
insurance rates will also vary depending on whether the coverage is Basic
Coverage or Additional Coverage, with higher rates being applicable to
Additional Coverage. The actual cost of insurance rates used ("current rates")
will depend on each Insured's Issue Age, sex, and Rate Class, as well as the
coverage's Duration, and whether the coverage is Basic Coverage or Additional
Coverage (however, current rates applicable to Additional Coverage may be higher
or lower than for Basic Coverage). National Life periodically reviews the
adequacy of its current cost of insurance rates and may adjust their level.
However, they will never exceed guaranteed maximum cost of insurance rates. Any
change in the current cost of insurance rates will apply to all sets of persons
of the same Issue Ages, sexes, and Rate Classes, and with coverages of the same
Duration.
Rate Class. The Rate Classes of the two Insureds will affect the
current cost of insurance rates. National Life currently places Insureds into
preferred nonsmoker, nonsmoker, preferred smoker, smoker, substandard, and
uninsurable classes. Smoker, substandard, and uninsurable classes reflect
higher mortality risks. In an otherwise identical Policy, Insureds in a
preferred or standard class will have a lower Cost of Insurance Charge than
Insureds in a substandard class with higher mortality risks. Nonsmoking
Insureds will generally incur lower cost of insurance rates than Insureds who
are classified as smokers. Classification of an Insured as substandard or
uninsurable will also affect the guaranteed cost of insurance rates.
Variable Account Charge. The Variable Account Charge varies by the
amount of Basic Coverage in the Policy. It is a percentage of the Accumulated
Value in the Variable Account, and does not apply to Accumulated Value in the
Fixed Account. During the first 10 Policy Years, for Policies with Basic
Coverage less than $1,000,000, the current annual charge is 0.90%; for Policies
with Basic Coverage from $1,000,000 to $2,999,999, the current annual charge is
0.80%, and for Policies with Basic Coverage of $3 million or more, the current
annual charge is 0.75%. In all cases, National Life reserves the right to
increase this charge to an amount not to exceed 0.90%. For years after Policy
Year 10, National Life currently intends to reduce this charge to the following
rates: for Polices with Basic Coverage of less than $1,000,000, an annual charge
of 0.35%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, an
annual charge of 0.30%, and for Policies with Basic Coverage of $3 million or
more, an annual charge of 0.25%. However, National Life reserves the right to
continue to charge a Variable Account Charge in an annual amount up to 0.90% in
years after Policy Year 10.
Monthly Administrative Charge. The amount of the Monthly
Administrative Charge during the first ten Policy Years is $15.00, plus $0.08
per $1000 of Basic Coverage (less for Joint Ages of 38 or less). The per $1000
portion of this charge during the first ten Policy Years will be increased by
$.005 per $1000 of Basic Coverage for each Insured who is a smoker. National
Life classifies all nicotine users as smokers, including cigarette, cigar, pipe,
chewing tobacco, snuff, nicotine patches and nicotine gum.
After the first ten Policy Years, National Life currently intends to
charge a Monthly Administrative Charge in the amount of $7.50, with no
additional amount per $1000 of Basic Coverage, and during this period the
Monthly Administrative Charge is guaranteed not to exceed $15.00, plus $0.08 per
$1000 of Basic Coverage plus $0.005 per $1000 of Basic Coverage for each Insured
who is a smoker. In addition, the $0.08 per $1000 of Basic Coverage portion of
the Monthly Administrative Charge will apply to increases in Basic Coverage for
10 years after an increase in Basic Coverage.
Optional Benefit Charges. The Monthly Deduction will include charges
for any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits," on Page ___ below.
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WITHDRAWAL CHARGE
At the time of a Withdrawal, National Life will assess a charge equal
to the lesser of 2% of the Withdrawal amount and $25. This Withdrawal Charge
will be deducted from the Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts,
or from the Variable Account to the Fixed Account, and transfers from the Fixed
Account to the Variable Account are permitted within the limits described on
Page ___, in each case without charge. National Life has no present intention
to impose a transfer charge in the foreseeable future. However, National Life
reserves the right to impose in the future a transfer charge of $25 on each
transfer in excess of twelve transfers in any Policy Year. The Transfer Charge
would be imposed to compensate National Life for the costs of processing such
transfers, and would not be designed to produce a profit.
If imposed, the transfer charge will be deducted from the amount being
transferred. All transfers requested on the same Valuation Day are treated as
one transfer transaction. Any future transfer charge will not apply to
transfers resulting from Policy loans, the exercise of special transfer rights,
the initial reallocation of account values from the Money Market Subaccount to
other Subaccounts, and any transfers made pursuant to the Dollar Cost Averaging
and Portfolio Rebalancing features. These transfers will not count against the
twelve free transfers in any Policy Year.
PROJECTION REPORT CHARGE
National Life may impose a charge for each projection report
requested by the Owner. This report will project future values and future Death
Benefits for the Policy. National Life will notify the Owner in advance of the
amount of the charge, and the Owner may elect to pay the charge in advance. If
not paid in advance, this charge will be allocated among and deducted from the
Subaccounts of the Variable Account and/or the Fixed Account in proportion to
their respective Accumulated Values on the date of the deduction.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset value.
The net asset value of those shares reflect management fees and expenses
already deducted from the assets of the Funds' Portfolios. The fees and
expenses for the Funds and their Portfolios are described briefly in connection
with a general description of each Fund, and historical expense ratio
information for the Funds is presented in the "Summary of Policy Expenses"
section on page above. More detailed information is contained in the
Funds Prospectuses which are attached to or accompany this Prospectus.
POLICY RIGHTS
LOAN PRIVILEGES
General. The Owner may at any time after the first anniversary of the
Date of Issue (and during the first year where required by law) borrow money
from National Life using the Policy as the only security for the loan. The
Owner may obtain Policy loans while the Policy is in force in an amount not
exceeding the Policy's Cash Surrender Value on the date of receipt of the loan
request, minus three times the Monthly Deduction for the most recent Monthly
Policy Date. However, for Policies which have elected the Guaranteed Death
Benefit Rider, if the Owner obtains a Policy loan in excess of the cumulative
premiums paid minus the Cumulative Guarantee Premium, then the Guaranteed Death
Benefit Rider will enter a lapse pending notification period. This means that
the Guaranteed Death Benefit Rider (but not the Policy itself) will lapse if a
sufficient premium is not paid within the 61-day lapse pending notification
period.
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While either Insured is living, the Owner may repay all or a portion
of a loan and accrued interest. Loans may be taken by making a written request
to National Life at its Home Office, or, if the telephone transaction privilege
has been elected, by providing telephone instructions to National Life at its
Home Office. Loan proceeds will be paid within seven days of a valid loan
request. (See "Telephone Transaction Privilege," Page ___.) National Life
limits the amount of a Policy loan taken pursuant to telephone instructions to
$25,000.
Interest Rate Charged. The interest rate charged on Policy loans will
be at the fixed rate of 6% per year. At the end of the Policy Year, the loan
interest will be added to the loan balance. Any payments made by the Owner to
cover loan interest will be used to reduce the amount of the Policy loan.
Allocation of Loans and Collateral. When a Policy loan is taken,
Accumulated Value is held in the Fixed Account as Collateral for the Policy
loan. Accumulated Value is taken from the Subaccounts of the Variable Account
based upon the instructions of the Owner at the time the loan is taken. If
specific allocation instructions have not been received from the Owner, the
Policy loan will be allocated to the Subaccounts based on the proportion that
each Subaccount's value bears to the total Accumulated Value in the Variable
Account. If the Accumulated Value in one or more of the Subaccounts is
insufficient to carry out the Owner's instructions, the loan will not be
processed until further instructions are received from the Owner. Non-loaned
Accumulated Value in the Fixed Account will become Collateral for a loan only
to the extent that the Accumulated Value in the Variable Account is
insufficient. Loan interest will be allocated among and transferred first from
the Subaccounts of the Variable Account in proportion to the Accumulated Values
held in the Subaccounts, and then from the non-loaned portion of the Fixed
Account.
The Collateral for a Policy loan will initially be the loan amount.
Loan interest will be added to the Policy loan. National Life will take
additional Collateral for such loan interest so added pro rata from the
Subaccounts of the Variable Account, and then, if the amounts in the Variable
Account are insufficient, from the non-loaned portion of the Fixed Account, and
hold the Collateral in the Fixed Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including interest
added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the
Policy is in force, National Life will credit the amount held in the Fixed
Account as Collateral with interest at effective annual rates it determines,
but not less than 4% or such higher minimum rate required under state law. The
rate will apply to the calendar year which follows the date of determination.
Preferred Policy Loans. National Life currently intends, but is not
obligated to continue, to make preferred Policy loans available at the
beginning of Policy Year 11. At such time the rate of interest charged on all
loans will be 4.25%, and amounts held as Collateral in the Fixed Account will
be credited with interest at an annual rate of 4.0%. National Life is not
obligated to continue to make preferred loans available, and will make such
loans available in its sole discretion. Preferred loans may not be treated as
indebtedness for federal income tax purposes.
Effect of Policy Loan. Policy loans, whether or not repaid, will have
a permanent effect on the Accumulated Value and the Cash Surrender Value, and
may permanently affect the Death Benefit under the Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable,
depending on whether the investment performance of the Subaccounts and the
interest credited to the Accumulated Value in the Fixed Account not held as
Collateral is less than or greater than the interest being credited on the
amounts held as Collateral in the Fixed Account while the loan is outstanding.
Compared to a Policy under which no loan is made, values under a Policy will be
lower when the credited interest rate on Collateral is less than the investment
experience of assets held in the Variable Account and interest credited to the
Accumulated Value in the Fixed Account not held as Collateral. The longer a
loan is outstanding, the greater the effect a Policy loan is likely to have.
The Death Benefit will be reduced by the amount of any outstanding Policy loan.
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Loan Repayments. National Life will assume that any payments made
while there is an outstanding loan on the Policy are premium payments, rather
than loan repayments, unless it receives written instructions that a payment is
a loan repayment. In the event of a loan repayment, the amount held as
Collateral in the Fixed Account will be reduced by an amount equal to the
repayment, and such amount will be transferred to the Subaccounts of the
Variable Account and to the non-loaned portion of the Fixed Account based on
the Net Premium allocations in effect at the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under
a Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page ___ and "Policy Lapse," Page ___.) In addition, if the
Policy is not a Modified Endowment Policy, lapse of the Policy with outstanding
loans may result in adverse federal income tax consequences. (See "Tax
Treatment of Policy Benefits," Page ___.)
Tax Considerations. Any loans taken from a "Modified Endowment
Contract" will be treated as a taxable distribution. In addition, with certain
exceptions, a 10% additional income tax penalty will be imposed on the portion
of any loan that is included in income. (See "Distributions from Policies
Classified as Modified Endowment Contracts," Page ___.)
SURRENDER PRIVILEGE
At any time before the death of the last to die of the two Insureds,
the Owner may surrender the Policy for its Cash Surrender Value. The Cash
Surrender Value is the Accumulated Value minus any Policy loan and accrued
interest and less any applicable Surrender Charge. The Cash Surrender Value
will be determined by National Life on the Valuation Day it receives, at its
Home Office, a written surrender request signed by the Owner, and the Policy.
A surrender may not be requested over the telephone. Coverage under the Policy
will end on the day the Owner mails or otherwise sends the written surrender
request and the Policy to National Life. Surrender proceeds will ordinarily be
mailed by National Life to the Owner within seven days of receipt of the
request. (See "Other Policy Provisions - Payment of Policy Benefits", Page
___.)
A surrender may have Federal income tax consequences. (See "Tax
Treatment of Policy Benefits," Page ___.
WITHDRAWAL OF CASH SURRENDER VALUE
At any time before the death of the last to die of the two Insureds
and after the first Policy Anniversary, the Owner may withdraw a portion of the
Policy's Cash Surrender Value. The minimum amount which may be withdrawn is
$500. The maximum Withdrawal is the Cash Surrender Value on the date of
receipt of the Withdrawal request, minus three times the Monthly Deduction for
the most recent Monthly Policy Date. However, for Policies which have elected
the Guaranteed Death Benefit Rider, if the Owner obtains a Withdrawal in excess
of the cumulative premiums paid minus the Cumulative Guarantee Premium, then
the Guaranteed Death Benefit Rider will enter a lapse pending notification
period. This means that the Guaranteed Death Benefit Rider (but not the Policy
itself) will lapse if a sufficient premium is not paid within the 61-day lapse
pending notification period.
A Withdrawal Charge will be deducted from the amount of the
Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and
Deductions - Withdrawal Charge" on Page ___.
The Withdrawal will be taken from the Subaccounts of the Variable
Account based upon the instructions of the Owner at the time of the Withdrawal.
If specific allocation instructions have not been received from the Owner, the
Withdrawal will be allocated to the Subaccounts based on the proportion that
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each Subaccount's value bears to the total Accumulated Value in the Variable
Account. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out the Owner's instructions, the Withdrawal will not be processed
until further instructions are received from the Owner. Withdrawals will be
taken from the Fixed Account only to the extent that Accumulated Value in the
Variable Account is insufficient.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page ___.)
Option A. The effect of a Withdrawal on the Face Amount and Unadjusted
Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount and the
Unadjusted Death Benefit by the lesser of such excess and the amount
of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
younger Insured is under 40 and there is no indebtedness. The
applicable percentage is 250% for a younger Insured with an Attained
Age under 40.
Under Option A, a contract with a Face Amount of $300,000 and
an Accumulated Value of $30,000 will have an Unadjusted Death Benefit
of $300,000. Assume that the Owner takes a Withdrawal of $10,000. The
Withdrawal Charge will be $25 and the amount paid to the Owner will be
$9,975. The Withdrawal will reduce the Accumulated Value to $20,000
($30,000 - $10,000) after the Withdrawal. The Face Amount divided by
the applicable percentage is $120,000 ($300,000 / 2.50), which exceeds
the Accumulated Value after the Withdrawal by $100,000 ($120,000 -
$20,000). The lesser of this excess and the amount of the Withdrawal
is $10,000, the amount of the Withdrawal. Therefore, the Unadjusted
Death Benefit and Face Amount will be reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after the
Withdrawal, then the Face Amount is not reduced. The Unadjusted Death
Benefit will be reduced by an amount equal to the reduction in
Accumulated Value times the applicable percentage (or equivalently,
the Unadjusted Death Benefit is equal to the new Accumulated Value
times the applicable percentage).
Under Option A, a policy with a Face Amount of $300,000 and an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal
of $10,000. The Withdrawal Charge will be $25 and the amount paid to
the Owner will be $9,975. The Withdrawal will reduce the Accumulated
Value to $140,000 ($150,000 - $10,000). The Face Amount divided by
the applicable percentage is $120,000, which does not exceed the
Accumulated Value after the withdrawal. Therefore, the Face Amount
stays at $300,000 and the Unadjusted Death Benefit is $350,000
($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus
the Accumulated Value, a Withdrawal will reduce the Accumulated Value
by the amount of the Withdrawal and thus the Unadjusted Death Benefit
will also be reduced by the amount of the Withdrawal.
