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As filed with the Securities and Exchange Commission on November 9, 1998.
Registration No. 333-_____________
811-9044
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-------------------------------
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
-------------------------------
D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(name and complete address of agent for service)
-------------------------------
Copy to:
Stephen E. Roth, Esq.
Sutherland Asbill & Brennan
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2404
-------------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
-------------------------------
TITLE OF SECURITIES BEING OFFERED:
Flexible premium variable universal life insurance policies intended
primarily for the corporate market.
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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This information is subject to completion or amendment. We have filed a
registration statement with the Securities & Exchange Commission relating to
these securities. We may not sell these securities or accept offers to buy them
before the registration statement becomes effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject To Completion Dated November 9, 1998
SENTINEL BENEFIT PROVIDER
A Variable Universal Life Insurance Policy
Intended Primarily
for the Corporate Market
PROSPECTUS
Dated November 9, 1998
[GRAPHIC]
- --------------------------------------------------------------------------------
National Life Insurance Company - Home Office: National Life Drive, Montpelier,
Vermont 05604 - 1-800-536-5934
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This Prospectus describes the Sentinel Benefit Provider Policy, a flexible
premium variable universal life insurance policy offered by National Life
Insurance Company. The policy has an insurance component and an investment
component. Owners of policies can make premium payments at various times and in
various amounts. You can also allocate premiums among a number of funds with
different investment objectives and you can increase or decrease the death
benefit payable under your policy. You may also choose between two death benefit
compliance tests at the time your policy is issued.
We make certain deductions from premium payments. Then these premium payments go
to the National Variable Life Insurance Account, a separate account of National
Life. This separate account has twenty subaccounts, each of which buys shares of
specific fund portfolios. The available funds are shown below.
- -----------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE GOLDMAN SACHS
MARKET STREET FUND, INC. ALGER AMERICAN FUND PORTFOLIOS, INC. VARIABLE INSURANCE
TRUST
- -----------------------------------------------------------------------------------------------------------------------------
- - AGGRESSIVE GROWTH PORTFOLIO* - GROWTH PORTFOLIO - VP INCOME & GROWTH - CORE SMALL CAP
PORTFOLIO EQUITY
- - BOND PORTFOLIO* - SMALL CAPITALIZATION PORTFOLIO - VP VALUE PORTFOLIO - GLOBAL INCOME
- - GROWTH PORTFOLIO* - INTERNATIONAL EQUITY
- - INTERNATIONAL PORTFOLIO+ - MID CAP EQUITY
- - MANAGED PORTFOLIO*
- - MONEY MARKET PORTFOLIO*
- - SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Company Managed by Fred Alger Managed by American Century Managed by Goldman Sachs
+Managed by Provident Mutual Management, Inc. Investment Management, Inc. Asset Management &
Investment Management Company Goldman Sachs Asset
Management International
- -----------------------------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN STRONG VARIABLE INSURANCE
J.P. MORGAN SERIES TRUST II ADVISERS MANAGEMENT TRUST FUNDS, INC. STRONG OPPORTUNITY
- -----------------------------------------------------------------------------------------------------------------------------
- - INTERNATIONAL OPPORTUNITIES - PARTNERS PORTFOLIO - GROWTH FUND II FUND II
PORTFOLIO
- - SMALL COMPANY PORTFOLIO
Managed by J. P. Morgan Asset Managed by Neuberger & Berman Managed by Strong Capital Managed by Strong Capital
Management, Inc. Management, Inc. Management, Inc. Management, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
The value in each subaccount will depend upon the investment results of the
funds you select. You bear the entire investment risk for all amounts allocated
to the various funds; there is no guaranteed minimum value for any of the funds,
and the value of your policy may be more or less than premiums paid.
You must receive, with this prospectus, current prospectuses for all of the fund
choices. They describe the investment objectives and the risks of the funds.
The value of your policy will also reflects our charges which include cost of
insurance charges, the policy administration charge, the mortality and expense
risk charge, the separate account administration charge, and certain other
charges. During the first five years your policy will remain in force if
specified premiums are paid on time, or if the policy has enough value to pay
the monthly charges as they become due. After the fifth year, the Policy will
remain in force only so long as it has enough value to pay the monthly charges
as they become due.
We recommend that you read this prospectus carefully. It may also be useful to
keep it to refer to later.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
Summary Description of the Policy...................................................................................1
The Policy Offered......................................................................................1
The Separate Account....................................................................................1
Availability of Policy..................................................................................2
The Death Benefit.......................................................................................2
Flexibility to Adjust Amount of Death Benefit...........................................................2
Account Value...........................................................................................2
Allocation of Net Premiums..............................................................................3
Transfers...............................................................................................3
Free-Look Privilege.....................................................................................3
Charges Assessed in Connection with the Policy..........................................................4
Summary of Policy Expenses..................................................................4
Premium Loads...............................................................................6
Monthly Deductions..........................................................................6
Daily Charges Against the Separate Account..................................................6
Transfer Charge.............................................................................7
Other Charges...............................................................................7
Allocation of Charges to the Subaccounts....................................................7
Policy Lapse and Reinstatement..........................................................................7
Loan Privilege..........................................................................................7
Withdrawal of Net Account Value.........................................................................8
Surrender of the Policy.................................................................................8
Tax Treatment...............................................................................8
Illustrations of Death Benefits, Account Value and Net Cash Surrender Value.................9
National Life Insurance Company, The Separate Account, and The Funds................................................10
National Life Insurance Company.........................................................................10
The Separate Account....................................................................................10
The Market Street Fund..................................................................................11
The Growth Portfolio........................................................................11
The Sentinel Growth Portfolio...............................................................11
The Aggressive Growth Portfolio.............................................................11
The Bond Portfolio..........................................................................11
The Managed Portfolio.......................................................................11
The International Portfolio.................................................................11
The Money Market Portfolio..................................................................11
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PAGE
Alger American Fund.....................................................................................12
Alger American Small Capitalization Portfolio...............................................12
Alger American Growth Portfolio.............................................................12
American Century Variable Portfolios, Inc...............................................................12
VP Value Portfolio..........................................................................13
VP Income & Growth Portfolio................................................................13
Goldman Sachs Variable Insurance Trust..................................................................13
International Equity........................................................................13
Global Income...............................................................................13
CORE Small Cap Equity.......................................................................13
Mid Cap Equity..............................................................................13
J.P. Morgan Series Trust II.............................................................................14
International Opportunities Portfolio.......................................................14
Small Company Portfolio.....................................................................14
Neuberger & Berman Advisers Management Trust............................................................14
Partners Portfolio..........................................................................15
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund, Inc..................................15
Growth Fund II..............................................................................15
Strong Opportunity Fund II..................................................................15
Resolving Material Conflicts............................................................................15
Detailed Description of Policy Provisions...............................................................16
Death Benefit...........................................................................................16
General.....................................................................................16
Federal Income Tax Law Compliance Test Options..............................................17
Death Benefit Options.......................................................................17
Option A....................................................................................17
Option B....................................................................................18
Change in Death Benefit Option..............................................................18
How the Death Benefit May Vary..............................................................19
Ability to Adjust Face Amount...........................................................................19
Increase....................................................................................19
Decrease....................................................................................20
How the Duration of the Policy May Vary.................................................................20
Account Value...........................................................................................20
Determination of Number of Units for the Separate Account...................................20
Determination of Unit Value.................................................................21
Net Investment Factor.......................................................................21
Calculation of Account Value................................................................21
Payment and Allocation of Premiums......................................................................21