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Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of
$390,000 ($300,000 + $90,000). Assume the Owner takes a Withdrawal of
$20,000. The Withdrawal Charge will be $25 and the amount paid to the
Owner will be $19,975. The Withdrawal will reduce the Accumulated
Value to $70,000 ($90,000 - $20,000) and the Unadjusted Death Benefit
to $370,000 ($300,000 + $70,000). The Face Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the
Withdrawal is based on the applicable percentage of Accumulated Value,
the Unadjusted Death Benefit will be reduced to equal the greater of
(a) the Face Amount plus the Accumulated Value after deducting the
amount of the Withdrawal and Withdrawal Charge and (b) the applicable
percentage of Accumulated Value after deducting the amount of the
Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $210,000 will have an Unadjusted Death Benefit of
$525,000 ($210,000 X 2.5). Assume the Owner takes a Withdrawal of
$60,000. The Withdrawal Charge will be $25 and the amount paid to the
Owner will be $59,975. The Withdrawal will reduce the Accumulated
Value to $150,000 ($210,000 - $60,000), and the Unadjusted Death
Benefit to the greater of (a) the Face Amount plus the Accumulated
Value, or $450,000 ($300,000 + $150,000) and (b) the Unadjusted Death
Benefit based on the applicable percentage of the Accumulated Value,
or $375,000 ($150,000 X 2.50). Therefore, the Unadjusted Death
Benefit will be $450,000. The Face Amount is unchanged.
Any decrease in Face Amount due to a Withdrawal will reduce Face
Amount in the order described under "Ability to Adjust Face Amount - Decreases"
on page .
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount
at Risk which is used to calculate the Cost of Insurance Charge under the
Policy. (See "Cost of Insurance Charge," Page ___.) Since a Withdrawal reduces
the Accumulated Value, the Cash Surrender Value of the Policy is reduced,
thereby increasing the likelihood that the Policy will lapse. (See "Policy
Lapse," Page ___.) Also, if a Withdrawal would result in cumulative premiums
exceeding the maximum premium limitations applicable under the Code for life
insurance, National Life will not allow such Withdrawal.
Withdrawals may be requested only by sending a written request, signed
by the Owner, to National Life at its Home Office. A Withdrawal may not be
requested over the telephone. A Withdrawal will ordinarily be paid within
seven days of receipt at the Home Office of a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page ___.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which the Owner
may cancel the Policy and receive a refund equal to the gross premiums paid on
the Policy. This free-look period ends 10 days after the Owner receives the
Policy (or any longer period provided by state law). To cancel the Policy, the
Owner must return the Policy to National Life or to an agent of National Life
within such time with a written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If the telephone transaction privilege has been elected, either on the
application for the Policy or thereafter by providing a proper written
authorization to National Life, an Owner may effect changes in premium
allocation, transfers, and loans of up to $25,000 by providing instructions to
National Life at its Home Office over the telephone. National Life reserves
the right to suspend telephone transaction
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privileges at any time, for any reason, if it deems such suspension to be in
the best interests of Policy Owners.
National Life will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If National Life follows
these procedures it will not be liable for any losses due to unauthorized or
fraudulent instructions. National Life may be liable for any such losses if
those reasonable procedures are not followed. The procedures to be followed
for telephone transfers will include one or more of the following: requiring
some form of personal identification prior to acting on instructions received
by telephone, providing written confirmation of the transaction, and making a
tape recording of the instructions given by telephone.
SPECIAL TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following
Policy issue, the Owner may, on one occasion, transfer the entire Accumulated
Value in the Variable Account to the Fixed Account, without regard to any
limits on transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment
policy of a Subaccount of the Variable Account is materially changed, the Owner
may transfer the portion of the Accumulated Value in such Subaccount to another
Subaccount or to the Fixed Account, without regard to any limits on transfers
or free transfers.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
National Life currently offers, at no charge to Owners, the following
automated fund management features. Only one of these two automated fund
management features may be operable at any time. National Life is not legally
obligated to continue to offer these features, and although it has no current
intention to do so, it may cease offering one or both such features at any
time, after providing 60 days prior written notice to all Owners who are
currently utilizing the features being discontinued.
Dollar Cost Averaging. This feature permits an Owner to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. It may be elected at issue by marking the appropriate box on
the initial application, and completing the appropriate instructions, or, after
issue, by filling out similar information on a change request form and sending
it to the Home Office.
If this feature is elected, the amount to be transferred will be taken
from the Money Market Subaccount and transferred to the Subaccount or
Subaccounts designated to receive the funds, each month on the Monthly Policy
Date (starting with the Monthly Policy Date next succeeding the date that the
reallocation of the Accumulated Value out of the Money Market Subaccount and
into the other Subaccounts would normally have occurred after expiration of the
10-day free look period after the Owner receives the Policy, or next succeeding
the date of an election subsequent to purchase), until the amount in the Money
Market Fund is depleted. The minimum monthly transfer by Dollar Cost Averaging
is $100, except for the transfer which reduces the amount in the Money Market
Subaccount to zero. An Owner may discontinue Dollar Cost Averaging at any time
by sending an appropriate change request form to the Home Office. The dollar
cost averaging feature may not be used to transfer Accumulated Value to the
Fixed Account.
This feature allows an Owner to move funds into the various investment
types on a more gradual and systematic basis than the frequency on which
premiums are paid. The periodic investment of the same amount will result in
higher numbers of units being purchased when unit prices are lower, and lower
numbers of units being purchased when unit prices are higher. This will
result, over time, in a lower cost per unit than the average of the unit costs
on the days on which the automated purchases are made. This technique will
not, however, assure a profit or protect against a loss in declining markets.
Moreover, for
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the dollar cost averaging technique to be effective, amounts should be
available for allocation from the Money Market Subaccount through periods of
low price levels as well as higher price levels.
Portfolio Rebalancing. This feature permits an Owner to automatically
rebalance the value in the Subaccounts on a quarterly, semi-annual or annual
basis, based on the Owner's premium allocation percentages in effect at the
time of the rebalancing. It may be elected at issue by marking the appropriate
box on the initial application, or, after issue, by completing a change request
form and sending it to the Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date three, six or twelve months after the
Date of Issue, and then on each Monthly Policy Date three, six or twelve
months thereafter. Policies electing Portfolio Rebalancing after issue will
have the first automated transfer occur as of the Monthly Policy Date on or
next following the date that the election is received at the Home Office, and
subsequent rebalancing transfers will occur every three, six or twelve months
from such date. An Owner may discontinue Portfolio Rebalancing at any time by
submitting an appropriate change request form to the Home Office.
In the event that an Owner changes the Policy's premium allocation
percentages, Portfolio Rebalancing will automatically be discontinued unless
the Owner specifically directs otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and
into Subaccounts which have had relatively unfavorable investment performance
in relation to the other Subaccounts to which the Policy allocates premiums.
THE GENERAL ACCOUNT
An Owner may allocate some or all of the Net Premiums and transfer
some or all of the Accumulated Value to National Life's Fixed Account.
National Life credits interest on Net Premiums and Accumulated Value
allocated to the Fixed Account at rates declared by National Life (subject to
a minimum guaranteed interest rate of 4%). The principal, after deductions,
is also guaranteed. National Life's Fixed Account supports its insurance and
annuity obligations. All assets in the Fixed Account are subject to National
Life's general liabilities from business operations.
The Fixed Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933, and the Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the Fixed Account and the interests therein are generally not
subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures
may be subject to certain generally applicable provisions of the Federal
securities laws relating to the accuracy and completeness of statements made
in prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulated Value in the Fixed Account is guaranteed to accumulate
at a minimum effective annual interest rate of 4%. National Life may credit
the non-loaned Accumulated Value in the Fixed Account with current rates in
excess of the minimum guarantee but is not obligated to do so. These current
interest rates are influenced by, but do not necessarily correspond to,
prevailing general market interest rates. Since National Life, in its sole
discretion, anticipates changing the current interest rate from time to time,
allocations to the Fixed Account made at different times are likely to be
credited with different current interest rates. An interest rate will be
declared by National Life each month to apply to amounts allocated or
transferred to the Fixed Account in that month. The rate declared on such
amounts
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will remain in effect for twelve months. At the end of the 12-month period,
National Life reserves the right to declare a new current interest rate on
such amounts and accrued interest thereon (which may be a different current
interest rate than the current interest rate on new allocations to the Fixed
Account on that date). Any interest credited on the amounts in the Fixed
Account in excess of the minimum guaranteed rate of 4% per year will be
determined in the sole discretion of National Life. The Owner assumes the
risk that interest credited may not exceed the guaranteed minimum rate.
Amounts deducted from the non-loaned Accumulated Value in the Fixed
Account for Withdrawals, Policy loans, transfers to the Variable Account,
Monthly Deductions or other charges are currently, for the purpose of
crediting interest, accounted for on a last in, first out ("LIFO") method.
National Life reserves the right to change the method of crediting
interest from time to time, provided that such changes do not have the
effect of reducing the guaranteed rate of interest below 4% per annum or
shorten the period for which the interest rate applies to less than 12
months.
Calculation of Non-loaned Accumulated Value in the Fixed Account. The
non-loaned Accumulated Value in the Fixed Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
Interest will be credited to the non-loaned Accumulated Value in the
Fixed Account on each Monthly Policy Date as follows: for amounts in the
account for the entire Policy Month, from the beginning to the end of the
month; for amounts allocated to the account during the prior Policy Month, from
the date the Net Premium or loan repayment is allocated to the end of the
month; for amounts transferred to the account during the Policy Month, from the
date of transfer to the end of the month; and for amounts deducted or withdrawn
from the account during the prior Policy Month, from the beginning of the month
to the date of deduction or withdrawal.
TRANSFERS FROM FIXED ACCOUNT
One transfer in each Policy Year is allowed from the amount of
non-loaned Accumulated Value in the Fixed Account to any or all of the
Subaccounts of the Variable Account. The amount transferred from the Fixed
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. The
transfer will be made as of the Valuation Day National Life receives the
written or telephone request at its Home Office.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force
indefinitely (in Texas and Maryland, however, the Policy matures at the younger
Insured's Attained Age 100 at which time National Life will pay the Cash
Surrender Value to the Owner in one sum unless a Payment Option is chosen, and
the Policy will terminate). However, for a Policy to remain in force after the
younger Insured reaches Attained Age 100, if the Face Amount is greater than
the Accumulated Value, the Face Amount will automatically be decreased to the
current Accumulated Value, and all Accumulated Value is transferred to the
Fixed Account. Also, at the younger Insured's Attained Age 100 Option B
automatically becomes Option A, and no premium payments are allowed after the
younger Insured's Attained Age 100, although loan repayments are allowed.
Monthly Deductions cease at the younger Insured's Attained Age 100. The tax
treatment of a Policy's Accumulated Value after Age 100 is unclear, and the
Owner may wish to discuss this treatment with a tax advisor.
Payment of Policy Benefits. The Owner may decide the form in
which Death Benefit proceeds will be paid. During the lifetime of either of
the two Insureds, the Owner may arrange for the Death Benefit to be paid in a
lump sum or under a Settlement Option. These choices are also available upon
surrender of the Policy for its Cash Surrender Value. If no election is made,
payment will be made in a lump sum. The Beneficiary may also arrange for
payment of the Death Benefit in a lump sum or under a Settlement Option. If
paid in a lump sum, the Death Benefit under a Policy will ordinarily be paid to
the
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Beneficiary within seven days after National Life receives proof of the death
of both of the Insureds at its Home Office and all other requirements are
satisfied. If paid under a Settlement Option, the Death Benefit will be
applied to the Settlement Option within seven days after National Life receives
proof of the death of both of the Insureds at its Home Office and all other
requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by
National Life or required by law is paid on the Death Benefit from the date
National Life receives due proof of the death of the last to die of the two
Insureds until payment is made.
Any amounts payable as a result of surrender, Withdrawal, or Policy
loan will ordinarily be paid within seven days of receipt of written request at
National Life's Home Office in a form satisfactory to National Life.
Generally, the amount of a payment will be determined as of the date
of receipt by National Life of all required documents. However, National Life
may defer the determination or payment of such amounts if the date for
determining such amounts falls within any period during which: (1) the disposal
or valuation of a Subaccount's assets is not reasonably practicable because the
New York Stock Exchange is closed or conditions are such that, under the SEC's
rules and regulations, trading is restricted or an emergency is deemed to
exist; or (2) the SEC by order permits postponement of such actions for the
protection of National Life policyholders. National Life also may defer the
determination or payment of amounts from the Fixed Account for up to six
months.
National Life may postpone any payment under the Policy derived from
an amount paid by check or draft until National Life is satisfied that the
check or draft has been paid by the bank upon which it was drawn.
The Contract. The Policy and a copy of the applications attached
thereto are the entire contract. Only statements made in the applications can
be used to void the Policy or deny a claim. The statements are considered
representations and not warranties. Only one of National Life's duly
authorized officers or registrars can agree to change or waive any provisions
of the Policy and only in writing. As a result of differences in applicable
state laws, certain provisions of the Policy may vary from state to state.
Ownership. The Owner is named in the application or thereafter
changed. While either of the two Insureds is living, the Owner is entitled to
exercise any of the rights stated in the Policy or otherwise granted by
National Life. If the Owner dies before the last to die of the two Insureds,
these rights will vest in the estate of the Owner, unless otherwise provided.
Beneficiary. The Beneficiary is designated in the application for the
Policy, unless thereafter changed by the Owner during the lifetime of either of
the two Insureds by written notice to National Life. The interest of any
Beneficiary who dies before the last to die of the two Insureds shall vest in
the Owner unless otherwise stated.
Change of Owner and Beneficiary. As long as the Policy is in force,
the Owner or Beneficiary may be changed by written request in a form acceptable
to National Life. The change will take effect as of the date it is signed,
whether or not the Insureds are living when the request is received by National
Life. National Life will not be responsible for any payment made or action
taken before it receives the written request.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Cash Surrender Value or Death Benefit) are split between the parties.
There are different ways of allocating such rights.
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For example, an employer and employee might agree that under a Policy
on the lives of the employee and his or her spouse, the employer will pay the
premiums and will have the right to receive the Cash Surrender Value. The
employee may designate the Beneficiary to receive any Death Benefit in excess
of the Cash Surrender Value. If the employee and his or her spouse both die
while such an arrangement is in effect, the employer would receive from the
Death Benefit the amount which the employer would have been entitled to receive
upon surrender of the Policy and the employee's Beneficiary would receive the
balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement
will be binding on National Life unless in writing and received by National
Life.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. The Owner may assign any and all rights under the
Policy. No assignment binds National Life unless in writing and received by
National Life at its Home Office. National Life assumes no responsibility for
determining whether an assignment is valid or the extent of the assignee's
interest. All assignments will be subject to any Policy loan. The interest of
any Beneficiary or other person will be subordinate to any assignment. A payee
who is not also the Owner may not assign or encumber Policy benefits, and to
the extent permitted by applicable law, such benefits are not subject to any
legal process for the payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of either of the two
Insureds at the Date of Issue has been misstated in the application, the
Accumulated Value of the Policy will be adjusted to be the amount that it would
have been had the Cost of Insurance Charges deducted been based on the correct
age and sex, or as otherwise required by state law. The adjustment will take
place on the Monthly Policy Date on or after the date on which National Life
has proof to its satisfaction of the misstatement. If both of the Insureds
have died, National Life will adjust the Accumulated Value as of the last
Monthly Policy Date prior to the last to die of the Insureds' death; however,
if the Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
Suicide. In the event that either Insured dies by suicide, while sane
or insane, within two years from the Date of Issue of the Policy (except where
state law requires a shorter period), or within two years of the effective date
of a reinstatement (unless otherwise required by state law), National Life's
liability is limited to the payment to the Beneficiary of a sum equal to the
premiums paid less any Policy loan and accrued interest and any Withdrawals
(since the date of reinstatement, in the case of a suicide within two years of
the effective date of a reinstatement), or other reduced amount provided by
state law.
If either Insured dies by suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Unadjusted Death Benefit and for which an application is
required, the amount which National Life will pay with respect to the increase
will be the Cost of Insurance Charges previously made for such increase (unless
otherwise required by state law).
Incontestability. The Policy will be incontestable after it has been
in force during both Insured's lifetimes for two years from the Date of Issue
(or such other date as required by state law). Similar incontestability will
apply to an increase in Face Amount or reinstatement after it has been in force
during both Insureds' lifetimes for two years from its effective date.
Before such times, however, National Life may contest the validity of
the Policy (or changes) based on material misstatements in the initial or any
subsequent application.
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Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will
be paid in cash, or paid in the form required by the applicable state.
Correspondence. All correspondence to the Owner is deemed to have
been sent to the Owner if mailed to the Owner at the Owner's last known
address.
Settlement Options. In lieu of a single sum payment on death or
surrender, an election may be made to apply the Death Benefit under any one of
the fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. Interest at a rate of 3.5%
per year will be paid on the amount of the proceeds retained by
National Life. Upon the earlier of the payee's death or the end of a
chosen period, the proceeds retained will be paid.
Payments for a Stated Time. Equal monthly payments,
based on an interest rate of 3.5% per annum, will be made for the
number of years selected.
Payments for Life. Equal monthly payments, based on
an interest rate of 3.5% per annum, will be made for a guaranteed
period and thereafter during the life of a chosen person. Guaranteed
payment periods may be elected for 0, 10, 15, or 20 years or for a
refund period, at the end of which the total payments will equal the
proceeds placed under the option.
Payments of a Stated Amount. Equal monthly payments
will be made until the proceeds, with interest at 3.5% per year on the
unpaid balance, have been paid in full. The total payments in any
year must be at least $10 per month for each thousand dollars of
proceeds placed under this option.
Life Annuity. Equal monthly payments will be made in
the same manner as in the above Payments for Life option except that
the amount of each payment will be the monthly income provided by
National Life's then current settlement rates on the date the proceeds
become payable. No additional interest will be paid.
Joint and Two Thirds Annuity. Equal monthly
payments, based on an interest rate of 3.5% per year, will be made
while two chosen persons are both living. Upon the death of either,
two-thirds of the amount of those payments will continue to be made
during the life of the survivor. National Life may require proof of
the ages of the chosen persons.
50% Survivor Annuity. Equal monthly payments, based
on an interest rate of 3.5% per year, will be made during the lifetime
of the chosen primary person. Upon the death of the chosen primary
person, 50% of the amount of those payments will continue to be made
during the lifetime of the secondary chosen person. National Life may
require proof of the ages of the chosen persons.
National Life may pay interest in excess of the stated amounts under
the first four options listed above, but not the last three. A right to change
options or to withdraw all or part of the remaining proceeds may be included in
the first two, and the fourth, options above. For additional information
concerning the payment options, see the Policy.
OPTIONAL BENEFITS
The following optional benefits, which are subject to the restrictions
and limitations set forth in the applicable Policy Riders, may be included in a
Policy at the option of the Owner, if the Insureds meet any applicable
underwriting requirements (election of any of these optional benefits may
involve an additional cost):
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GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is elected, National Life will
guarantee that the Policy will not lapse, regardless of the Policy's investment
performance, either for the entire lifetimes of the Insureds, or until the end
of the year that the younger Insured attains Age 80, whichever is elected by the
Owner. In order to elect the guarantee period until the end of the year that
the younger Insured attains Age 80, the Issue Age of the younger Insured must
be 70 or less. Riders which guarantee that the Policy will not lapse prior to
the end of the year that the younger Insured attains Age 80 will have lower
Monthly Guarantee Premiums (and therefore lower Cumulative Guarantee Premiums)
than Riders which guarantee that the Policy will not lapse for the entire
lifetimes of the Insureds.
To keep this Rider in force, cumulative premiums paid must be greater
than the Cumulative Guarantee Premium from the Date of Issue. The Policy will
be tested monthly for this qualification, and if not met, a notice will be sent
to the Owner, who will have 61 days from the date the notice is mailed to pay a
premium sufficient to keep the Rider in force. The premium required will be an
amount equal to the Cumulative Guarantee Premium from the Date of Issue, plus
two times the Monthly Guarantee Premium, minus the sum of all premiums
previously paid. The Rider will be cancelled if a sufficient premium is not
paid during that 61-day period. The Rider cannot be reinstated. The amount of
the Monthly Guarantee Premium for each Policy electing the Guaranteed Death
Benefit Rider will be stated in the Data section of the Policy.
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand
of Face Amount per month. This Rider is available only at issue, and only if
at least 50% of the Face Amount consists of Basic Coverage.
If while the Guaranteed Death Benefit Rider is in force, the
Accumulated Value of the Policy is not sufficient to cover the Monthly
Deductions, Monthly Deductions will be made until the Accumulated Value of the
Policy is exhausted, and will thereafter be deferred, and collected at such
time as the Policy has positive Accumulated Value. For as long as Cash
Surrender Value is zero, failure to have paid the Cumulative Guarantee Premium
as of any Monthly Policy Date will cause the Guaranteed Death Benefit Rider to
enter a 61 day lapse pending notification period. If a sufficient premium, as
set forth above, is not paid during this period, the Rider will be cancelled
and if the Cash Surrender Value is still zero, the Policy will enter a Grace
Period, and will lapse if the Grace Period expires without a sufficient premium
payment (see "Payment and Allocation of Premiums - Policy Lapse", Page ).
If the Face Amount of a Policy subject to the Guaranteed Death Benefit
Rider is increased or the Death Benefit Option is changed from Option A to
Option B, the Rider's guarantee will extend to the increased Face Amount. This
will result in increased Monthly Guarantee Premiums.
For Policies with the Guaranteed Death Benefit Rider, Withdrawals and
Policy loans will be limited to the excess of premiums paid over the Cumulative
Guarantee Premium, if the Owner wishes to keep the Rider in force. If a Policy
loan or Withdrawal for an amount greater than such excess is desired, the
Guaranteed Death Benefit Rider will enter a 61-day lapse-pending notification
period, and will be cancelled if a sufficient premium is not paid.
THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR
MASSACHUSETTS.
ADDITIONAL PROTECTION BENEFIT
The Additional Protection Benefit Rider may be used to provide a
higher Face Amount by adding Additional Coverage to the Policy. This Rider is
available only at issue, or after issue only by submitting an application to
National Life with evidence satisfactory to National Life of insurability of
both Insureds. Additional Coverage must be in an amount of at least $50,000,
and cannot exceed three times the Basic Coverage.
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Adding to the Face Amount of the Policy through the Additional
Protection Benefit Rider can offer a cost savings over adding to the Face
Amount by increasing the Basic Coverage. Specifically, there is no Target
Premium, no Surrender Charge, and no per $1000 Monthly Administrative Charge
associated with Additional Coverage. The cost of the Rider is that a Cost of
Insurance Charge is included in the Monthly Deductions for the Additional
Coverage - the guaranteed cost of insurance rate applicable to the Additional
Coverage will generally be higher than the rate applicable to Basic Coverage,
but current cost of insurance rates may be either higher or lower for the
Additional Coverage than for the Basic Coverage.
POLICY SPLIT OPTION
If the Policy Split Option Rider is elected, the Owner will have the
right to split the Face Amount and Accumulated Value of a Policy into two
single life whole life insurance contracts on the lives of each of the two
Insureds, in the event of divorce or a material change in federal estate tax
law. The two single life contracts may be any traditional whole life
insurance, universal or variable life insurance contract then offered by
National Life. This Rider is available only at issue, only to Insureds legally
married to each other, only where both Insureds are not in a substandard Rate
Class with a rating in excess of 250% and not uninsurable, and only where
neither Insured is older than age 80. Exercise of the option to split the
Policy will be allowed without evidence of insurability, but only within 180
days of the date of a final divorce decree relating to the Insureds, or within
180 days of the occurrence of either of the following changes in federal estate
tax law: (1) an end to the Unlimited Marital Deduction, as defined in the
Code;; and (2) a reduction of 50% or more of the percentage federal estate tax
rate applicable to the estate of the surviving spouse.
The two new policies will have an issue date of the date of the split,
and will be based on the Insureds' ages as of the date of the split. The Rate
Classes of each of the Insureds will be the Rate Class for such Insured for the
most recently issued coverage segment under the Policy. The Owner may select
the face amounts of the new policies, as long as the total of the two face
amounts does not exceed the Face Amount of the Policy on the date of the split,
and neither of the face amounts on the two new policies exceeds 50% of the Face
Amount on the Policy. Increases on the Policy which contain a substandard
rating in excess of 250% will not be eligible for the split. If the face
amounts of the new policies are not equal, and the Policy is jointly owned,
then the consent of all Owners to the split is required. The Accumulated
Value, and any Policy loans and accrued interest, will be split in proportion
to the Face Amount split, and the total of the accumulated values and any
policy loans and accrued interest of the new individual contracts will equal
the Accumulated Value of the Policy. There will not be new suicide and
incontestability periods for the new individual policies as of the date of the
split if they had expired on the Policy prior to the split, but if such periods
had not expired, then the remaining time to expiration will be transferred to
the new Policies.
There is no cost for the Policy Split Option Rider, except that a
fixed charge of $200 will also be assessed at the time of the split to cover
administrative costs. The Rider may be cancelled at any time by the Owner, and
will automatically terminate on its exercise, on the date of death of the first
of the two Insureds to die, or on the date that the older of the Insureds
reaches Attained Age 85. Any other Riders applicable to the Policy will
terminate upon exercise of the Policy Split Option.
ESTATE PRESERVATION RIDER
The Estate Preservation Rider is designed for use in situations in
which a Policy is issued outside of an irrevocable life insurance trust but is
expected to be transferred into such a trust within a year after the Date of
Issue. This Rider provides four years of additional last survivor term
coverage on the two Insureds. The goal of the rider is to provide a Death
Benefit including this Rider, net of incremental
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estate taxes owed as a result of the Policy, at least equal to the Death
Benefit provided by the Policy not including the Rider. This Rider is
available only at issue and only where the Insureds are legally married to each
other.
The cost of the Estate Preservation Rider is a charge for the death
benefit coverage included by this Rider, at the same rates that apply to the
Additional Coverage. The coverage provided by this Rider will be level,
regardless of whether Option A or Option B applies to the Face Amount of the
Policy. The amount of coverage will be the initial Face Amount multiplied by a
fraction the numerator of which is 0.55 and the denominator of which is 1-0.55,
or 0.45. A factor of 0.55 is used in the above formula because the maximum
estate tax rate is currently 55%.
Any decrease in Face Amount during the first four Policy Years will
result in a proportionate reduction in the coverage provided by the Estate
Preservation Rider.
The Estate Preservation Rider will terminate on the first Policy
Anniversary, if the Owner of the Policy has not become an irrevocable life
insurance trust by that time. If the Owner has become an irrevocable life
insurance trust by such time, then the Rider will automatically terminate at
the end of the fourth Policy Year.
TERM RIDER
The Term Rider allows an Owner to add individual life term coverage on
either or both of the two Insureds. The Term Rider is available at any time,
subject to submission of an application with evidence of insurability
satisfactory to National Life, on Insureds with Issue Ages from 20 through 75.
The Term Rider coverage is renewable through age 80. The maximum amount of
Term Rider coverage for each Insured is 50% of the Face Amount of the Policy.
Charges included in the Monthly Deductions will include amounts associated with
the individual life term coverage. The cost of insurance rates for the Term
Rider will be set forth in the Rider.
Individual term life insurance coverage addresses different insurance
needs than the survivorship life insurance coverage provided by the Face Amount
of the Policy. Your determination of the usefulness of the Term Rider should
be based on your specific insurance needs. Consult your sales representative
for further information.
CONTINUING COVERAGE RIDER
The Continuing Coverage Rider allows an Owner to extend coverage at
the Face Amount of a Policy beyond the younger Insured's Attained Age 100 if
the Policy is still in force at that time. This Rider is available only at
issue and only if the younger Insured is no older than Attained Age 75.
On the date that the extension of coverage occurs, the Policy's
Accumulated Value will be transferred to the Fixed Account, and no further
transfers will be permitted. The Monthly Deductions will be set to zero. No
further Premium Payments will be accepted. All other rights and benefits will
continue while the Policy is in force.
The charge is guaranteed never to exceed $3.50 per $1000 per month
applied to the Net Amount at Risk. The current charge for the Continuing
Coverage Rider is $2.50 per $1000 per month, applied to the Net Amount at Risk.
The charge will begin at the younger Insured's Attained Age 90. At the time
charges
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begin for this Rider, Policies with Death Benefit Option B will automatically
be changed to Death Benefit Option A.
The tax consequences associated with continuing a Policy beyond age
100 of the younger Insured are uncertain.
ENHANCED DEATH BENEFIT RIDER
The Enhanced Death Benefit Rider may provide a higher Death Benefit at a
targeted age for the younger Insured. The target age is selected by the Owner.
The Rider operates by increasing the otherwise applicable specified percentages
that are shown in the Policy and which may be applied in determining the Death
Benefit, beginning 4 years prior to the targeted Attained Age and ending at
Attained Age 99 of the younger Insured, by the following percentages:
Target Age - 4: 4% Target Age -1: 16% Attained Age - 97: 12%
Target Age - 3: 8% Target Age through Age 95: 20% Attained Age - 98: 8%
Target Age - 2: 12% Attained Age - 96: 16% Attained Age - 99: 4%
The minimum target age that may be selected by the Owner is the later
of the younger Insured's Attained Age 70 and 15 years after the Date of Issue.
The maximum target age that may be selected is Attained Age 95 of the younger
Insured. Once selected, the target age may not be changed. This Rider may be
cancelled at any time, but if cancelled, cannot be reinstated.
There is no cost for the Enhanced Death Benefit Rider. However, if
the Rider's increases in the specified percentages result in an increase in
Death Benefit, the Net Amount at Risk will be higher than if the Rider did not
apply, and the Cost of Insurance Charges will be commensurately higher .
This Rider is available only at issue, and only where the younger
Insured's Attained Age is 80 or less.
AUTOMATIC INCREASE RIDER
The Automatic Increase Rider will provide for regular increases in
Face Amount. The Owner may elect that such increases be effected annually in
amounts equal to either of 5% or 10% of the sum of the Face Amount of the
Policy at issue plus all previous increases resulting from this Rider. The
Owner may also elect annual increases of a level amount equal to the Owner's
planned periodic premiums for the Policy. In either case, the maximum increase
that can be effected by means of the Automatic Increase Rider is 100% of the
Face Amount of the Policy at issue.
Increases in Face Amount effected by means of the Automatic Increase
Rider will be similar to Additional Coverage in that there will be no Target
Premium , no Surrender Charge and no per $1000 Monthly Administrative Charge
associated with these increases.
The cost of the Rider is that the Cost of Insurance Charge for the
Policy will include amounts for the increase segments as they become effective.
The cost of insurance rates will be the same as the rates
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applied to Basic Coverage at issue. Guaranteed cost of insurance rates that
will be applied to increases effected through this Rider will be set forth in
the Rider.
An Automatic Increase Rider terminates (a) at the request of the
Owner, (b) when the younger insured reaches Attained Age 81, (c) when the
maximum total increase is reached, (d) on the death of the first to die of the
Insureds, or (e) when a requested decrease in Face Amount becomes effective.
Termination of the Rider does not cancel previously added increases.
This Rider is available only at issue, only if the younger Insured's
Issue Age is at least 20 and less than 71, and only if neither Insured has a
substandard rating in excess of 250%.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon National Life's
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service (the "Service"). No representation
is made as to the likelihood of continuation of the present Federal income tax
laws or of the current interpretations by the Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal income
tax purposes, the policy must meet the definition of a life insurance contract
which is set forth in Section 7702 of the Code. The manner in which Section
7702 should be applied to certain features of the Policy is not directly
addressed by Section 7702 or any guidance issued to date under Section 7702.