Issuance of a Policy........................................................................21
Amount and Timing of Premiums...............................................................21
Premium Limitations.........................................................................22
Allocation of Net Premiums..................................................................23
Transfers...................................................................................23
Policy Lapse................................................................................23
Reinstatement...............................................................................24
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PAGE
Charges and Deductions..............................................................................................24
Premium Loads...........................................................................................24
Monthly Deductions......................................................................................24
Cost of Insurance Charge....................................................................24
Cost of Insurance Rate......................................................................25
Rate Class..................................................................................25
Term Rider Charge...........................................................................25
Policy Administration Charge................................................................25
Underwriting Charge.........................................................................25
Mortality and Expense Risk Charge.......................................................................26
Separate Account Administration Charge..................................................................26
Transfer Charge.........................................................................................26
Other Charges...........................................................................................26
Possible Charge for National Life's Taxes...............................................................26
Policy Rights and Privileges........................................................................................27
Loan Privileges.........................................................................................27
General.....................................................................................27
Interest Rate Charged.......................................................................27
Allocation of Loans and Collateral..........................................................27
Interest Credited to Amounts Held as Collateral.............................................27
Effect of Policy Loan.......................................................................27
Loan Repayments.............................................................................27
Lapse With Loans Outstanding................................................................28
Tax Considerations..........................................................................28
Surrender Privilege.....................................................................................28
Withdrawal of Net Account Value.........................................................................28
Option A....................................................................................28
Option B....................................................................................29
Free-Look Privilege.....................................................................................30
Transfer Right for Change in Investment Policy..........................................................30
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PAGE
Other Policy Provisions.............................................................................................30
Indefinite Policy Duration..................................................................30
Payment of Policy Benefits..................................................................30
The Contract................................................................................31
Split Dollar Arrangements...................................................................31
Assignments.................................................................................31
Misstatement of Age and Sex.................................................................32
Suicide.....................................................................................32
Incontestability............................................................................32
Dividends...................................................................................32
Correspondence..............................................................................32
Settlement Options..........................................................................32
Payment of Interest Only....................................................................32
Payments for a Stated Time..................................................................32
Payments for Life...........................................................................32
Payments of a Stated Amount.................................................................32
Life Annuity................................................................................32
Joint and Two Thirds Annuity................................................................33
50% Survivor Annuity........................................................................33
Supplemental Term Insurance Rider...................................................................................33
Federal Income Tax Considerations...................................................................................33
Introduction............................................................................................33
Tax Status of the Policy................................................................................33
Tax Treatment of Policy Benefits........................................................................34
In General..................................................................................34
Modified Endowment Contracts................................................................35
Distributions from Policies Classified as Modified Endowment Contracts......................35
Distributions from Policies Not Classified as Modified Endowment Contracts..................35
Policy Loan Interest........................................................................36
Investment in the Policy....................................................................36
Multiple Policies...........................................................................36
Possible Changes in Taxation ...............................................................36
Voting Rights.......................................................................................................36
Changes in Applicable Law, Funding and Otherwise....................................................................37
Officers and Directors of National Life.............................................................................37
Distribution of Policies............................................................................................39
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PAGE
Policy Reports ............................................................................................40
Third Party Administrator...........................................................................................40
State Regulation....................................................................................................40
Preparing for Year 2000.............................................................................................40
Experts.............................................................................................................41
Legal Matters.......................................................................................................41
Financial Statements................................................................................................41
Glossary............................................................................................................42
Appendix A-Illustration of Death Benefits, Account Values and
Net Cash Surrender Values...............................................................................A-1
Financial Statements................................................................................................F-1
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with the
detailed information appearing later in this Prospectus. Unless otherwise noted,
this Prospectus assumes the Insured is alive. The precise meanings of the few
capitalized terms used in this summary can be found in the Glossary, on pages 42
to 46.
THE POLICY OFFERED
The Sentinel Benefit Provider flexible premium variable universal life
insurance policy offered by this Prospectus is issued by National Life. Its
primary market is the corporate market. The policy allows you, subject to
certain limitations, to make premium payments in any amount and whenever you
like. As long as the policy remains in force, it will provide for:
(1) Life insurance coverage on the named insured person;
(2) A cash surrender value; and
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits.
Life insurance is a long-term investment. You should consider your need
for insurance coverage and the policy's investment potential on a long-term
basis.
There is no fixed schedule for premium payments. You may, within limits,
increase or decrease the Face Amount and, if you have selected the Guideline
Premium Test to determine compliance with federal income tax law (see "Federal
Income Tax Law Compliance Test Options", page 17), you may change the Death
Benefit Option. The policy's value will fluctuate based on the investment
results of the chosen fund portfolios, as well as other factors. The death
benefit may also rise and fall, but not below the face amount as long as the
policy remains in force.
The failure to pay any particular amounts of premiums will not itself
cause the policy to lapse. Conversely, the payment of premiums in any amount or
frequency will not necessarily guarantee that the policy will remain in force.
In general, the Policy will lapse if it does not have enough value to pay the
monthly charges as they become due. During the first five years, the policy will
not lapse even if its value is not enough to pay the monthly charges as they
become due, if at least specified amounts of premiums have been paid (these
amounts are defined in the Glossary as the Cumulative Minimum Monthly Premium).
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account is divided into subaccounts,
twenty of which are available under this policy. Each of these subaccounts
purchases shares of a designated corresponding Portfolio that is part of one of
the following Funds: the Market Street Fund, the Alger American Fund, the
American Century Variable Portfolios, Inc., the Goldman Sachs Variable Insurance
Trust, the J.P. Morgan Series Trust II, the Neuberger & Berman Advisers
Management Trust, managed by Neuberger & Berman Management Incorporated, and the
Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund II, managed
by Strong Capital Management, Inc. There is no assurance that the investment
objectives of a particular Portfolio will be met. You bear the entire investment
risk on the value of your policy.
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AVAILABILITY OF POLICY
This Policy can be issued for Insureds with Issue Ages of at least 20.
The insured person must be 85 years old or younger for policies underwritten on
the basis of full medical underwriting (65 or younger for guaranteed issue and
simplified issue). The Minimum Face Amount per Policy is $5000. The Minimum
Initial Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust or a partnership is $50,000. The
Policies are available on a full medical underwriting basis, a simplified issue
basis, or a guaranteed issue basis. Before issuing a Policy on a full medical
underwriting basis, we will require that the person to be insured meets certain
underwriting standards satisfactory to us. The rate classes available are Male
non-smoker, Female non-smoker, Unisex non-smoker, Male smoker, Female smoker,
Unisex smoker, Male unismoker, female unismoker, and Unisex unismoker. (See
"Issuance of a Policy," Page 21.) In simplified issue cases, the application
will ask 3 medical questions about the person to be insured.