Nevertheless, National Life believes it is reasonable to conclude that the
Policy will meet the Section 7702 definition of a life insurance contract. In
the absence of final regulations or other pertinent interpretations of Section
7702, however, there is necessarily some uncertainty as to whether a Policy
will meet the life insurance contract definition, particularly if the Owner
pays the full amount of premiums permitted under the Policy. An Owner
contemplating the payment of such premiums should do so only after consulting a
tax adviser. If a Policy were determined not to be a life insurance contract
for purposes of Section 7702, such Policy would not provide the tax advantages
normally provided by a life insurance policy.
If it is subsequently determined that a Policy does not satisfy
Section 7702, National Life may take whatever steps are appropriate and
necessary to attempt to cause such a Policy to comply with Section 7702. For
these reasons, National Life reserves the right to restrict Policy transactions
as necessary to attempt to qualify it as a life insurance contract under
Section 7702.
Section 817(h) of the Code requires that the investments of each
Subaccount of the Variable Account must be "adequately diversified" in
accordance with Treasury regulations in order for the Policy to qualify as a
life insurance contract under Section 7702 of the Code (discussed above). The
Variable Account, through the Funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. Section 1.817-5, which affect how each
Fund's assets are to be invested. National Life believes that the Variable
Account will, thus, meet the diversification requirement, and National Life
will monitor continued compliance with this requirement. In certain
circumstances, owners of variable life insurance contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
accounts used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includible in the variable
contract owner's gross income. The Service has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department has also announced, in connection with the
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issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the Service in rulings in which it
was determined that Policy Owners were not owners of separate account assets.
For example, the Owner has additional flexibility in allocating premium
payments and Accumulated Value. These differences could result in an Owner
being treated as the owner of a pro rata portion of the assets of the Variable
Account. In addition, National Life does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. National Life therefore reserves the right to
modify the Policy as necessary to attempt to prevent an Owner from being
considered the owner of a pro rata share of the assets of the Variable Account.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for Federal income tax purposes. Thus, the
Unadjusted Death Benefit under the Policy should be excludable from the gross
income of the Beneficiary under Section 101(a)(1) of the Code.
Depending on the circumstances, an increase or decrease in a Policy's
Face Amount, the exchange of a Policy, a change in the Policy's Death Benefit
Option (i.e., a change from Death Benefit Option A to Death Benefit Option B or
vice versa), a Policy loan, a Withdrawal, a surrender, a change in ownership,
or an assignment of the Policy may have Federal income tax consequences.
Generally, the Owner will not be deemed to be in constructive receipt
of the Accumulated Value, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"Modified Endowment Contract". Whether a Policy is or is not a Modified
Endowment Contract, upon a complete surrender or lapse of a Policy or when
benefits are paid at a Policy's maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. Section 7702A establishes a class of
life insurance contracts designated as "Modified Endowment Contracts. The
rules for determining whether a Policy will be classified as a Modifeid
Endowment Contract generally apply when a Policy is entered into, materially
changed, or the death benefit is reduced.
Due to the Policy's flexibility, classification as a Modified
Endowment Contract will depend on the individual circumstances of each Policy.
In general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a
Modified Endowment Contract after a material change generally depends upon the
relationship of the Unadjusted Death Benefit and Accumulated Value at the time
of such change and the additional premiums paid in the seven years following
the material change. A policy may become a Modified Endowment Contract if
there is a reduction in the Policy's death benefit at any time. At the time a
premium is credited, or the death benefit is reduced, which would cause the
Policy to become a Modified Endowment Contract, National Life will notify the
Owner's agent of action or actions that may be taken to
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prevent the Policy from becoming a Modified Endowment Contract. If after 30
days from contacting the agent, National Life has not heard from the Owner,
National Life will mail a letter directly to the Owner notifying him or her of
actions that may be taken to prevent the Policy from becoming a Modified
Endowment Contract. If after 30 days from mailing such notification National
Life has received no response, National Life will assume the Owner wishes to
take no action. If the Owner requests a refund of excess premium, the excess
premium paid (with appropriate interest) will be returned to the Owner. The
amount to be refunded will be deducted from the Accumulated Value in the
Variable Account and in the Fixed Account in the same proportion as the premium
payment was allocated to such accounts.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective
Owner should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract.
Distributions from Policies Classified as Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts will be
subject to the following tax rules: First, all distributions, including
distributions upon surrender and Withdrawals from such a Policy are treated
as ordinary income subject to tax up to the amount equal to the excess (if
any) of the Accumulated Value immediately before the distribution over the
investment in the Policy (described below) at such time. Second, loans
taken from or secured by, such a Policy are treated as distributions from
such a Policy and taxed accordingly. Past due loan interest that is added
to the loan amount will be treated as a loan. Third, a 10 percent
additional income tax is imposed on the portion of any distribution from, or
loan taken from or secured by, such a Policy that is included in income
except where the distribution or loan is made on or after the Owner attains
age 59-1/2, is attributable to the Owner's becoming disabled, or is part of
a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of
the Owner and the Owner's Beneficiary.
Distributions From Policies Not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment
Contract, are generally treated as first recovering the investment in the
Policy (described below) and then, only after the return of all such investment
in the Policy, as distributing taxable income. An exception to this general
rule occurs in the case of a decrease in the Policy's Unadjusted Death Benefit
or any other change that reduces benefits under the Policy in the first 15
years after the Policy is issued and that results in a cash distribution to the
Owner in order for the Policy to continue complying with the Section 7702
definitional limits. Such a cash distribution will be taxed in whole or in
part as ordinary income (to the extent of any gain in the Policy) under rules
prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon
surrender) nor loans from, or secured by, a Policy that is not a Modified
Endowment Contract are subject to the 10 percent additional tax.
Policy Loan Interest. Generally, interest paid on any loan under a
Policy is not deductible. A tax advisor should be consulted before deducting
Policy loan interest.
Investment in the Policy. Investment in the Policy means: (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from gross income of the Owner (except that the amount of any loan from, or
secured by, a Policy that is a Modified Endowment Contract, to the extent
such amount is excluded from gross income, will be disregarded), plus (iii)
the amount of any loan from, or secured by, a Policy that is a Modified
Endowment Contract to the extent that such amount is included in the gross
income of the Owner.
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Multiple Policies. All Modified Endowment Contracts that are issued
by National Life to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includible in the gross income under Section 72(e) of the Code.
Taxation of Policy Split. The Policy Split Option Rider permits a
Policy to be split into two other fixed-benefit or variable-benefit life
insurance policies in certain situations. A Policy split could have adverse
tax consequences; for example, it is not clear whether a Policy split will be
treated as a non-taxable exchange under Sections 1031 through 1043 of the Code.
If a Policy split is not treated as a nontaxable exchange, a split could result
in the recognition of taxable income in an amount up to any gain in the Policy
at the time of the split. In addition, it is not clear whether, in all
circumstances, the individual contracts that result from a Policy split would
be would be classified as modified endowment contracts. Before exercising
rights provided by the Policy Split Option Rider, it is important for an Owner
to consult with a tax adviser regarding the possible consequences of a Policy
split.
Other Tax Considerations. The transfer of a Policy or the designation
of a Beneficiary may have federal, state, and/or local transfer and inheritance
tax consequences, including the imposition of gift, estate and
generation-skipping transfer taxes. For example, the transfer of a Policy to,
or the designation as Beneficiary of, or the payments of proceeds to, a person
who is assigned to a generation which is two or more generations below the
generation assignment of the Owner, may have gift and generation skipping
transfer tax considerations under the Code.
Generally, the proceeds of the Policy are includible in the gross
estate of the Insured if the Insured possesses any "incidents of ownership"
over the Policy at death. "Incidents of ownership" generally includes the
right to receive economic benefits of the Policy as defined in Section 2042 of
the Code and applicable Treasury regulations. If the Insured never held
incidents of ownership over the Policy, or irrevocably transferred all
interests in the Policy to a third party (e.g., an irrevocable life insurance
trust) more than three years before death, the proceeds should be excluded from
the Insured's gross estate.
The individual situations of each Owner or Beneficiary will determine
the extent, if any, to which federal, state or local transfer taxes may be
imposed. Prospective Owners should consult their tax advisers for specific
information in connection with these taxes. The Policies also may be used in
various arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, retiree
medical benefit plans and others. The tax consequences of such plans may vary
depending on the particular facts and circumstances of each individual
arrangement. Therefore, if you are contemplating the use of the Policies in
any arrangement the value of which depends in part on its tax consequences, you
should be sure to consult a qualified tax advisor regarding the tax attributes
of the particular arrangement.
POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than state premium taxes or the DAC Tax) that the
Company incurs that may be attributable to the Variable Account or to the
Policies. National Life, however, reserves the right in the future to make a
charge for any such tax or other economic burden resulting from the application
of the tax laws that it determines to be properly attributable to the Accounts
or to the Policies. If any tax charges are made in the future, they will be
accumulated daily and transferred periodically from the Variable Account to
National Life's general account. Any investment earnings on tax charges
accumulated in the Variable Account will be retained by National Life.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is
always the possibility that the tax treatment of the Policies could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of
51
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the Policies. It is also possible that any change could be retroactive (that
is, effective prior to the date of the change). A tax adviser should be
consulted with respect to legislative developments and their effect on the
Policy.
VOTING RIGHTS
All of the assets held in the Subaccounts of the Variable Account will
be invested in shares of corresponding Portfolios of the Funds. The Funds do
not hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act or other applicable law or governing documents to be
approved or ratified by the shareholders of a mutual fund. National Life is
the legal owner of Fund shares and as such has the right to vote upon any
matter that may be voted upon at a shareholders' meeting. However, in
accordance with the SEC's view of present applicable law, National Life will
vote the shares of the Funds at meetings of the shareholders of the appropriate
Fund or Portfolio in accordance with instructions received from Owners. Fund
shares held in each Subaccount of the Variable Account for which no timely
instructions from Owners are received will be voted by National Life in the
same proportion as those shares in that Subaccount for which instructions are
received.
Each Owner having a voting interest will be sent proxy material and a
form for giving voting instructions. Owners may vote, by proxy or in person,
only as to the Portfolios that correspond to the Subaccounts in which their
Policy values are allocated. The number of shares held in each Subaccount
attributable to a Policy for which the Owner may provide voting instructions
will be determined by dividing the Policy's Accumulated Value in that account
by the net asset value of one share of the corresponding Portfolio as of the
record date for the shareholder meeting. Fractional shares will be counted.
For each share of a Portfolio for which Owners have no interest, National Life
will cast votes, for or against any matter, in the same proportion as Owners
vote.
If required by state insurance officials, National Life may disregard
voting instructions if such instructions would require shares to be voted so as
to cause a change in the investment objectives or policies of one or more of
the Portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, National Life may
disregard voting instructions in favor of certain changes initiated by an Owner
or the Fund's Board of Directors provided that National Life's disapproval of
the change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the portfolio's objectives and purposes, and the effect the change would have
on National Life. If National Life does disregard voting instructions, it will
advise Owners of that action and its reasons for such action in the next
semi-annual report to Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect
of voting instructions of Owners of the Policies.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. To the extent that such laws or
regulations promulgated thereunder eliminate the necessity to solicit voting
instructions from Owners or restrict such voting rights, National Life reserves
the right to proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required: (1) to make
changes in the form of the Variable Account, if in its judgment such
52
63
changes would serve the interests of Owners or would be appropriate in carrying
out the purposes of the Policies, for example: (i) operating the Variable
Account as a management company under the 1940 Act; (ii) deregistering the
Variable Account under the 1940 Act if registration is no longer required;
(iii) combining or substituting separate accounts; (iv) transferring the assets
of the Variable Account to another separate account or to the Fixed Account;
(v) making changes necessary to comply with, obtain or continue any exemptions
from the 1940 Act; or (vi) making other technical changes in the Policy to
conform with any action described herein; (2) if in its judgment a Portfolio no
longer suits the investment goals of the Policy, or if tax or marketing
conditions so warrant, to substitute shares of another investment portfolio for
shares of such Portfolio; (3) to eliminate, combine, or substitute Subaccounts
and establish new Subaccounts, if in its judgment marketing needs, tax
considerations, or investment conditions so warrant; and (4) to transfer assets
from a Subaccount to another Subaccount or separate account if the transfer in
National Life's judgment would best serve interests of Policy Owners or would
be appropriate in carrying out the purposes of the Policies; and (5) to modify
the provisions of the Policies to comply with applicable laws. National Life
has reserved all rights in respect of its corporate name and any part thereof,
including without limitation the right to withdraw its use and to grant its use
to one or more other separate accounts and other entities.
If a Policy has Accumulated Value in a Subaccount that is eliminated,
National Life will give the Owner at least 30 days notice before the
elimination, and will request that the Owner designate the Subaccount or
Subaccounts (or the Fixed Account) to which the Accumulated Value in the
Subaccount to be eliminated should be transferred. If no such designation is
received prior to the date of the elimination, then the Accumulated Value in
such Subaccount will be transferred to the Money Market Subaccount. In any
case, if in the future a transfer charge is imposed or limits on the number of
transfers or free transfers are established, no charge will be made for this
transfer, and it will not count toward any limit on transfers or free
transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their
principal occupations during the past five years, are listed below.
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer Chairman of the Board, Chief Executive
Officer and President of GNA Corporation
Thomas H. MacLeay 1996 to Present - President and
President, Chief Chief Operating Officer; 1993 to
Operating Officer, 1996 - Executive Vice President
and Director & Chief Financial Officer; 1991 to
1993 - Senior Vice President & Chief Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok & Boardman Realty, Inc.
David R. Coates 1993 to present - Business
Director Consultant; 1987 to 1993 - Managing Partner of KPMG
Peat Marwick in Burlington, VT
Benjamin F. Edwards III 1983 to present - Chairman, President
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Director and Chief Executive Officer of A.
G. Edwards, Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.; 1986 to
1992 - President and Chief
Operating Officer of Monsanto Company
Roger B. Porter 1985 to present - Professor of Business
Director and Government, Harvard University; 1976 to
present - Member of the President's Commission
on White House Fellowships; 1993 to present,
Senior Scholar, Woodrow Wilson International
Center for Scholars
E. Miles Prentice III 1997 to present: Partner in the law firm of Eaton
Director & Van Winkle; 1996 to 1997 - Partner in
the law firm of Bryan Cave L.L.P.; 1993 to 1996 - Partner
in the law firm of Piper & Marbury
Thomas P. Salmon 1997 to present: Partner in the law firm of
Director Salmon & Nostrand; 1991 to 1996 - President, the University of
Vermont; formerly Governor, State of Vermont
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
Thomas R. Williams 1987 to present - President of the
Director Wales Group, Inc.
Patricia K. Woolf 1990 to present - Author, Consultant,
Director and lecturer at the Department of
Molecular Biology at Princeton University
Martin P. Klein 1998 to present: Executive Vice President &
Executive Vice President & Chief Financial Officer; 1996 to 1998: Managing
Chief Financial Officer Director - Zurich Insurance Group; 1994 to 1996:
Executive Vice President Centre-Re Chase
Investment Company; 1992 to 1994: Executive
Vice President and Chief Financial Officer -
Arm Financial Group, Inc.
James A. Mallon 1998 to present: Executive Vice President & Chief
Executive Vice President & Marketing Officer; 1996 to 1998: President & Chief
Chief Marketing Officer Executive Officer - Integon Life Insurance Corporation;
1993 to 1996: Senior Vice President & Chief Marketing Officer -
Commercial Union Life Insurance Company of America
Rodney A. Buck 1996 to present - Senior Vice
Senior Vice President & President and Chief Investment
Chief Investment Officer Officer; 1993 to 1995 - Senior Vice President -
Investments; 1996 to present - Chairman
& Chief Executive Officer, National
Life Investment Management
Company, Inc. ("NLIMC"); 1991 to 1995 - President and Chief
Operating Officer, NLIMC; 1998 to present - Chief Executive Officer
- Sentinel Advisors Company; 1987 to present - Senior Vice
President - Sentinel Advisors Company
Jeffrey P. Johnson 1997 to present - General Counsel; 1992- to present -
General Counsel Partner, Primmer & Piper (law firm)
Craig A. Smith 1998 to present: Vice President - Corporate
Vice President Actuarial; 1996 to 1998 - Senior Vice President; 1993 to 1996 -
Senior Vice
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- President - Product; 1992 to 1993 -
Vice President - Product Development
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed
by state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, whose address is National Life Drive, Montpelier,
Vermont 05604, is a registered broker/dealer under the Securities Exchange Act
of 1934 (the "1934 Act") and a member of the National Association of Securities
Dealers, Inc. (the "NASD"). ESI is an indirect wholly-owned subsidiary of
National Life. ESI acts as the principal underwriter, as defined in the 1940
Act, of the Policies, and for the Variable Account pursuant to an Underwriting
Agreement to which the Variable Account, ESI and National Life are parties.
The Policies are offered and sold only in those states where their sale is
lawful.
The insurance underwriting and the determination of a proposed
Insured's Rate Class and whether to accept or reject an application for a
Policy is done by National Life. National Life will refund any premiums paid
if a Policy ultimately is not issued or will refund the applicable amount if
the Policy is returned under the free look provision.
Agents who are ESI registered representatives are compensated for
sales of the Policies on a commission and service fee basis and with other
forms of compensation. During the first Policy Year, agent commissions will
not be more than 50% of the premiums paid up to a target amount (which is a
function of Basic Coverage, and which is used primarily to determine commission
payments) and 3% of the premiums paid in excess of that amount. For Policy
Years 2 through 10, the agent commissions will not be more than 4.0% of the
premiums paid up to the target amount, and 3% of premiums paid in excess of
that amount. For Policy Year 11 and thereafter, agent commissions will be 1.5%
of all premiums paid. For premiums received in the year following an increase
in Basic Coverage and attributable to the increase, agent commissions will not
be more than 48.5% up to the target amount for the increase. Agents may also
receive expense allowances, and will also receive service fees, starting in
Policy year 5, of 0.15% of unloaned accumulated value. Agents who are
affiliated with National Life's producer group may receive compensation
somewhat higher than the amounts stated above.
Dealers other than ESI will receive gross concessions during the first
Policy Year of 90% of the premiums paid up to the target amount, and 4% of the
premiums paid in excess of that amount. For Policy Years 2 through 10, the
gross dealer concession will not be more than 4.0% of the premiums paid. For
Policy Year 11 and thereafter, the gross dealer concession will be 1.5% of all
premiums paid. Such delaers will also receive gross service fees beginning in
Policy Year 5 of 0.20% of unloaned Accumulated Value.
POLICY REPORTS
At least once each Policy Year a statement will be sent to the Owner
describing the status of the Policy, including setting forth the Face Amount,
the current Unadjusted Death Benefit, any Policy loans and accrued interest,
the current Accumulated Value, the non-loaned Accumulated Value in the Fixed
Account, the amount held as Collateral in the Fixed Account, the value in each
Subaccount of the Variable Account, premiums paid since the last report,
charges deducted since the last report, any Withdrawals since the last report,
and the current Cash Surrender Value. National Life currently plans to send
such statements quarterly. In addition, a statement will be sent to an Owner
showing the status of the Policy following the transfer of amounts from one
Subaccount of a Variable Account to another or between the Fixed Account and
the Variable Account, the taking out of a loan, a repayment of a loan, a
Withdrawal and the payment of any premiums (excluding those paid by bank draft
or otherwise under the Automatic Payment Plan).
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66
An Owner will be sent a semi-annual report containing the financial
statements of each Fund in which his or her Policy has Accumulated Value, as
required by the 1940 Act.
STATE REGULATION
National Life is subject to regulation and supervision by the
Insurance Department of the State of Vermont which periodically examines its
affairs. It is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. A copy of the Policy form
has been filed with, and where required approved by, insurance officials in
each jurisdiction where the Policies are sold. National Life is required to
submit annual statements of its operations, including financial statements, to
the insurance departments of the various jurisdictions in which it does
business for the purposes of determining solvency and compliance with local
insurance laws and regulations.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the
year 1900. Like all financial services providers, National Life utilizes
computer systems that may be effected by Year 2000 transition issues, and
National Life relies on service providers, including the Funds, that also may
be affected. National Life has developed, and is in the process of
implementing, a Year 2000 transition plan, and is confirming that its service
providers are also so engaged. The resources that are being devoted to this
effort are substantial. It is difficult to predict with precision whether the
amount of resources ultimately devoted, or the outcome of these efforts, will
have any negative impact on National Life. However, as of the date of this
prospectus, it is not anticipated that any Policy Owners will experience
negative effects on their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. National Life
currently anticipates that its computer systems will be Year 2000 compliant on
or about January 1, 1999, but there can be no assurance that National Life will
be successful, or that interaction with other service providers will not impair
National Life's services at that time.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
Actuarial matters included in the Prospectus have been examined by
Elizabeth H. MacGowan, F.S.A., MAAA, Associate Actuary - Product Development
of National Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided
advice on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Jeffrey P. Johnson, General Counsel
of National Life.
The Variable Account is not a party to any litigation. There are no
material legal proceedings involving National Life which are likely to have a
material adverse effect upon the Variable Account or upon the ability of
National Life to meet its obligations under the Policies. ESI is not engaged
in any litigation of any material nature.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating to life
insurance pricing and sales practices. A number of these lawsuits have
resulted in substantial jury awards or settlements. During 1997 several
lawsuits of this nature were
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filed against National Life on behalf of purported classes of persons who
purchased certain insurance products from National Life. National Life has
highly meritorious defenses and believes that plaintiffs' claims are entirely
without merit and further, does not believe that these lawsuits will have any
material adverse effect upon its ability to meet its obligations under the
Policies.
National Life is also party to ordinary routine litigation incidental
to the business, none of which is expected to have a material adverse effect
upon its ability to meet its obligations under the Policies.
FINANCIAL STATEMENTS
The financial statements of National Life appear on the following
pages. The financial statements of National Life should be distinguished from
any financial statements of the Variable Account and should be considered only
as bearing upon National Life's ability to meet its obligations under the
Policies. No financial statements of the Variable Account are included herein
because, as of the date of this prospectus, the Subaccounts of the Variable
Account that have been established to serve as investment options under the
Policies had no assets and had incurred no liabilities.
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APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES
AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Variable Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to two Insureds
of given age, sex and Rate Class would vary over time if the investment return
on the assets held in each Portfolio of each of the Funds were a uniform,
gross, annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued with the
Insureds being a male age 55 and a female age 50, each in the Preferred
Nonsmoker Rate Class with a Face Amount of $1,000,000 and Planned Periodic
Premiums of $10,000 paid at the beginning of each Policy Year. Both Death
Benefit Option A and Death Benefit Option B, are illustrated. The Death
Benefits, Accumulated Values and Cash Surrender Values would be lower if either
or both of the Insureds were in a nonsmoker, preferred smoker, smoker,
substandard or uninsurable class since the cost of insurance charges are higher
for these classes. Also, the values would be different from those shown if the
gross annual investment returns averaged 0%, 6% and 12% over a period of years,
but fluctuated above and below those averages for individual Policy Years.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
Cost of Insurance Charge, the Premium Expense Charge, the Variable Account
Charge, and the Monthly Administrative Charge are charged at the maximum level.
The columns under the heading "Current" assume that throughout the life of the
Policy, the monthly charge for the cost of insurance is based on the current
cost of insurance rates and that the Premium Expense Charge, the Variable
Account Charge and the Monthly Administrative Charges are assessed at current
levels.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total asset charge reflected in the
Current and Guaranteed illustrations, is 0.83%. This total charge is based on
an assumption that an Owner allocates the Policy values equally among the
Subaccounts of the Variable Account.
The asset charge reflects an investment advisory fee of %, which
represents an average of the fees incurred by the Portfolios during 1997 and
expenses of % which is based on an average of the actual expenses incurred
by the Portfolios during 1997, adjusted, as appropriate, to take into account
expense reimbursement arrangements expected to be in place for 1998. For
information on Fund expenses, see the prospectuses for the Funds accompanying
this prospectus. For some of the Portfolios, the annual expenses used in the
illustrations are net of certain reimbursements that may or may not continue.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Variable Accounts. If such a
charge is made in the future, it would take a higher gross annual rate of
return to produce the same Policy values.
The tables illustrate the Policy values that would result based upon
the hypothetical investment rates of return if premiums are paid and allocated
as indicated, no amounts are allocated to the Fixed Account, and no Policy
loans are made. The tables are also based on the assumption that the Owner has
not requested an increase or decrease in the Face Amount, that no Withdrawals
have been made and no transfers have been made in any Policy Year, and that no
Riders have been purchased.
Upon request, National Life will provide a comparable illustration
based upon the proposed Insureds' Ages and Rate Classes, the Death Benefit
Option, Face Amount, Planned Periodic Premiums and Riders requested.
A-1
69
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 7,626 0 1,000,000 7,634 0 1,000,000
2 20,500 15,005 5,005 1,000,000 15,028 5,028 1,000,000
3 31,525 22,117 12,117 1,000,000 22,164 12,164 1,000,000
4 43,101 28,941 18,941 1,000,000 29,016 19,016 1,000,000
5 55,256 35,449 25,449 1,000,000 35,559 25,559 1,000,000
6 68,019 41,613 33,446 1,000,000 41,764 33,597 1,000,000
7 81,420 47,400 41,233 1,000,000 47,597 41,430 1,000,000
8 95,491 52,774 48,608 1,000,000 53,315 49,149 1,000,000
9 110,266 57,698 55,531 1,000,000 58,923 56,756 1,000,000
10 125,779 62,122 61,955 1,000,000 64,412 64,245 1,000,000
11 142,068 65,990 65,990 1,000,000 71,465 71,465 1,000,000
12 159,171 69,229 69,229 1,000,000 78,390 78,390 1,000,000
13 177,130 71,748 71,748 1,000,000 85,172 85,172 1,000,000
14 195,986 73,427 73,427 1,000,000 91,784 91,784 1,000,000
15 215,786 74,133 74,133 1,000,000 98,206 98,206 1,000,000
16 236,575 73,717 73,717 1,000,000 104,406 104,406 1,000,000
17 258,404 72,014 72,014 1,000,000 110,345 110,345 1,000,000
18 281,324 68,846 68,846 1,000,000 115,975 115,975 1,000,000
19 305,390 64,021 64,021 1,000,000 121,235 121,235 1,000,000
20 330,660 57,301 57,301 1,000,000 126,050 126,050 1,000,000
25 477,271 0 0 0 145,339 145,339 1,000,000
30 664,388 0 0 0 133,585 133,585 1,000,000
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
70
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 8,116 0 1,000,000 8,125 0 1,000,000
2 20,500 16,452 6,452 1,000,000 16,478 6,478 1,000,000
3 31,525 24,993 14,993 1,000,000 25,046 15,046 1,000,000
4 43,101 33,720 23,720 1,000,000 33,809 23,809 1,000,000
5 55,256 42,609 32,609 1,000,000 42,746 32,746 1,000,000
6 68,019 51,634 43,467 1,000,000 51,829 43,663 1,000,000
7 81,420 60,762 54,595 1,000,000 61,028 54,862 1,000,000
8 95,491 69,959 65,792 1,000,000 70,605 66,439 1,000,000
9 110,266 79,184 77,017 1,000,000 80,580 78,413 1,000,000
10 125,779 88,387 88,220 1,000,000 90,960 90,793 1,000,000
11 142,068 97,507 97,507 1,000,000 103,657 103,657 1,000,000
12 159,171 106,466 106,466 1,000,000 116,925 116,925 1,000,000
13 177,130 115,166 115,166 1,000,000 130,776 130,776 1,000,000
14 195,986 123,477 123,477 1,000,000 145,215 145,215 1,000,000
15 215,786 131,255 131,255 1,000,000 160,250 160,250 1,000,000
16 236,575 138,335 138,335 1,000,000 175,883 175,883 1,000,000
17 258,404 144,533 144,533 1,000,000 192,108 192,108 1,000,000
18 281,324 149,646 149,646 1,000,000 208,912 208,912 1,000,000
19 305,390 153,456 153,456 1,000,000 226,274 226,274 1,000,000
20 330,660 155,693 155,693 1,000,000 244,164 244,164 1,000,000
25 477,271 128,044 128,044 1,000,000 344,981 344,981 1,000,000
30 664,388 0 0 0 451,264 451,264 1,000,000
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
71
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 8,607 0 1,000,000 8,616 0 1,000,000
2 20,500 17,959 7,959 1,000,000 17,988 7,988 1,000,000
3 31,525 28,106 18,106 1,000,000 28,166 18,166 1,000,000
4 43,101 39,099 29,099 1,000,000 39,206 29,206 1,000,000
5 55,256 50,996 40,996 1,000,000 51,165 41,165 1,000,000
6 68,019 63,853 55,686 1,000,000 64,104 55,938 1,000,000
7 81,420 77,732 71,565 1,000,000 78,089 71,922 1,000,000
8 95,491 92,701 88,534 1,000,000 93,488 89,321 1,000,000
9 110,266 108,832 106,666 1,000,000 110,452 108,285 1,000,000
10 125,779 126,200 126,034 1,000,000 129,134 128,967 1,000,000
11 142,068 144,883 144,883 1,000,000 151,896 151,896 1,000,000
12 159,171 164,956 164,956 1,000,000 177,082 177,082 1,000,000
13 177,130 186,494 186,494 1,000,000 204,942 204,942 1,000,000
14 195,986 209,561 209,561 1,000,000 235,747 235,747 1,000,000
15 215,786 234,235 234,235 1,000,000 269,806 269,806 1,000,000
16 236,575 260,603 260,603 1,000,000 307,454 307,454 1,000,000
17 258,404 288,771 288,771 1,000,000 349,066 349,066 1,000,000
18 281,324 318,875 318,875 1,000,000 395,055 395,055 1,000,000