THE DEATH BENEFIT
As long as the Policy remains in force, we will pay the death benefit to
the beneficiary when we receive proof of the insured person's death. When you
purchase the policy, you must choose between two different death benefit
compliance tests used to qualify the policy as life insurance under the Internal
Revenue Code: the cash value accumulation test or the guideline premium test.
Once chosen, the death benefit compliance test that applies to the Policy cannot
be changed. If the Guideline Premium Test is chosen, then two death benefit
options are available. Option A provides for the greater of (a) the policy's
face amount and (b) the Death Benefit Factor times the Cash Surrender Value.
Option B provides for the greater of (a) the policy's face amount plus the
Account Value and (b) the Death Benefit Factor times the Cash Surrender Value.
(See "Death Benefit Options," Page 17). If the cash value accumulation test is
chosen, only Option A is available. The total death benefit will be the amount
provided for under Option A or Option B, plus any dividends payable and any
coverage provided by the optional term rider, and minus any outstanding policy
loans and accrued interest, and any unpaid monthly charges.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
You will have the ability to increase or decrease the face amount of the
policy. If you have elected the guideline premium test to qualify the policy as
life insurance for federal income tax purposes, you will also be able to change
the death benefit option from Option A to Option B, or from Option B to Option
A. (See "Change in Death Benefit Option," Page 18, and "Ability to Adjust Face
Amount," Page 19.)
Any change in death benefit option or in the face amount may affect the
charges under the policy. Any increase in the face amount will result in an
increase in monthly charges, since the policy will be providing more insurance
coverage. A decrease in face amount may also change the monthly deductions. (See
"Cost of Insurance Charge," Page 24.)
If you have elected the guideline premium test and you request a decrease
in face amount that would result in total premiums exceeding the maximum premium
limitations applicable under the Internal Revenue Code for life insurance, we
will not allow the decrease.
ACCOUNT VALUE
The Account Value is the total amount of value held in your policy at any
time. It equals the sum of the amounts held in the subaccounts of the separate
account, plus amounts held in the Loan Account. (See "Calculation of Account
Value," Page 21.)
The Account Value in the separate account will reflect the investment
performance of the chosen funds, any premiums paid, any transfers, any
withdrawals, any loans, any loan repayments, any loan interest paid or credited
and any charges assessed on the policy. You bear the entire investment risk for
amounts in the separate account. There is no guaranteed minimum for the portion
of the Account Value in the separate account. Account Value in
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the separate account may be more or less than the premiums allocated to the
separate account.
The Account Value in the Loan Account will reflect any amounts
transferred from the separate account as collateral for policy loans, plus
interest at 4%. The Loan Account will be reduced by loan repayments. (See "Loan
Privileges," Page 27.)
The Account Value affects the death benefit and the level of cost of
insurance charges.
ALLOCATION OF NET PREMIUMS
Net premiums (that is, premiums you pay minus the deductions we make from
premium payments) will generally go to the subaccounts of the separate account
in accordance with the percentages you have specified, either in the application
or as subsequently changed. Account Value cannot be allocated to more than ten
subaccounts at any one time.
Any net premiums received before the end of the "free look" period will
go initially to the Money Market Subaccount. For this purpose we will assume
that the free look period will end 20 days after the policy is issued, unless we
have received the policy receipt showing receipt of the policy by you sooner. On
the first business day after we have received a policy receipt showing your
receipt of the policy at least 10 days ago, or the first business day at least
20 days after the policy is issued, whichever is sooner, the amount in the Money
Market Subaccount (including investment experience) will go to each of the
chosen subaccounts based on your chosen percentages. (See "Allocation of Net
Premiums," Page 23.)
TRANSFERS
You may transfer the amounts in the subaccounts of the separate account
among the subaccounts on any business day. Transfer requests must be in writing
and in a form acceptable to us. Currently you are allowed an unlimited number of
transfers without charge. However, we may in the future impose a maximum charge
of $25 on each transfer in excess of twelve transfers in any one year. (See
"Transfers," Page 23.)
FREE-LOOK PRIVILEGE
The policy provides for an initial "free-look" period, during which you
may cancel the policy and receive a refund equal to the gross premiums paid on
your policy. This free-look period ends on the later of the end of the tenth day
after you receive the policy, the end of the tenth day after we mail notice of
the policy issue to you, or any longer period provided by state law. To cancel
the policy, you must return the policy to National Life or to an agent of
National Life within this period with a written request for cancellation. (See
"Free-Look Privilege," Page 30.)
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CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
Transaction Expenses
Premium Loads......................................Year 1: 13% of premiums paid up to the Target
Premium, 0.5% of premiums paid in excess of
Target Premium;
Years 2 to 7: 15% of premiums paid up to Target
Premium, 2.5% of premiums paid in excess of
Target Premium; and
Years 8 and thereafter: 5% of premiums paid up
to Target Premium, 2.5% of premiums paid in
excess of Target Premium;
in each case plus an amount equal to the state and
local premium taxes actually assessed by the
jurisdiction in which the insured person resides.
Transfer Charge....................................No current charge(1)
Daily Charges
Mortality and Expense Risk Charge..................For years 1 - 7: 0.35% of Account Value in the
separate account
For years 8 -10: 0.25% of Account Value in the
separate account
For years 11-20: 0.15% of Account Value in the
separate account
For year 21 and thereafter: 0.10% of
Account Value in the separate account(2)
Separate Account Administration
Charge 0.10% of Account Value in the separate account
per year
Monthly Deductions
Cost of Insurance Charge Varies by age, sex, rate class-See below
Policy Administration Charge.......................$66 per year(3)
Underwriting Charge $20 in the first year, $45 in each of years 2 - 5;
only applies to policies issued on the basis of full
medical underwriting.
Supplemental Term Insurance Rider
Charge.............................................Varies by age, sex, rate class-See below
=============================================================================================================================
(1) We reserve the right to impose in the future a transfer charge of up to $25
for each transfer in excess of twelve transfers in any year.
(2) We reserve the right to increase the Mortality and Expense Risk Charge to
rates up to 0.60% annually of Account Value in the separate account at any time.
(3) We reserve the right to increase the Policy Administration Charge up to an
amount equal to $96 per year.
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Annual Charges of Underlying Funds (for the year ended December 31, 1997)
Management Other Total
Fee Expenses Expenses
---------- -------- --------
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%
Alger American Fund:
Alger American Growth Portfolio .75% .04% .79%
Alger American Small Capitalization .85% .04% .89%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0 1.00%
VP Income & Growth Portfolio .70% 0 .70%
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%
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%
We have agreed to reimburse a portion of the expenses of the Market
Street Sentinel Growth Portfolio. Without this reimbursement, that Portfolio's
management fee would have been 0.50%, its other expenses would have been 0.85%,
and its and total expenses would have been 1.35%.
Strong Capital Management, Inc. agreed to reimburse a portion of the
Growth Fund II Portfolio's expenses during the period. Without this
reimbursement, that Portfolio's management fee would have been 1.00%, its other
expenses would have been 1.00%, and its total expenses would have been 2.00%.
J.P. Morgan Asset Management, Inc. agreed to reimburse a portion of the
International Opportunities Portfolio's expenses and the Small Company
Portfolio's expenses during the period.
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Without these reimbursements, the International Opportunities Portfolio's
management fee would have been 0.60%, its other expenses would have been 3.65%,
and its total expenses would have been 4.25%. The Small Company Portfolio's
management fee would have been 0.60%, its other expenses would have been 3.21%,
and its total expenses would have been 3.81%.
The expense ratios presented above for the four series of Goldman Sachs
Variable Insurance Trust are estimates, since the Trust began operations on
January 1, 1998. In the absence of expense reimbursement programs, under which
Goldman Sachs Asset Management and Goldman Sachs Asset Management International
have agreed to reduce or limit certain Fund expenses (excluding management fees,
taxes, interest and brokerage fees, and litigation, indemnification and
extraordinary expenses), it is estimated that the International Equity Fund
would have had other expenses of 1.22% and total other expenses of 2.22%, the
Global Income Fund would have had other expenses of 1.72% and total other
expenses of 2.62%,, the CORE Small Cap Equity Fund would have had other expenses
of 1.03% and total other expenses of 2.22%, and the Mid Cap Equity Fund would
have had other expenses of .53% and total other expenses of 1.33%.
We anticipate that these reimbursement arrangements will continue, but
there are no legal obligations to continue these arrangements for any particular
period of time. If they are terminated, the affected portfolios' expenses may
increase.
Premium Loads. We will deduct a Premium Load from each premium payment.
The Premium Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in the first year, 13% of the premiums paid
during the year up to the Target Premium, and 0.5% of premiums paid in excess of
the Target Premium. In the second through seventh years, the Distribution Charge
is equal to 15% of premiums paid during a year up to the Target Premium, and
2.5% of premiums paid in excess of the Target Premium in a year. After the
seventh year, the Distribution Charge will be 5% of premiums paid during a year
up to the Target Premium, and 2.5% of premiums paid in excess of the Target
Premium in a year.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
insured person resides. (See "Premium Loads," Page 24.)
Monthly Deductions. Starting on the day the policy is issued and in each
following month, we will assess the Cost of Insurance Charge, the Policy
Administration Charge, and, for policies issued on the basis of full medical
underwriting, the Underwriting Charge. Any applicable charge for the Term Rider
will also be assessed monthly. The monthly Cost of Insurance Charge will be
determined by multiplying the Net Amount at Risk by the applicable cost of
insurance rate(s). See "Cost of Insurance Charge," Page 31. The Policy
Administration Charge is $5.50 per month, This Charge may be changed but is
guaranteed never to be greater than $8.00 per month. (See "Policy Administration
Charge," Page 25.)
If a policy is issued with full medical underwriting. we will assess an
Underwriting Charge each month in the first five years. The Underwriting Charge
totals $20 in Policy Year 1, and $45 in each of the next four Policy Years.
Policies issued on the basis of guaranteed issue or simplified issue will not be
assessed an Underwriting Charge. (See "Underwriting Charge", page 25).
Daily Charges Against the Separate Account. We will assess a daily charge
for our assumption of certain mortality and expense risks we accept on the
Policy. The current annual rates are set forth below.
For years 1 - 7: 0.35% of Account Value in the separate account
For years 8 -10: 0.25% of Account Value in the separate account
For years 11-20: 0.15% of Account Value in the separate account; and
For year 21 and thereafter: 0.10% of Account Value in the separate
account.
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We may increase the above rates for the Mortality and Expense Risk Charge, but
the charge is guaranteed not to exceed 0.60% of Account Value in the separate
account at all times. (See "Mortality and Expense Risk Charge," Page 26.)
We also assess a daily separate account administration charge to cover
the expense of separate account administration. The annual rate of this charge
is 0.10% of Account Value in the separate account. (See "Separate Account
Administration Charge", page 26).
Transfer Charge. Currently you are allowed an unlimited number of
transfers without charge. We have no current intent to impose a transfer charge
in the foreseeable future; however, we reserve the right to impose in the future
a charge of up to $25 for each transfer in excess of twelve transfers in any
year. (See "Transfer Charge," Page 26.)
Other Charges. The subaccounts of the separate account purchase shares of
the funds at net asset value, which reflects management fees and expenses
deducted from the assets of the funds.
Allocation of Charges to the Subaccounts. All of the above charges will
be allocated to the subaccounts of the separate account based on the proportion
that each subaccount's value bears to the total Account Value in the separate
account.
POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, a policy will not lapse if premiums
in a specified amount (defined in the Glossary as the Cumulative Minimum Monthly
Premium) have been paid, no matter what happens to the value of the policy. If,
however, the specified premiums have not been paid or the policy is more than
five years old, and the policy's value is not enough to pay the monthly charges
as they become due, the policy will lapse after a 61-day grace period unless a
sufficient premium is paid.
You may reinstate a lapsed policy at any time within five years after the
beginning of the grace period, if you meet certain conditions, including
providing evidence of insurability satisfactory to us and the payment of a
sufficient premium. (See "Reinstatement," Page 24.)
LOAN PRIVILEGE
You may borrow against the policy. The maximum amount of all loans is the
Net Account Value less three times the next monthly deduction, and less the loan
interest due until the next policy anniversary. Policy loans and repayments may
be taken or made on any business day.
Policy loans will bear interest at the following fixed rates:
For years 1 - 7: 4.60%
For years 8 - 10: 4.50%
For years 11 - 20: 4.40%
For year 21 and thereafter: 4.35%.
Interest is payable at the end of each policy year. If interest is not
paid when due, it will be added to the outstanding loan balance. You may repay
policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered we will deduct policy loans and accrued
interest from the proceeds otherwise payable.
When you take a policy loan, we will hold Account Value in the Loan
Account as collateral for the Policy loan. We will take Account Value from the
subaccounts of the separate account in proportion to the values in the
subaccounts. Account Value held in the Loan Account as collateral will earn
interest at an effective annual rate of 4%. (See "Loan Privileges," Page 27.)
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Loans may cause a policy to lapse, depending upon the investment
performance of the Account Value and the amount of the loan. If a policy is not
a Modified Endowment Contract, lapse of a policy with loans outstanding may
result in adverse tax consequences. (See "Tax Treatment of Policy Benefits,"
Page 34.)
WITHDRAWAL OF NET ACCOUNT VALUE
After the first policy anniversary, you may request a withdrawal of Net
Account Value on any business day. The withdrawal amount will be taken from the
subaccounts of the separate account in proportion to the values in the
subaccounts. If the guideline premium test for federal tax law compliance and
death benefit option A are in effect, we will reduce the face amount of the
policy by an amount equal to the lesser of (a) the amount of the withdrawal and
(b) the excess of the face amount plus any term insurance amount provided by the
Term Rider, divided by the Death Benefit Factor, over the Cash Surrender Value
just after the withdrawal, but in any case not less than zero. If death benefit
option B is in effect, the withdrawal will not decrease the face amount. If the
cash value accumulation test is in effect, the withdrawal will result in a
decrease in the face amount plus any term insurance amount provided by the Term
Rider of an amount equal to the withdrawal amount times 1.00327374 (See
"Withdrawal of Net Account Value," Page 28.)
If a requested withdrawal would reduce the face amount below $5000, the
withdrawal will not be allowed.