19 305,390 351,093 351,093 1,000,000 445,886 445,886 1,000,000
20 330,660 385,626 385,626 1,000,000 502,082 502,082 1,000,000
25 477,271 603,292 603,292 1,000,000 890,838 890,838 1,000,000
30 664,388 960,216 960,216 1,008,227 1,542,054 1,542,054 1,619,156
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
72
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 7625 0 1,007,625 7,645 0 1,007,634
2 20,500 15,002 5,002 1,015,002 15,025 5,024 1,015,025
3 31,525 22,107 12,107 1,022,107 22,153 12,153 1,022,153
4 43,101 28,916 18,916 1,028,916 28,991 18,991 1,028,991
5 55,256 35,399 25,399 1,035,399 35,509 25,509 1,035,509
6 68,019 41,523 33,357 1,041,523 41,674 33,507 1,041,674
7 81,420 47,251 41,084 1,047,251 47,448 41,281 1,047,448
8 95,491 52,542 48,376 1,052,542 53,099 48,932 1,053,099
9 110,266 57,352 55,186 1,057,352 58,631 56,465 1,058,631
10 125,779 61,626 61,460 1,061,626 64,037 63,871 1,064,037
11 142,068 65,301 65,301 1,065,301 70,994 70,994 1,070,994
12 159,171 68,295 68,295 1,068,295 77,808 77,808 1,077,808
13 177,130 70,507 70,507 1,070,507 84,464 84,464 1,084,464
14 195,986 71,808 71,808 1,071,808 90,931 90,931 1,090,931
15 215,786 72,056 72,056 1,072,056 97,184 97,184 1,097,184
16 236,575 71,093 71,093 1,071,093 103,187 103,187 1,103,187
17 258,404 68,752 68,752 1,068,752 108,893 108,893 1,108,893
18 281,324 64,857 64,587 1,064,587 114,246 114,246 1,114,246
19 305,390 59,231 59,231 1,059,231 119,173 119,173 1,119,173
20 330,660 51,658 51,658 1,051,658 123,587 123,587 1,123,587
25 477,271 0 0 0 139,974 139,974 1,139,974
30 664,388 0 0 0 120,204 120,204 1,120,204
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
73
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 8,116 0 1,008,116 8,124 0 1,008,124
2 20,500 16,449 6,449 1,016,449 16,475 6,475 1,016,475
3 31.525 24,982 14,982 1,024,982 25,034 15,034 1,025,034
4 43,101 33,690 23,690 1,033,690 33,780 23,780 1,033,780
5 55,256 42,548 32,548 1,042,548 42,685 32,685 1,042,685
6 68,019 51,520 43,353 1,051,520 51,715 43,549 1,051,715
7 81,420 60,566 54,400 1,060,566 60,832 54,665 1,060,832
8 95,491 69,642 65,475 1,069,642 70,309 66,142 1,070,309
9 110,266 78,694 76,527 1,078,694 80,164 77,997 1,080,164
10 125,779 87,656 87,490 1.087,656 90,403 90,236 1,090,403
11 142,068 96,450 96,450 1,096,450 102,927 102,927 1,102,927
12 159,171 104,974 104,974 1,104,974 115,988 115,988 1,115,988
13 177,130 113,101 113,101 1,113,101 129,591 129,591 1,129,591
14 195,986 120,667 120,667 1,120,667 143,731 143,731 1,143,731
15 215,786 127,484 127,484 1,127,484 158,405 158,405 1,158,405
16 236,575 133,342 133,342 1,133,342 173,598 173,598 1,173,598
17 258,404 138,006 138,006 1,138,006 189,286 189,286 1,189,286
18 281,324 141,219 141,219 1,141,219 205,430 205,430 1,205,430
19 305,390 142,711 142,711 1,142,711 221,972 221,972 1,221,972
20 330,660 142,159 142,159 1,142,159 238,836 238,836 1,238,836
25 477,271 92,109 92,109 1,092,109 330,948 330,948 1,330,948
30 664,388 0 0 0 407,332 407,332 1,407,332
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
74
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE
LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
Guaranteed Current
Premiums ------------------------------------------- -----------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
1 10,000 8,607 0 1,008,607 8,616 0 1,008,616
2 20,500 17,955 7955 1,017,955 17,984 7,984 1,017,984
3 31,525 28,093 18,093 1,028,093 28,153 18,153 1,028,153
4 43,101 39,065 29,065 1,039,065 39,172 29,172 1,039,172
5 55,256 50,922 40,922 1,050,922 51,091 41,091 1,051,091
6 68,019 63,709 55,543 1,063,709 63,960 55,794 1,063,960
7 81,420 77,476 71,309 1,077,476 77,831 71,664 1,077,831
8 95,491 92,269 88,103 1,092,269 93,083 88,917 1,093,083
9 110,266 108,138 105,972 1,108,138 109,861 107,694 1,109,861
10 125,779 125,125 124,958 1,125,125 128,308 128,141 1,128,308
11 142,068 143,262 143,262 1,143,262 150,768 150,768 1,150,768
12 159,171 162,571 162,571 1,162,571 175,572 175,572 1,175,572
13 177,130 183,049 183,049 1,183,049 202,953 202,953 1,202,953
14 195,986 204,663 204,663 1,204,663 233,153 233,153 1,233,153
15 215,786 227,357 227,357 1,227,357 266,446 266,446 1,266,446
16 236,575 251,057 251,057 1,251,057 303,123 303,123 1,303,123
17 258,404 275,662 275,662 1,275,662 343,496 343,496 1,343,496
18 281,324 301,052 301,052 1,301,052 387,896 387,896 1,387,896
19 305,390 327,090 327,090 1,327,090 436,675 436,675 1,436,675
20 330,660 353,582 353,582 1,353,582 490,207 490,207 1,490,207
25 477,271 479,970 479,970 1,479,970 852,096 852,096 1,852,096
30 664,388 531,112 531,112 1,531,112 1,409,275 1,409,275 2,409,275
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
75
APPENDIX B
JOINT AGE CALCULATION
To calculate Joint Age, the two insureds ages are converted to adjusted ages,
the difference in the adjusted ages is converted to an add-on, and the add-on
is added to the adjusted age of the younger insured.
Step1: Sex Adjustment
Make the following adjustment to each insured's age based on sex:
Male: Subtract 0
Female: Subtract 5
Step2: Tobacco Adjustment
Take the results from Step 1 and make the following adjustment to each
insured's age based on tobacco use:
Male Tobacco: Add 3
Female Tobacco: Add 2
Step3: Substandard Rating Adjustment:
Take the results from Step 2 and make the following adjustment to each
insured's age based on substandard rating table:
Table A (125%) Add 2
Table B (150%) Add 4
Table C (175%) Add 6
Table D (200%) Add 8
Table E (225%) Add 10
Table F (250%) Add 12
Table H (300%) Add 14
Table J (350%) Add 15
Table L (400%) Add 16
Table P (500%) Add 19
If the adjusted age exceeds 100, then cap the adjusted age at 100.
Step 4: Uninsurables:
An adjusted age of 100 will be used for all uninsurables.
B-1
76
Step 5: Age Add-on:
Take the difference of the adjusted ages and determine the add-on from
the following table:
0 0
1-2 1
3-4 2
5-6 3
7-9 4
10-12 5
13-15 6
16-18 7
19-23 8
24-28 9
29-34 10
35-39 11
40-44 12
45-47 13
48-50 14
51-53 15
54-56 16
57-60 17
61-64 18
65-69 19
70-75 20
76-85 21
Step 6: Joint Age:
Add the add-on from Step 5 to the younger adjusted age to get the
Joint Age.
B-2
77
Target Premiums and Surrender Charges
(Annual rates per $1000 of Basic Coverage)
The initial surrender charge is level for the number of years indicated below.
Following this level period, the surrender charge decreases linearly by month
until it is zero at the beginning of the 11th year.
Initial Level Initial Level
Joint Target Surrender Period Joint Target Surrender Period
Age Premium Charge (in years) Age Premium Charge (in years)
- --- ------- ------ ---------- --- ------- ------ ----------
15 2.40 2.40 5 53 11.70 11.70 5
16 2.50 2.50 5 54 12.90 12.90 5
17 2.60 2.60 5 55 14.05 14.05 5
18 2.65 2.65 5 56 15.25 15.25 5
19 2.75 2.75 5 57 16.45 16.45 5
20 2.80 2.80 5 58 17.65 17.65 5
21 2.90 2.90 5 59 18.80 18.80 5
22 3.00 3.00 5 60 20.00 20.00 5
23 3.10 3.10 5 61 20.75 20.75 5
24 3.20 3.20 5 62 21.50 21.50 5
25 3.30 3.30 5 63 22.70 22.70 5
26 3.35 3.35 5 64 23.90 23.90 5
27 3.45 3.45 5 65 25.05 25.05 5
28 3.60 3.60 5 66 26.25 26.25 5
29 3.70 3.70 5 67 27.45 27.45 5
30 3.80 3.80 5 68 28.65 28.65 5
31 3.90 3.90 5 69 29.80 29.80 5
32 4.00 4.00 5 70 31.00 31.00 5
33 4.15 4.15 5 71 31.75 31.75 5
34 4.30 4.30 5 72 32.50 32.50 5
35 4.50 4.50 5 73 33.45 33.45 5
36 4.70 4.70 5 74 34.40 34.40 5
37 4.85 4.85 5 75 35.30 35.30 5
38 5.05 5.05 5 76 36.25 36.25 5
39 5.30 5.30 5 77 37.20 37.20 5
40 5.50 5.50 5 78 38.15 38.15 5
41 5.65 5.65 5 79 39.05 39.05 5
42 5.80 5.80 5 80 40.00 40.00 5
43 6.35 6.35 5 81 40.00 41.00 4
44 6.85 6.85 5 82 40.00 42.00 4
45 7.40 7.40 5 83 40.00 43.00 4
B-3
78
46 7.90 7.90 5 84 40.00 44.00 3
47 8.45 8.45 5 85 40.00 45.00 3
48 8.95 8.95 5 86 40.00 46.00 2
49 9.50 9.50 5 87 40.00 47.00 2
50 10.00 10.00 5 88 40.00 48.00 2
51 10.25 10.25 5 89 40.00 49.00 2
52 10.50 10.50 5 90 40.00 50.00 2
B-4
79
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997 AND 1996
80
Report of Independent Accountants
April 7, 1998
To the Board of Directors and
Policyowners of National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and policyowners' equity, and of cash
flows present fairly, in all material respects, the financial position of
National Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE, LLP
81
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 372,180 $ 268,235
Available-for-sale debt and equity securities, at fair value 5,317,427 4,393,046
Held-to-maturity debt securities, at amortized cost - 590,700
Mortgage loans 992,170 907,024
Policy loans 791,753 796,193
Real estate investments 95,926 99,442
Other invested assets 90,520 78,596
- -------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,659,976 7,133,236
Deferred policy acquisition costs 392,014 421,584
Due and accrued investment income 125,790 120,753
Premiums and fees receivable 23,458 25,874
Deferred income taxes 17,517 33,514
Amounts recoverable from reinsurers 210,020 190,873
Present value of future profits of insurance acquired 54,444 80,957
Property and equipment, net 59,188 64,302
Other assets 63,967 51,453
Separate account assets 207,425 181,771
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 8,813,799 $ 8,304,317
===================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,814,213 $ 3,701,597
Policyowners' accounts 3,236,710 3,051,973
Policyowners' deposits 40,836 37,524
Policy claims payable 26,968 31,217
Policyowners' dividends 53,395 51,792
Other liabilities and accrued expenses 479,483 394,127
Debt 80,085 82,682
Separate account liabilities 187,998 165,234
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 7,919,688 7,516,146
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 53,222 39,263
POLICYOWNERS' EQUITY:
Net unrealized gains on available-for-sale securities 85,017 28,867
Retained earnings 755,872 720,041
- -------------------------------------------------------------------------------------------------------------------
Total policyowners' equity 840,889 748,908
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 8,813,799 $ 8,304,317
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
1
82
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
REVENUES:
Insurance premiums $ 399,017 $ 406,286
Universal life and investment-type policy fees 45,397 41,745
Net investment income 532,594 517,268
Realized investment gains (losses) 11,887 (2,070)
Mutual fund commission and fee income 51,417 42,256
Other income 17,524 21,278
- -------------------------------------------------------------------------------------------------------------------
Total revenue 1,057,836 1,026,763
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 118,134 166,668
Policy benefits 313,819 297,564
Policyowners' dividends 106,312 105,690
Interest credited to policyowners' accounts 189,776 170,955
Operating expenses 174,709 148,716
Commissions and expense allowances 105,329 95,517
Net deferral of policy acquisition costs (14,617) (13,352)
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 993,462 971,758
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 64,374 55,005
Income taxes 20,907 31,957
- -------------------------------------------------------------------------------------------------------------------
Income before minority interests 43,467 23,048
Minority interests 7,636 5,925
- -------------------------------------------------------------------------------------------------------------------
NET INCOME 35,831 17,123
RETAINED EARNINGS:
Beginning of year 720,041 702,918
- -------------------------------------------------------------------------------------------------------------------
End of year $ 755,872 $ 720,041
===================================================================================================================
NET UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of year $ 28,867 $ 77,173
Change during year 56,150 (48,306)
- -------------------------------------------------------------------------------------------------------------------
End of year $ 85,017 $ 28,867
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
2
83
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,831 $ 17,123
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Due and accrued investment income (5,037) (1,502)
Policy liabilities 74,693 144,723
Deferred policy acquisition costs (14,617) (9,956)
Policyowners' dividends 1,603 4,975
Deferred income taxes (20,747) (13,646)
Realized investment (gains) losses (11,887) 2,070
Depreciation 3,715 4,283
Other 15,774 (12,678)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 79,328 135,392
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 2,385,471 2,497,648
Cost of investments acquired (2,647,628) (2,714,560)
Acquisition of subsidiary, net - (81,551)
Other 7,091 4,793
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (255,066) (293,670)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyowners' deposits, including interest credited 670,780 535,932
Policyowners' withdrawals, including policy charges (495,076) (418,775)
Net increase (decrease) in borrowings under repurchase agreements 234,570 (51,013)
Net (decrease) increase in securities lending liabilities (139,652) 31,717
Other 9,061 17,747
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 279,683 115,608
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103,945 (42,670)
CASH AND CASH EQUIVALENTS:
Beginning of year 268,235 310,905
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 372,180 $ 268,235
======================================================================================================================
The accompanying notes are an integral part of these financial statements.
3
84
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1996
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848 and is
among the 15 largest mutual life insurance companies in the United States.
National Life is also known by its registered trade name "National Life of
Vermont". National Life employs about 750 people in its home office in
Montpelier, Vermont. As a mutual life insurance company, National Life has no
shareholders. With its affiliates and subsidiaries, National Life offers a
broad range of financial products and services, including life insurance,
annuities, disability income insurance, mutual funds, investment advisory and
administration services.
National Life primarily develops and distributes individual life insurance and
annuity products. National Life markets its products primarily to small
business owners, professionals and high net worth individuals by providing
financial solutions in the form of estate, business succession and retirement
planning, deferred compensation and other key executive fringe benefit plans.
Insurance and annuity products are primarily distributed through about 40
general agencies in major metropolitan areas throughout the United States.
National Life also distributes its products through brokers and banks.
National Life has about 235,000 policyowners and is licensed to do business in
all 50 states and the District of Columbia. About 26% of National Life's total
collected premiums are from residents of New York and California.
Through affiliates National Life also distributes and provides investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $2.8 billion of net assets represent thirteen mutual funds
managed on behalf of about 107,000 individual, corporate and institutional
shareholders worldwide.
During 1996, National Life acquired a majority interest in Life Insurance
Company of the Southwest (LSW), a Dallas, Texas based financial services
company specializing in annuities. LSW is licensed in all states but New York,
with particular concentration in the west and the southwest. About 50% of LSW's
total collected premiums are from residents of California, Texas and Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life and
subsidiaries have been prepared in conformity with generally accepted
accounting principles (GAAP).
The consolidated financial statements include the accounts of National Life
Insurance Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to conform prior periods presented to the
current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
4
85
Debt securities are designated as available-for-sale or held-to-maturity where
the company has the ability and intent to hold securities to maturity.
Available-for-sale debt securities and equity securities are reported at
estimated fair value. Held-to-maturity debt securities are reported at
amortized cost. Debt and equity securities that experience declines in value
that are other than temporary are written down with a corresponding charge to
realized losses.
Mortgage loans are reported at amortized cost, less valuation allowances for
the excess, if any, of the amortized cost of impaired loans over the estimated
fair value of the related collateral. Changes in valuation allowances are
included in realized gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at the lower of the
recorded investment in the loan, including accrued interest, or estimated fair
value.
Realized investment gains and losses are recognized using the specific
identification method and include changes in valuation allowances. Changes in
the estimated fair values of available-for-sale debt and equity securities are
reflected in policyowners' equity after adjustments for related deferred policy
acquisition costs, present value of future profits of insurance acquired,
income taxes and minority interests.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively
for actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through policyowners' equity, net of related income taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance is amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to
gross profits of those policies. Amortization is adjusted retrospectively for
actual experience and when estimates of future profits are revised.
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
depreciated over 40 years using the straight line method. Furniture and
equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
5
86
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyowners' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyowners' interests
are excluded from revenues and expenses.
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance
terminal dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level
premium method, with assumptions for interest, mortality, morbidity,
withdrawals and expenses based principally on company experience.
Policyowners' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyowners
(before surrender charges).
POLICYOWNERS' DIVIDENDS
Policyowners' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyowner. Benefits and expenses are matched with income
by providing for policy benefit liabilities and the deferral and amortization
of policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyowners' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyowners' accounts. Policy benefits charged to expense include
benefit claims in excess of related policyowners' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
FEDERAL INCOME TAXES
National Life files a consolidated federal income tax return that includes all
of its wholly-owned subsidiaries. Current federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized based on temporary differences
between financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
6
87
NOTE 3 - ACQUISITION
National Financial Services, Inc., a wholly-owned subsidiary of National Life,
acquired a two-thirds interest in Life Insurance Company of the Southwest (LSW)
located in Dallas, Texas on February 8, 1996. LSW is a financial services
company specializing in annuities that is licensed in all states except New
York.
The acquisition was accomplished by purchasing two-thirds of LSW Holdings
Corporation, the owner of LSW. LSW Holdings Corporation was renamed LSW
National Holdings, Inc. concurrent with the purchase. The purchase price was
about $102 million in cash. The purchase resulted in the recording of an
intangible asset for the present value of future profits of insurance acquired
of $67.2 million.
The minority shareholders have the right to put their shares to National Life
at specified prices in the event of certain contingencies during the first five
years subsequent to closing and generally thereafter. Similarly, National Life
has the right to call the minority shareholders' shares at specified prices.
The specified prices are generally a function of GAAP equity or the original
purchase price.
These consolidated financial statements include the financial position and
operations of LSW National Holdings since the purchase, along with appropriate
adjustments for minority interests, using the purchase method. Pro forma
results had the acquisition occurred as of January 1, 1996 are shown in the
table below (in thousands). These pro forma consolidated results are not
necessarily indicative of the actual results which might have occurred had
National Life owned LSW since that date.
1996
- ---------------------------------------------------------------------------------
Revenues $ 1,026,763
Net income 17,356
Noncash investing activities relating to the acquisition that are not reflected
in the 1996 consolidated statement of cash flow were as follows (in thousands):
Fair value of assets acquired, excluding cash acquired $ 1,144,694
Liabilities assumed (1,063,143)
- ---------------------------------------------------------------------------------
Cash paid (net of cash acquired) $ 81,551
=================================================================================
7
88
NOTE 4 - INVESTMENTS
Debt and Equity Securities
The amortized cost and estimated fair values of debt and equity securities at
December 31 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale (AFS):
U.S. government obligations $ 284,039 $ 13,515 $ 612 $ 296,942
Government agencies, authorities
and subdivisions 178,986 11,649 793 189,842
Public utilities 389,744 19,246 6,314 402,676
Corporate 2,403,091 133,881 7,069 2,529,903
Private placements 598,144 29,576 2,170 625,550
Mortgage-backed securities 1,196,369 35,308 1,275 1,230,402
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,050,373 243,175 18,233 5,275,315
Preferred stocks 6,482 803 259 7,026
Common stocks 29,638 5,511 63 35,086
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,086,493 $ 249,489 $ 18,555 $ 5,317,427
===============================================================================================================
1996
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale (AFS):
U.S. government obligations $ 180,646 $ 3,336 $ 187 $ 183,795
Government agencies, authorities
and subdivisions 222,867 9,165 3,693 228,339
Public utilities 427,426 12,354 7,270 432,510
Corporate 2,176,977 72,482 20,581 2,228,878
Private placements 199,061 4,923 2,349 201,635
Mortgage-backed securities 1,089,434 16,244 10,142 1,095,536
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 4,296,411 118,504 44,222 4,370,693
Preferred stocks 9,719 739 359 10,099
Common stocks 9,705 2,560 11 12,254
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046
===============================================================================================================
Held-to-maturity (HTM) debt securities:
U.S. government obligations $ 2,052 $ 14 $ 2 $ 2,064
Government agencies, authorities
and subdivisions 20,970 1,264 208 22,026
Public utilities 9,953 359 1 10,311
Corporate 30,669 1,593 40 32,222
Private placements 527,056 21,799 3,061 545,794
- ---------------------------------------------------------------------------------------------------------------
Total HTM debt securities $ 590,700 $ 25,029 $ 3,312 $ 612,417
===============================================================================================================
8
89
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of policyowners' equity and changes therein for the
years ended December 31 were as follows (in thousands):
1997 1996
- ----------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on available-for-sale securities $ 153,723 $ (153,543)
Net unrealized gains on separate accounts 3,047 1,225
Related minority interests (9,360) 2,474
Related deferred policy acquisition costs (44,378) 61,726
Related present value of future profits of insurance acquired (10,138) 11,639
Related deferred income taxes (36,744) 28,173
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in net unrealized gains (losses) 56,150 (48,306)
Balance, beginning of year 28,867 77,173
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 230,934 $ 77,211
Net unrealized gains on separate accounts 4,272 1,225
Related minority interests (6,886) 2,474
Related deferred policy acquisition costs (94,678) (50,300)
Related present value of future profits on insurance acquired 1,501 11,639
Related deferred income taxes (50,126) (13,382)
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
In December 1997, National Life transferred all securities designated as
held-to-maturity to available-for-sale. The securities transferred had an
estimated fair value of $618.8 million and an amortized cost of $586.1 million,
resulting in $32.7 million in unrealized gains.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1997 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated Fair
Cost Value
- ---------------------------------------------------------------------------
Due in one year or less $ 82,465 $ 83,291
Due after one year through five years 557,609 575,489
Due after five years through ten years 2,074,439 2,147,536
Due after ten years 1,139,491 1,238,597
Mortgage-backed securities 1,196,369 1,230,402
- ---------------------------------------------------------------------------
Total $ 5,050,373 $ 5,275,315
===========================================================================
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 are shown below (in thousands):
1997 1996
- ---------------------------------------------------------------------------
Proceeds from sales $ 1,928,055 $ 1,990,175
Gross realized gains $ 27,318 $ 46,092
Gross realized losses $ 16,916 $ 42,759
9
90
National Life periodically lends certain U.S. government or corporate bonds to
approved counterparties to enhance the yield of its bond portfolio. National
Life receives cash collateral for at least 105% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held (included in other liabilities) were $19.8 million and $159.4
million at December 31, 1997 and 1996, respectively.
National Life also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1996. The repurchase liability
is included in other liabilities and was $234.6 million at December 31, 1997.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
1997 1996
------------------------------
GEOGRAPHIC REGION
-----------------
New England 4.0% 4.5%
Middle Atlantic 10.3 9.0
East North Central 8.8 10.4
West North Central 4.9 3.6
South Atlantic 29.1 30.2
East South Central 5.0 4.4
West South Central 10.8 13.3
Mountain 16.7 15.9
Pacific 10.4 8.7
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
PROPERTY TYPE
-------------
Residential 0.2% 0.3%
Apartment 24.3 21.1
Retail 15.9 18.6
Office Building 34.0 32.6
Industrial 22.2 25.0
Hotel/Motel 0.9 1.0
Other Commercial 2.5 1.4
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
Total mortgage loans and real estate $ 1,088,096 $ 1,006,466
=================================================================================
10
91
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
1997 1996
- ----------------------------------------------------------------------------
Unimpaired loans $ 965,760 $ 876,994
Impaired loans without valuation allowances 9,413 6,146
- ----------------------------------------------------------------------------
Subtotal 975,173 883,140
- ----------------------------------------------------------------------------
Impaired loans with valuation allowances 21,426 31,167
Related valuation allowances (4,429) (7,283)
- ----------------------------------------------------------------------------
Subtotal 16,997 23,884
- ----------------------------------------------------------------------------
Total $ 992,170 $ 907,024
============================================================================
Impaired loans:
Average recorded investment $ 34,076 $ 40,161
Interest income recognized $ 3,543 $ 5,026
Interest received $ 3,818 $ 5,170
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans
without valuation allowances are mortgage loans where the estimated fair value
of the collateral exceeds the recorded investment in the loan. For these
impaired loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
1997 1996
=========================================================================================
Additions for impaired loans charged to realized losses $ 1,543 $ 3,944
Impairment losses charged to valuation allowances (1,419) (7,559)
Changes to previously established valuation allowances (2,978) 2,423
- -----------------------------------------------------------------------------------------
Decrease in valuation allowances (2,854) (1,192)
Balance, beginning of year 7,283 8,475
- -----------------------------------------------------------------------------------------
Balance, end of year $ 4,429 $ 7,283
=========================================================================================
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
1997 1996
- ----------------------------------------------------------------------------
Debt securities interest $ 392,674 $ 385,750
Equity securities dividends 2,765 1,730
Mortgage loan interest 85,782 81,575
Policy loan interest 48,856 49,438
Real estate income 15,822 15,193
Other investment income 13,627 9,016
- ----------------------------------------------------------------------------
Gross investment income 559,526 542,702
Less: investment expenses 26,932 25,434
- ----------------------------------------------------------------------------
Net investment income $ 532,594 $ 517,268
============================================================================
DERIVATIVES
National Life purchases over-the-counter options and exchange-traded futures on
the Standard & Poor's 500 (S&P 500) index to hedge obligations relating to
equity indexed products. When the S&P 500 index increases, increases in the
intrinsic value of the options and fair value of futures are offset by
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life's loss is the decrease in the fair value of futures
and is limited to the premium paid for the options.
11
92
National Life purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life's loss
would be equal to the fair value of the net options held from that
counterparty.
The option premium is expensed over the term of the option. The amortization
of the option premium, increases in the intrinsic value of options and changes
in the fair value of futures are reflected in investment income. Interest
credited includes amounts that would be credited on the next policy anniversary
based on the S&P 500 index's value at the reporting date.
The notional amounts and net book value of options and futures at December 31,
were as follows (in thousands):
1997 1996
- -----------------------------------------------------------------------------------------------------------
Notional amounts:
Options $ 245,187 $ 61,078
Futures $ 27,892 -
===========================================================================================================
Book values:
Options: Net amortized cost $ 4,058 $ 2,986
Intrinsic value 7,876 3,480
- -----------------------------------------------------------------------------------------------------------
Book value 11,934 6,466
Futures at fair value 630 -
- -----------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 12,564 $ 6,466
===========================================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Value Estimated Fair
Value Value Value
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 372,180 $ 372,180 $ 268,235 $ 268,235
Available-for-sale debt and equity securities 5,317,427 5,317,427 4,393,046 4,393,046
Held-to-maturity debt securities - - 590,700 612,417
Mortgage loans 992,170 1,024,582 907,024 924,732
Policy loans 791,753 730,059 796,193 715,914
Derivatives 12,564 11,629 6,466 5,123
Investment products 2,642,511 2,503,727 2,341,273 2,336,171
Debt 80,085 82,314 82,682 80,149
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value.
Fixed rate policy loan fair values are estimated based on discounted cash flows
using the current variable policy loan rate (including appropriate provisions
for mortality and repayments).
Derivatives estimated fair values are based on quoted values.
12
93
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated values are based on discounted cash flows using
current interest rates of similar securities.
NOTE 5 - INSURANCE IN-FORCE AND REINSURANCE
National Life reinsures certain risks assumed in the normal course of business.
For individual life products, National Life generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable
term, coinsurance, and modified coinsurance. Disability income products are
significantly reinsured under coinsurance and modified coinsurance.
National Life remains liable in the event any reinsurer is unable to meet its
assumed obligations. National Life regularly evaluates the financial condition
of its reinsurers and concentrations of credit risk of reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.
The effects of reinsurance for the years ended December 31, were as follows (in
thousands):
1997 1996
- -------------------------------------------------------------------------------
Insurance premiums:
Direct premiums $ 470,853 $ 474,998
Reinsurance assumed 896 959
Reinsurance ceded (72,732) (69,671)
- -------------------------------------------------------------------------------
$ 399,017 $ 406,286
===============================================================================
Increase in policy liabilities:
Direct increase in policy $ 112,577 $ 164,233
liabilities
Reinsurance assumed 17 (20)
Reinsurance ceded 5,540 2,455
- -------------------------------------------------------------------------------
$ 118,134 $ 166,668
===============================================================================
Policy benefits:
Direct policy benefits $ 393,082 $ 363,405
Reinsurance assumed 12 62
Reinsurance ceded (79,275) (65,903)
- -------------------------------------------------------------------------------
$ 313,819 $ 297,564
===============================================================================
Policyowners' dividends:
Direct policyowners' dividends $ 111,617 $ 112,050
Reinsurance ceded (5,305) (6,360)
- -------------------------------------------------------------------------------
$ 106,312 $ 105,690
===============================================================================
13
94
NOTE 6 - INCOME TAXES
The components of income taxes and a reconciliation of the expected and actual
income taxes and marginal and effective federal income tax rates for the years
ended December 31 were as follows ($ in thousands):
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
Current $ 41,654 $ 45,603
Deferred (20,747) (13,646)
- ------------------------------------------------------------------ -----------------
Income taxes $ 20,907 $ 31,957
================================================================== =================
Expected income taxes $ 22,531 35.0% $ 19,252 35.0%
Differential earnings amount 4,581 7.1 6,007 10.9
Affordable housing tax credit (4,318) (6.7) (1,305) (2.4)
Net change in tax reserves 1,298 2.0 10,290 18.7
Other, net (3,185) (4.9) (2,287) (4.1)
- -----------------------------------------------------------------------------------------------------------------
Income taxes $ 20,907 $ 31,957
================================================================= =================
Effective federal income tax rate 32.5% 58.1%
========================================== ============== ==================
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Policy liabilities $ 172,387 $ 160,933
Other liabilities and accrued expenses 56,946 47,703
Other 4,294 10,495
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 233,627 219,131
- -----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 126,914 125,454
Present value of future profits of insurance acquired 20,642 24,262
Net unrealized gain on available-for-sale securities 50,126 13,382
Debt and equity securities 9,253 9,352
Other 9,175 13,167
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 216,110 185,617
- -----------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 17,517 $ 33,514
=================================================================================================================
Management believes it is more likely than not that National Life will realize
the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS.
The IRS has examined tax returns through 1993 and is currently examining the
years 1994 and 1995. In management's opinion adequate tax liabilities have been
established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an
employee's retirement age, years of service and compensation near retirement.
Plan assets are primarily bonds and common stocks held in a National Life
separate account and funds invested in an annuity contract issued by National
Life. National Life also sponsors other non-qualified pension plans, including
a non-contributory defined benefit plan for general agents that provides
benefits based on years of service and sales levels, a contributory defined
benefit plan for certain employees, agents and general
14
95
agents and a non-contributory defined supplemental benefit plan for certain
executives. These non-qualified plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life pays
for plan benefits on a current basis. The cost of these benefits is recognized
as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for the pro-rata recognition of actuarial gains on lump
sum settlements of pension benefit obligations.