SURRENDER OF THE POLICY
You may at any time fully surrender your policy and receive the Net Cash
Surrender Value, if any, which will take into account any outstanding policy
loans and accrued interest (See "Surrender Privilege," Page 28.)
TAX TREATMENT
We believe that a Policy issued on a standard rate class basis generally
should meet the Section 7702 definition of a life insurance contract. For
policies issued on a substandard basis, there is insufficient guidance to
determine if such a policy would in all situations satisfy the Section 7702
definition of a life insurance contract. Assuming that a policy qualifies as a
life insurance contract for Federal income tax purposes, you should not be
deemed to be in constructive receipt of value under your policy until there is a
distribution from the policy. Moreover, death benefits payable under a policy
should be completely excludable from the gross income of the beneficiary. As a
result, the beneficiary generally should not be taxed on these proceeds. (See
"Tax Status of the Policy," Page 33.)
Under certain circumstances, a policy may be treated as a "Modified
Endowment Contract." If a policy is a Modified Endowment Contract, then all
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59-1/2 any distributions generally will
be subject to a 10% penalty tax. (For further discussion on the circumstances
under which a Policy will be treated as a Modified Endowment Contract, See "Tax
Treatment of Policy Benefits," Page 34.)
If a policy is not a Modified Endowment Contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Moreover, loans will not be treated as
distributions. Finally, neither distributions nor loans from a policy that is
not a Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions from Policies Not Classified as Modified Endowment Contracts,"
Page 35.)
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ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUE AND NET CASH SURRENDER VALUE
Illustrations of how investment performance of the separate account may
cause the death benefit, the Account Value and the Net Cash Surrender Value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you to understand the
long-term effects of different levels of investment performance, of charges and
deductions, of electing one or the other death benefit option or death benefit
compliance test, and generally comparing and contrasting this policy to other
life insurance policies. Nonetheless, the illustrations are based on
hypothetical investment rates of return. THEY ARE NOT GUARANTEED. Illustrations
are not a representation of past or future performance. Actual rates of return
may be more or less than those reflected in the illustrations and, therefore,
actual values will differ from those illustrated.
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The following detailed description of the policy uses certain precise
terms which are capitalized. These terms have the meanings set out in the
Glossary, on pages 42 to 46.
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we"), 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 Sentinel Benefit Provider
policy offered by this Prospectus (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.)
On May 8, 1998, the Board of Directors of National Life approved a Plan
of Reorganization under which National Life would convert from a mutual life
insurance company to a stock life insurance company, all of the outstanding
stock of which would initially be indirectly owned by a newly formed mutual
insurance holding company, National Life Holding Company. All policyholders of
National Life, including owners of the Policies, would become voting members of
National Life Holding Company. The contractual rights of owners of Policies
would not change if the Plan of Reorganization is consummated. The Plan of
Reorganization was approved by the Vermont Commissioner of Banking, Insurance,
Securities and Health Care Administration on October 2, 1998, and is subject to
the approval of the policyholders of National Life. A special meeting of
policyholders at which the Plan will be considered has been called for November
30, 1998.
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account (the "Separate Account") was
established by National Life on February 1, 1985 under the provisions of the
Vermont Insurance Law. It is a separate investment account to which assets are
allocated to support the benefits payable under the Policies, other variable
life insurance policies National Life currently issues, and other variable life
insurance policies National Life may issue in the future.
The Separate Account's assets are the property of National Life. Each
Policy provides that the portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies (and other policies) supported
by the Separate Account will not be chargeable with liabilities arising out of
any other business that National Life may conduct. The portion of the Separate
Account's assets equal to the reserves and other liabilities under the Policies
may, however, be chargeable with liabilities arising from other subaccounts of
the Separate Account that fund other variable life insurance policies. In
addition to the net assets and other liabilities for the Policies (and other
policies), the Separate Account's net assets include amounts derived from
expenses charged to the Policies (and the other policies) by National Life which
it currently holds in the Separate Account, and may in the future include
amounts held to support other variable life insurance policies issued by
National Life. From time to time these additional amounts will be transferred in
cash by National Life to its general account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies of
the Separate Account by the SEC. The Separate Account meets the definition of a
"Separate Account" under Federal securities laws.
You may choose among the Subaccount options described below. However, a
Policy may not allocate Account Value to more than ten Subaccounts at any one
time.
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THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Separate Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which is
registered with the SEC under the 1940 Act as a diversified open-end management
investment company. The Market Street Fund currently issues seven "series" or
classes of shares, each representing an interest in a separate portfolio within
the Fund, which are purchased and redeemed by the corresponding Subaccounts of
the Separate Account: the Growth Portfolio, the Sentinel Growth Portfolio, the
Aggressive Growth Portfolio, the Bond Portfolio, the Managed Portfolio, the
International Portfolio and the Money Market Portfolio. The Market Street Fund
sells and redeems its shares at net asset value without a sales charge.
The investment objectives of the Market Street Fund's Portfolios eligible
for purchase by the Separate Account are set forth below. The investment
experience of each of the Subaccounts of the Separate Account depends on the
investment performance of the corresponding Portfolio. There is no assurance
that any Portfolio will achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to
achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level of
current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The International Portfolio. The International Portfolio seeks long-term
growth of capital principally through investments in a diversified portfolio of
marketable equity securities of established non-United States companies.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
With respect to the Growth, Sentinel Growth, Aggressive Growth, Bond,
Managed and Money Market Portfolios, the Market Street Fund is advised by
Sentinel Advisors Company ("SAC"), which is registered with the SEC as an
investment adviser under the Investment Advisers Act of 1940. SAC is a
partnership whose partners are affiliates of National Life, Provident Mutual
Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance
Company. National Life's affiliate is currently the managing partner of SAC and
is entitled to the majority share of SAC's profit or loss. With respect to the
International Portfolio, the Market Street Fund is advised by Providentmutual
Investment Management Company ("PIMC"), which is also registered with the SEC as
an investment adviser under the Investment
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Advisers Act of 1940. PIMC has employed The Boston Company Asset Management,
Inc. to provide investment advisory services in connection with the Portfolio.
A full description of the Market Street Fund, its investment objectives
and policies, its risks, expenses, and all other aspects of its operation is
contained in the attached Prospectus for the Market Street Fund, which should be
read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. Like the Market Street Fund and
the VIP Fund, the Alger American Fund is a "series" type mutual fund registered
with the SEC as a diversified open-end management investment company issuing a
number of series or classes of shares, each of which represents an interest in a
Portfolio of the Alger American Fund.
The Alger Small Cap Subaccount and the Alger Growth Subaccount of the
Separate Account invest in shares of the Alger American Small Capitalization
Portfolio and the Alger American Growth Portfolio, respectively, of the Alger
American Fund. Shares of these Portfolios are purchased and redeemed by the
Separate Account at net asset value without a sales charge
The investment objectives of the Portfolios of the Alger American Fund in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that any Portfolio will achieve its stated
objective.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization of less than $1 billion. Income is a consideration in the
selection of investments but is not an investment objective of the Portfolio.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of equity
securities, primarily of companies with a total market capitalization of $1
billion or greater. Income is a consideration in the selection of investments
but is not an investment objective of the Portfolio.
The Alger American Small Capitalization Portfolio and the Alger American
Growth Portfolio are managed by Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment objectives
and policies of the Portfolios, the risks, expenses and all other aspects of
their operation is contained in the attached Prospectus for the Alger American
Fund.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests exclusively
in shares of VP Income & Growth portfolio, each of which are series of American
Century Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is
a "series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares,
each of which represents an interest in a portfolio of American Century
Variable Portfolios, Inc.
The American Century VP Value Subaccount and the American Century VP
Income & Growth Subaccount of the Variable Account invest in shares of the
VP Value portfolio and the VP Income & Growth portfolio, respectively, of the
American Century Variable Portfolios, Inc. Shares of these Portfolios will be
purchased and redeemed by the Variable Account at net asset value without a
sales charge.
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The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for VP
Value and VP Income & Growth.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which invest exclusively in
shares of the following four Portfolios of Goldman Sachs Variable Insurance
Trust: the International Equity Fund, the Global Income Fund, the CORE Small
Cap Equity Fund and the Mid Cap Equity Fund. Goldman Sachs Variable Insurance
Trust is a "series" type mutual fund registered with the SEC as an open-end
management investment company issuing a number of series or classes, each of
which represents an interest in a Portfolio of Goldman Sachs Variable Insurance
Trust. Each Portfolio, except the Global Income Fund, is a diversified
investment company.
The International Equity Subaccount, the Global Income Subaccount, the
CORE Small Cap Equity Subaccount and the Mid Cap Equity Subaccount invest
in shares of the Goldman Sachs International Equity Fund, the Goldman Sachs
Global Income Fund, the Goldman Sachs CORE Small Cap Equity Fund and the Goldman
Sachs Mid Cap Equity Fund, respectively. Shares of these Portfolios will be
purchased and redeemed by the Variable Account at net asset value without a
sales charge.
The investment objectives of the Portfolios of Goldman Sachs Variable
Insurance Trust in which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that any
Portfolio 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 Portfolio invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and foreign currencies.
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 within the range of the market capitalization of
companies constituting the Russell Midcap Index at the time of investment
(currently between $400 million and $16 billion).
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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 Portfolios will be purchased and redeemed by the Variable Account at net
asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment performance of the underlying
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a
high total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total return
from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P. Morgan
Small Company Portfolio of the J.P. Morgan Series Trust II are managed by J.P.
Morgan Investment Management Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger & Berman Advisers
Management Trust. Neuberger & Berman Advisers Management Trust 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 will be purchased and redeemed by
the Variable Account at net asset value without a sales charge.
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The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek 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 Portfolio, its investment objectives and policies, and the risks, expenses
and all other aspects of its operation is contained in the attached Prospectus
for the Partners Portfolio of Neuberger & Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the Growth Fund II, a series of Strong Variable Insurance Funds,
Inc., and one Subaccount which invests exclusively in shares of Strong
Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series"
type mutual fund registered with the SEC as a diversified open-end management
investment company issuing a number of series or classes of shares, each of
which represents an interest in a Portfolio of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund II is a single series mutual fund also
registered with the SEC as a diversified open-end management investment
company.
The Strong Growth Subaccount and the Strong Opportunity Subaccount of the
Variable Account invest in shares of the Growth Fund II series of the Strong
Variable Insurance Funds, Inc., and the Strong Opportunity Fund II,
respectively. Shares of these Funds will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Portfolio. There is no
assurance that either Portfolio will achieve its stated objective.
Growth Fund II. This Portfolio seeks capital growth. It invests primarily
in equity securities that the advisor believes have above-average growth
prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The 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.
RESOLVING MATERIAL CONFLICTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In general, each party may terminate a participation
agreement at its option with specified advance written notice, and may also
terminate in the event of specific regulatory or business developments. Should
an agreement between National Life
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and a Fund terminate, the Subaccounts which invest in that Fund may not be
able to purchase additional shares of such Fund. In that event, you will no
longer be able to transfer Accumulated Values or allocate Net Premiums to
Subaccounts investing in Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
Portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and National Life has
not been terminated. Should a Fund or Portfolio of such Fund decide not to
sell its shares to National Life, we will not be able to honor your requests
to allocate cash values or net premiums to Subaccounts investing in shares of
that Fund or Portfolio.
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a material
conflict may arise between the interests of owners of Policies with Account
Value allocated to the Separate Account and the owners of life insurance
policies and variable annuities issued by such other companies whose values
are allocated to one or more other separate accounts investing in any one of
the Funds.
In the event of a material conflict, National Life will take any
necessary steps, including removing the Separate Account from that Fund, to
resolve the matter. The Board of Directors or Trustees of the Funds intend to
monitor events in order to identify any material conflicts that possibly may
arise and to determine what action, if any, should be taken in response to
those events or conflicts. See the individual Fund Prospectuses for more
information.
We have entered into or may enter into agreements with Funds pursuant to
which the adviser or distributor pays National Life a fee based upon an annual
percentage of the average net asset amount invested by National Life on behalf
of the Separate Account and other separate accounts of National Life. These
percentages may differ, and National Life may be paid a greater percentage by
some investment advisers or distributors than other advisers or distributors.
These agreements reflect administrative services provided by National Life.
The investment objectives and policies of certain Portfolios are similar
to the investment objectives and policies of mutual fund portfolios other than
the Portfolios that may be managed by the investment adviser or manager. The
investment results of the Portfolios, however, may be higher or lower than the
results of such other portfolios. There can be no assurance, and no
representation is made, that the investment results of any of the Portfolios
will be comparable to the investment results of any other portfolio, even if the
other portfolio has the same investment adviser or manager.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Death Benefit of the
Policy will, upon due proof of the Insured's death (and fulfillment of certain
other requirements), be paid to the named Beneficiary in accordance with the
designated Death Benefit Option, unless the claim is contestable in accordance
with the terms of the Policy. The proceeds may be paid in cash or under one of
the Settlement Options set forth in the Policy. (See "Payment of Policy
Benefits," Page 30.) The Death Benefit payable under Option A will be the
greater of the Face Amount or the Death Benefit Factor times the Cash Surrender
Value on the date of death; under Option B, the Death Benefit will be the
greater of the Face Amount plus the Account Value on the date of death, or the
Death Benefit Factor times the Cash Surrender Value on the date of death, in
each case plus any dividends payable, plus any Supplemental Term Insurance
Amount, less any outstanding Policy loan and accrued interest, and less any
unpaid Monthly Deductions.
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Federal Income Tax Law Compliance Test Options. The Policy must satisfy
either of two death benefit compliance tests in order to qualify as life
insurance under section 7702 of the Internal Revenue Code: the Cash Value
Accumulation Test or the Guideline Premium Test. Each test effectively requires
that the Policy's Death Benefit, plus any outstanding Policy loans and accrued
interest, and any unpaid Monthly Deductions, must always be equal to or greater
than the Cash Surrender Value multiplied by a certain percentage (the "Death
Benefit Factor"). Thus, the Policy has been structured so that the Death Benefit
may increase above the Face Amount in order to comply with the applicable test.