The status of the defined benefit plans at December 31, was as follows (in
thousands):
Pension Benefits Other Benefits
---------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $180,075 $ 170,740 $ 24,351 $ 23,410
Service cost (benefits earned during the current period) 4,467 4,384 630 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Actuarial gains (19,077) 3,312 (3,587) (592)
Benefits paid (14,557) (10,149) (784) (786)
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement payments (8,799) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 162,986 $ 180,075 $ 24,759 $ 24,351
==============================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 97,566 $ 90,592
Actual return on plan assets 23,337 10,230
Employer contributions 2,502 2,047
Benefits paid (5,722) (5,303)
1997 early retirement program settlement payments (8,799) -
- ------------------------------------------------------------------------------------------------------
Plan assets, end of year $ 108,884 $ 97,566
======================================================================================================
FUNDED STATUS:
Benefit obligation $ 162,986 $ 180,075 $ 24,759 $ 24,351
Plan assets (108,884) (97,566) - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 54,102 82,509 24,759 24,351
Unrecognized actuarial gains (losses) 28,485 (2,376) 4,548 930
Unrecognized prior service cost - - (1,224) (1,296)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost (included in other liabilities) $ 82,587 $ 80,133 $ 28,083 $ 23,985
==============================================================================================================================
15
96
The components of net periodic benefit cost for the years ended December 31,
were as follows (in thousands):
Pension Benefits Other Benefits
----------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Service cost (benefits earned during the current period) $ 4,467 $ 4,384 $ 630 $ 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Expected return on plan assets (8,636) (6,225) - -
Net amortization and deferrals - - 31 -
Amortization of prior service cost - - 72 72
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement gains (2,917) - - -
- ------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating expenses) $ 13,791 $ 9,947 $ 4,882 $ 2,391
==================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were as follows (in thousands):
1997 1996
- ---------------------------------------------------------------------------------------
Projected benefit obligation $ 69,116 $ 71,511
Accumulated benefit obligation 66,268 67,070
Fair value of plan assets - -
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
Pension Benefits Other Benefits
---------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.00% 7.50% 7.00%
Rate of increase in future compensation levels 3.50% 5.00%
Expected long term return on plan assets 9.00% 7.00%
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1997
service and interest cost components of net periodic postretirement benefit
cost by about $0.3 million. Decreasing the assumed health care trend rates by
one percentage point in each year would reduce the APBO by about $1.9 million
and the 1997 service and interest cost components of net periodic
postretirement benefit cost by about $0.3 million. National Life uses the
straight-line method of amortization for prior service cost and unrecognized
gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. National Life also contributes
various amounts of an employee's compensation (up to certain levels) to a
401(k) account. Additional voluntary employee contributions may be made to the
plans subject to certain limits. Company contributions to these plans
generally vest within two years.
16
97
NOTE 8 - DEBT
Debt consists of the following (in thousands):
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
8.25% Surplus Notes: $ 69,685 $ 69,682
$70 million, maturing March 1, 2024 with interest payable
semi-annually on March 1 and September 1. The notes are
unsecured and subordinated to all present and future
indebtedness, policy claims and prior claims. The notes may be
redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal
payments require prior written approval by the State of Vermont
Department of Banking, Insurance, Securities and Health Care
Administration.
6.10% Term Note: 10,400 13,000
maturing March 1, 2000 with interest payable semi-annually on
March 1 and September 1. The note is secured by subsidiary
stock, includes certain restrictive covenants and requires
annual payments of principal (see below).
- ---------------------------------------------------------------------------------------------------------------------------
Total debt $ 80,085 $ 82,682
===========================================================================================================================
The aggregate annual maturities of debt for the next five years are as follows
(in thousands):
1998 $ 4,400
1999 3,000
2000 3,000
2001 -
2002 -
In February 1998, the Term Note was renegotiated. Under the new terms,
effective March 1, 1998, the interest rate will be 6.57% with principal
payments of $2.0 million annually for 1998 to 2001 (inclusive) and $2.4 million
in 2002.
NOTE 9 - CONTINGENCIES
During 1997, several class action lawsuits were filed against National Life in
various states relating to the sale of life insurance policies during the
1980's and 1990's. National Life specifically denies any wrongdoing and
intends to defend these cases vigorously. Accordingly, a provision for legal
and administrative costs of defending these lawsuits was established in 1997.
The ultimate outcome of such litigation is uncertain given the complexity and
scope of the issues involved. While management believes that the ultimate
outcome is unlikely to have a material adverse effect on National Life's
financial position (after considering existing provisions), an adverse outcome
could materially affect operating results for a given year.
17
98
NOTE 10 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of
Columbia. A reconciliation of National Life Insurance Company's statutory
surplus to GAAP retained earnings at December 31 and statutory net income to
GAAP net income for the years ended December 31 were as follows (in thousands):
1997 1996
----------------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- --------------------------------------------------------------------------------------------------------------
Statutory surplus/net income $ 342,614 $ 49,574 $ 305,611 $ 11,684
Asset valuation reserve 67,734 - 57,054 -
Interest maintenance reserve 56,940 (229) 57,169 1,540
Surplus notes (69,685) (3) (69,682) (3)
Non-admitted assets 20,874 - 18,391 -
Investments (944) (18,856) 18,504 290
Deferred policy acquisition costs 437,932 (5,651) 443,583 3,970
Deferred income taxes 72,544 13,807 58,737 9,179
Policy liabilities (186,349) 7,449 (193,798) (9,874)
Policyowners' dividends 64,734 2,206 62,528 (1,142)
Benefit plans (37,826) (1,732) (36,094) 4,403
Other changes, net (12,696) (10,734) (1,962) (2,924)
- --------------------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 755,872 $ 35,831 $ 720,041 $ 17,123
==============================================================================================================
The New York Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company and for determining solvency under the New
York Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with generally accepted accounting principles
in making such determinations.
18
99
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VI, Section 2 of the Bylaws of National Life Insurance Company
("National Life" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify directors, officers and
employees of the Company or any other corporation served at the request of the
Company, and their heirs, executors and administrators, shall be indemnified to
the maximum extent permitted by law against all costs and expenses, including
judgments paid, settlement costs, and counsel fees, reasonably incurred in the
defense of any claim in which such person is involved by virtue of his or her
being or having been such a director, officer, or employee.
The Bylaws are filed as Exhibit 1.A.(7) to this Registration
Statement.
Vermont law authorizes Vermont corporations to provide indemnification
to directors, officers and other persons.
National Life owns a directors and officers liability insurance policy
covering liabilities that directors and officers of National Life and its
subsidiaries and affiliates may incur in acting as directors and officers.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or other controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
REPRESENTATION RELATING TO FEES AND CHARGES
National Life Insurance Company ("the Company") hereby represents that
the fees and charges deducted under the last survivor variable life insurance
policy described in the prospectus contained in this registration statement are,
in the aggregate, reasonable in relationship to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Company.
100
Part II
101
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectus consisting of __ pages.
Undertaking to file reports.
Rule 484 undertaking.
Representation relating to fees and charges.
The signatures.
Written consents of the following persons:
(a) Jeffrey P. Johnson, Esq.
(b) Elizabeth H. MacGowan, F.S.A., M.A.A.A.
(c) Sutherland, Asbill & Brennan.
(d) Price Waterhouse LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolutions of the Board of Directors of National
Life Insurance Company establishing the National
Variable Life Insurance Account.**
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between
National Life Insurance Company and Equity
Services, Inc.****
(b)(1) Form of Equity Services, Inc. Branch Office
Supervisor Contract.**
(b)(2) Form of Equity Services, Inc. Registered
Representative Contract.**
(c) Schedule of Sales Commissions.
(4) Not Applicable.
(5) (a) Specimen Sentinel Estate Builder Policy Form.
(b) Rider for Guaranteed Death Benefit.
(c) Rider for Additional Protection Benefit.
(d) Rider for Policy Split Option.
(e) Rider for Estate Preservation.
(f) Rider for Annually Renewable Term.
(g) Rider for Continuing Coverage.
(h) Rider for Enhanced Death Benefit.
(i) Rider for Automatic Increase.
(6) (a) Charter documents of National Life Insurance
Company.**
(b) Bylaws of National Life Insurance Company.**
(7) Not Applicable.
(8) (a) Participation Agreement by and among Market
Street Fund, Inc., National Life Insurance
Company and Equity Services, Inc.****
(a)(3) Form of Amendment No. 2 to Participation
Agreement among Market Street Fund., Inc.,
National Life Insurance Company and Equity
Services, Inc.
(b) Participation Agreement among Variable
Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated August 1, 1989.***
(b)(2) Amendment No. 1 to Participation Agreement
among Variable Insurance Products Fund,
Fidelity Distributors Corporation and
National Life Insurance Company.****
(b)(4) Form of Amendment No. 3 to Participation
Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company
(c) Participation Agreement by and among National
Life Insurance Company, Strong Variable
Insurance Funds, Inc., Strong Special Fund
II, Strong Capital Management, Inc. and
Strong Funds Distributors, Inc.
(d) Form of Participation Agreement Among
Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now National
Life Insurance Company) dated April 1,
1990*****
(d)(2) Form of Amendment No 1. to Participation
Agreement Among Variable Insurance Products
Fund II, Fidelity Distributors Corporation,
and National Life Insurance Company (as
successor to Vermont Life Insurance
Company)******
(d)(3) Form of Amendment No. 2 to Participation
Agreement among Variable Insurance Products
Fund II, Fidelity Distributors Corporation
and National Life Insurance Company (as
successor to Vermont Life Insurance Company)
(e) Form of Participation Agreement among
National Life Insurance Company, American
Century Investment Management, Inc.
(f) Form of Participation Agreement among
National Life Insurance Company, Neuberger &
Berman Advisers Managers Trust.
(g) Form of Participation Agreement among
National Life Insurance Company, J. P. Morgan
Series Trust II.
(h) Form of Participation Agreement among
National Life Insurance Company, Goldman
Sachs Variable Insurance Trust.
102
(9) Not Applicable.
(10) Sentinel Estate Builder Application Form.
(11) Memorandum describing issuance, transfer and
redemption procedures.
2. Opinion and Consent of Jeffrey P. Johnson, Esq., as to the
legality of the securities being offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Elizabeth H. MacGowan, F.S.A.,
M.A.A.A., as to actuarial matters pertaining to the
securities being registered.
7. (a) Consent of Price Waterhouse LLP.
(b) Consent of Sutherland, Asbill & Brennan LLP.
8. Powers of Attorney for Directors.*
- ------------------
* Incorporated herein by reference to Registration Statement on Form S-6
(File No. 333-44723) filed January 22, 1998, Accession No. 00009501
33-98-000165.
** Incorporated herein by reference to the Form S-6 Registration
Statement (File No. 33-91938) for National Variable Life Insurance
Account filed on May 5, 1995.
*** Incorporated herein by reference to Post-Effective Amendment No. 3
to the Form S-6 Registration Statement (File No. 33-16470) for
Vermont Variable Life Insurance Account filed April 30, 1990.
**** Incorporated herein by reference to Post Effective Amendment No. 1 to
S-6 Registration Statement File No. 33-91938 for National Variable
Life Insurance Account filed March 12, 1996, Accession Number
0000950133-96-000202.
***** Incorporated herein by reference to Post-Effective Amendment No. 3 to
the Form S-6 Registration Statement (File No. 33-16470) for Vermont
Variable Life Insurance Company filed April 30, 1990.
****** Incorporated herein by reference to Post Effective Amendment No. 2 to
the Form S-6 Registration Statement (File No. 33-91938) for National
Variable Life Insurance Account filed April 30, 1997 (Accession Number
000.950133-97-001551).
103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, National Variable Life Insurance Account, has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of
Montpelier and the State of Vermont, on the 9th day of April, 1998.
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH
--------------------- -----------------------------
Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National
Life Insurance Company has duly caused this Pre-Effective Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal fixed and attested, in the City of
Montpelier and the State of Vermont, on the 9th day of April, 1998.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH
--------------------- -----------------------------
Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 Registration Statement has been signed below by
the following persons in the capacities indicated on the date(s) set forth
below.
Signature Title Date
- --------- ----- ----
/s/ PATRICK E. WELCH Chairman of the Board and April 9, 1998
- ------------------------ and Chief Executive Officer
Patrick E. Welch
/s/ THOMAS H. MACLEAY President, Chief Operating April 9, 1998
- ------------------------ Officer and Director
Thomas H. MacLeay
/s/ Martin P. Klein Executive Vice President April 9, 1998
- ------------------------ Chief Financial Officer
Martin P. Klein
Robert E. Boardman* Director
- ------------------ ------------
Robert E. Boardman
David R. Coates* Director
- ---------------- ------------
David R. Coates
105
Benjamin F. Edwards III* Director
- ----------------------- ------------
Benjamin F. Edwards III
Earle H. Harbison, Jr.* Director
- ---------------------- ------------
Earle H. Harbison, Jr.
Roger B. Porter* Director
- ---------------------- ------------
Roger B. Porter
E. Miles Prentice, III* Director
- ---------------------- ------------
E. Miles Prentice, III
Director
- ---------------- ------------
Thomas P. Salmon
A. Gary Shilling* Director
- ---------------- ------------
A. Gary Shilling
Thomas R. Williams* Director
- ------------------ ------------
Thomas R. Williams
Director
- ----------------- ------------
Patricia K. Woolf
*By /s/ PATRICK E. WELCH Date: April 9, 1998
--------------------------
Patrick E. Welch
Pursuant to Power of Attorney
106
EXHIBIT INDEX
1.
A.
(3) (c) Schedule of Sales Commissions
(5) (a) Sentinel Estate Provider Policy Form
(b) Rider for Guaranteed Death Benefit
(c) Rider for Additional Protection Benefit
(d) Rider for Policy Split option
(e) Rider for Estate Preservation
(f) Rider for Annually Renewable Term
(g) Rider for Continuing Coverage
(h) Rider for Enhanced Death Benefit
(i) Rider for Automatic Increase
(8) (a)(3) Form of Amendment No. 2 to Participation
Agreement among Market Street Fund., Inc.,
National Life Insurance Company and Equity
Services, Inc.
(b)(4) Form of Amendment No. 3 to Participation
Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company
(c) Participation Agreement by and among National
Life Insurance Company, Strong Variable
Insurance Funds, Inc., Strong Special Fund
II, Strong Capital Management, Inc. and
Strong Funds Distributors, Inc.
(d)(3) Form of Amendment No. 2 to Participation
Agreement among Variable Insurance Products
Fund II, Fidelity Distributors Corporation
and National Life Insurance Company (as
successor to Vermont Life Insurance Company)
(e) Form of Participation Agreement among
National Life Insurance Company, American
Century Investment Management, Inc.
(f) Form of Participation Agreement among
National Life Insurance Company, Neuberger &
Berman Advisers Managers Trust.
(g) Form of Participation Agreement among
National Life Insurance Company, J. P. Morgan
Series Trust II.
(h) Form of Participation Agreement among
National Life Insurance Company, Goldman
Sachs Variable Insurance Trust.
(10) Sentinel Estate Provider Application Form.
(11) Memorandum describing issuance, transfer
and redemption procedures
107
EXHIBIT INDEX (continued)
(2) Opinion and Consent of Jeffrey P. Johnson,
Esq.
(6) Opinion and Consent of Elizabeth H. MacGowan,
FSA, MAAA
(7) (a) Consent of Price Waterhouse LLP
(b) Consent of Sutherland, Asbill & Brennan LLP