The Death Benefit Factor for the Guideline Premium Test varies only by age, as
shown below:
Death Death
Attained Age Benefit Factor Attained Age Benefit Factor
------------ -------------- ------------ --------------
40 and under 250% 70 115%
45 215% 75-90 105%
50 185% 91 104%
55 150% 92 103%
60 130% 93 102%
65 120% 94 101%
95 100%
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
The Death Benefit Factor for the Cash Value Accumulation Test varies by
age and sex, and generally such Death Benefit Factors are different from those
for the Guideline Premium Test. The Guideline Premium Test also imposes maximum
premium limits, whereas the Cash Value Accumulation test does not.
You must select and specify on the application which of the two federal
tax death benefit compliance tests will apply. Once the Policy is issued, you
may not change this selection. In general, where maximum accumulation of Account
Value during the initial Policy Years is a primary objective, the Cash Value
Accumulation Test is more appropriate. If your primary objective is the most
economically efficient method of obtaining a specified amount of coverage, the
Guideline Premium Test is generally more appropriate. You should take into
account in considering the Guideline Premium Test that both Option A and Option
B are available, and that it is possible to change from time to time between
Option A and Option B. Since the selection of the federal tax death benefit
compliance test depends on complex factors and may not be changed, prospective
purchasers of the Policy should consult with a qualified tax adviser before
making this election.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. Policies which use the Guideline Premium Test as the
federal tax death benefit compliance test may select either Death Benefit Option
A or Option B. You designate the Death Benefit Option in the application, and
you may change it as described in "Change in Death Benefit Option," Page 18.
Only Option A is available for Policies which use the Cash Value Accumulation
Test as the federal tax death benefit compliance test.
Option A. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy and (b) the Cash Surrender Value on the Valuation Date on
or next following the Insured's date of death multiplied by the applicable Death
Benefit Factor, in each case less any outstanding Policy loan and accrued
interest thereon, and less any unpaid Monthly Deductions.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40, the Guideline Premium Test has been
elected, and there is no Policy loan outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
pay a Death Benefit of $200,000, assuming no Policy loans outstanding and no
unpaid Monthly Deductions. The Death Benefit Factor for an Insured under
Attained Age 40 on the Policy Anniversary prior to the date of death is 250%.
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Because the Death Benefit must be equal to or greater than 2.50 times the Cash
Surrender Value, any time the Cash Surrender Value exceeds $80,000 the Death
Benefit will exceed the Face Amount. Each additional dollar added to the Cash
Surrender Value will increase the Death Benefit by $2.50. Thus, a 35 year old
Insured with a Cash Surrender Value of $90,000 will have an Death Benefit of
$225,000 (2.50 x $90,000, and a Cash Surrender Value of $150,000 will have an
Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Cash Surrender Value exceeds $80,000, each dollar
taken out of the Cash Surrender Value will reduce the Death Benefit by $2.50. If
at any time, however, the Cash Surrender Value multiplied by the specified
percentage is less than the Face Amount, the Death Benefit will be the Face
Amount of the Policy.
If the Cash Value Accumulation Test for tax compliance applies to a
Policy, the Death Benefit Factors will be different but the above example
otherwise applies.
Option B. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy plus the Account Value and (b) the Cash Surrender Value on
the Valuation Date on or next following the Insured's date of death multiplied
by the applicable Death Benefit Factor (shown in the table above), in each case
less any outstanding Policy loan and accrued interest thereon, and less any
unpaid Monthly Deductions. As noted above, Option B is only available for
Policies on which the Guideline Premium Test has been elected.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
pay an Death Benefit of $200,000 plus the Cash Surrender Value, assuming no
Policy loans outstanding and no unpaid Monthly Deductions. Thus, for example, a
Policy with a $50,000 Cash Surrender Value will have an Unadjusted Death Benefit
of $250,000 ($200,000 plus $50,000). Since the applicable Death Benefit Factor
is 250%, the Unadjusted Death Benefit will be at least 2.50 times the Cash
Surrender Value. As a result, if the Cash Surrender Value exceeds $133,333, the
Death Benefit will be greater than the Face Amount plus the Cash Surrender
Value. Each additional dollar added to the Cash Surrender Value above $133,333
will increase the Death Benefit by $2.50. An Insured with a Cash Surrender Value
of $150,000 will have a Death Benefit of $375,000 (2.50 x $150,000), and a Cash
Surrender Value of $200,000 will yield a Death Benefit of $500,000 (2.50 x
$200,000). Similarly, any time the Cash Surrender Value exceeds $133,333, each
dollar taken out of the Cash Surrender Value will reduce the Death Benefit by
$2.50. If at any time, however, the Cash Surrender Value multiplied by the
specified percentage is less than the Face Amount plus the Cash Surrender Value,
the Death Benefit will be the Face Amount plus the Cash Surrender Value.
At Attained Age 99, Option B automatically becomes Option A.
Change in Death Benefit Option. After the first Policy Year, the Death
Benefit Option in effect for Policies which have elected the Guideline Premium
Test as the federal tax death benefit compliance test may be changed by sending
National Life a written request. No charges will be imposed to make a change in
the Death Benefit Option. The effective date of any such change will be the
Policy Anniversary on or next following the date we receive the written request.
Only one change in Death Benefit Option is permitted in any one Policy Year.
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 Account Value on that date. However, this change
may not be made if it would reduce the Face Amount to less than the Minimum Face
Amount.
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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 Account 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 24). 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 Death Benefit is based on the Death
Benefit Factor times the Cash Surrender Value, remain level as cost of insurance
rates increase over time, rather than the Net Amount at Risk decreasing as the
Account Value increases. Changing from Option B to Option A will, if the Account
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,
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, an Account Value of
$100,000 and no Policy loans outstanding or unpaid Monthly Deductions, and
therefore, a 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 Death
Benefit and Net Amount at Risk would remain the same. Assume that a contract
under Option B has a Face Amount of $500,000 and an Account Value of $50,000
and, therefore, the 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 Death Benefit and Net Amount at Risk would remain the same.
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance (such limitations apply only to Policies to which the
Guideline Premium Test for federal income tax law compliance has been elected),
we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 34.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Account Value in the following circumstances. The Death Benefit under
Option A will vary with the Account Value whenever the Death Benefit Factor
multiplied by the Cash Surrender Value exceeds the Face Amount of the Policy.
The Death Benefit under Option B will always vary with the Account Value because
the Death Benefit equals the greater of (a) the Face Amount plus the Account
Value and (b) the Cash Surrender Value multiplied by the Death Benefit Factor.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, you may increase or decrease the Policy's Face
Amount by submitting a written application to National Life. The effective date
of an increase will be the Monthly Policy Date on or next following our approval
of the request, and the effective date of a decrease is the Monthly Policy Date
on or next following the date that we receive the written request. An increase
in Face Amount may have federal tax consequences. (See "Tax Treatment Of Policy
Benefits," Page 34.) The effect of changes in Face Amount on Policy charges, as
well as other considerations, are described below. The Face Amount, and any
change in Face Amount, do not include any coverage provided by the Term Rider,
if it has been elected.
Increase. A request for an increase in Face Amount may not be for less
than $25,000, or such lesser amount required in a particular state. You may
not increase the Face Amount after the Insured's Attained Age 85 (Attained Age
65 in the case of guaranteed issue or simplified issue underwriting). To
obtain the increase, you should submit an application for the increase. We
reserve the right to require evidence
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satisfactory to us of the Insured's insurability, if the Net Amount at Risk
would increase. For Policies issued on the basis of guaranteed issue
underwriting, increases in Face Amount are limited to a maximum of 10% without
medical underwriting. Automated annual increases in Face Amount of specified
percentages may be elected.
On the effective date of an increase, and taking the increase into
account, the Net Account Value must be equal to the Monthly Deductions then due.
If the Net Account Value is not sufficient, the increase will not take effect
until you make a sufficient additional premium payment to increase the Net
Account Value.
An increase in the Face Amount will generally affect the total Net Amount
at Risk which will increase the monthly Cost of Insurance Charges. In
addition, the Insured may be in a different Rate Class as to the increase in
insurance coverage. An increase in premium payment or frequency may be
appropriate after an increase in Face Amount. (See "Cost of Insurance Charge,"
Page 24.)
Decrease. By providing a written request, you may decrease the Face
Amount of the Policy. The Face Amount after any decrease may not be less than
the Minimum Face Amount, which is generally currently $5000, or may not be
less than the minimum amount for which the Policy qualify as life insurance
for federal income tax purposes under the Internal Revenue Code.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge, any decrease in
the Face Amount will reduce the Face Amount in the following order: (a) the
increase in Face Amount provided by the most recent increase; (b) the next
most recent increases, in inverse chronological order; and (c) the Face Amount
on the Date of Issue.
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Account Value of the
Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Net Account Value is insufficient to pay the charges and the
Grace Period expires without an adequate premium payment the Policy will lapse
and terminate without value. Notwithstanding the foregoing, during the first
five Policy Years the Policy will not lapse if, as of the Monthly Policy Date
that the Net Account Value of the Policy first becomes insufficient to pay the
charges, the Cumulative Minimum Monthly Premium has been paid. You have certain
rights to reinstate the Policy, if it should lapse. (See "Reinstatement," Page
24.)
ACCOUNT VALUE
The Account Value is the total amount of value held under the Policy at
any time. It is equal to the sum of the Policy's values in the Separate Account
and the Loan Account. In Policy Years one and two, the Cash Surrender Value is
the Account Value reflecting the Distribution Charge Refund. After the second
Policy Anniversary, the Cash Surrender Value is equal to the Account Value.
There is no guaranteed minimum for the Account Value in any of the Subaccounts
of the Separate Account and, because the Account Value on any future date
depends upon a number of variables, it cannot be predetermined.
The Net Account Value and Net Cash Surrender Value will reflect the Net
Premiums paid, investment performance of the chosen Subaccounts of the Separate
Account, any transfers, any Withdrawals, any loans, any loan repayments, any
loan interest, and charges assessed in connection with the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that
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Subaccount; units are redeemed when amounts are deducted, transferred or
withdrawn. The number of units a Policy has in a Subaccount equals the number of
units purchased minus the number of units redeemed up to such time. For each
Subaccount, the number of units purchased or redeemed in connection with a
particular transaction is determined by dividing the dollar amount by the unit
value.
Determination of Unit Value. The unit value of a Subaccount is equal to
the unit value on the immediately preceding Valuation Date multiplied by the Net
Investment Factor for that Subaccount on that Valuation Date.
Net Investment Factor. Each Subaccount of the Separate Account has its
own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or decrease,
as appropriate, to reflect net investment income and capital gains or losses,
realized and unrealized, for the securities of the underlying portfolio or
series.
The asset charges for mortality and expense risks and for separate
account administration will be deducted in determining the applicable Net
Investment Factor. (See "Charges and Deductions - Mortality and Expense Risk
Charge," Page 26, and "Charges and Deductions - Separate Account Administration
Charge," Page 26.)
Calculation of Account Value. The Account Value is determined first on
the Date of Issue and thereafter on each Valuation Date. On the Date of Issue,
the Account Value will be the Net Premiums received, plus any earnings prior to
the Date of Issue, less the Monthly Deduction due on the Date of Issue. On each
Valuation Date after the Date of Issue, the Account Value will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of units
the Policy has in each Subaccount of the Separate Account by such
Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Loan Account.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us through
a licensed National Life agent who is also a registered representative of
Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement
with ESI or a broker/dealer having a Selling Agreement with such a
broker/dealer. The Minimum Initial Premium must be submitted when the Policy
is delivered. The Minimum Face Amount of a Policy is generally $5000. The
Minimum Initial Premium per set of Policies purchased at the same time and
associated with a corporation or its affiliates, a trust or a partnership is
$50,000.
This Policy can be issued for Insureds with Issue Ages of at least 20.
The maximum Issue Age for full medical underwriting is 85. The maximum Issue Age
for guaranteed underwriting and simplified issue underwriting is 65. The Minimum
Face Amount is $5000. The Policies are available on a full medical underwriting
basis, a simplified issue basis, or a guaranteed issue basis. Before issuing a
Policy on a full medical underwriting basis, we will require that the proposed
Insured meet certain underwriting standards satisfactory to us. In simplified
issue cases, the application will ask 3 medical questions about the Insured. We
reserve the right to revise our rules from time to time to specify a different
Minimum Face Amount for subsequently issued policies. Acceptance is subject to
our underwriting rules. We reserve the right to reject an application for any
reason permitted by law.
Amount and Timing of Premiums. Each premium payment must be at least
$300. Subject to certain limitations described below, you have considerable
flexibility in determining the amount and frequency of premium payments.
At the time of application, you may select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a
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premium reminder notice at the specified interval. You may change the Planned
Periodic Premium frequency and amount. Payments may be made by wire transfer
or by check.
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums in any amount (subject to
the $300 minimum and the limitations described in the next section), frequency
and time period. Payment of the Planned Periodic Premiums will not, however,
guarantee that the Policy will remain in force (except that if such premiums
are at least equal to the Cumulative Minimum Monthly Premium, then the Policy
will remain in force for at least 5 years). Instead, the duration of the
Policy depends upon the Policy's Net Account Value. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Net Account
Value is insufficient to pay the Monthly Deductions and any other charges
under the Policy and if a Grace Period expires without an adequate payment by
you (unless the Policy is in its first five years, and the Cumulative Minimum
Monthly Premium has been paid).
Any payments made while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless we are notified
in writing that the amount is to be applied as a loan repayment. No premium
payments may be made after the Insured reaches Attained Age 99. However, loan
repayments will be permitted after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the Death
Benefit Factor times the Cash Surrender Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this situation
will result in a higher Net Amount at Risk, which will result in higher Cost of
Insurance Charges under the Policy.
Under Death Benefit Option B, until the Death Benefit Factor times the
Cash Surrender Value exceeds the Face Amount plus the Account Value, the level
of premium payments will not affect the Net Amount at Risk. (However, both the
Account Value and Death Benefit will be higher if premium payments are higher,
and lower if premium payments are lower.)
Under either Death Benefit Option, if the Death Benefit is based on the
Death Benefit Factor times the Cash Surrender Value, then higher premium
payments will result in a higher Net Amount at Risk, and higher Cost of
Insurance Charges. Lower premium payments will result in a lower Net Amount at
Risk, and lower Cost of Insurance Charges.
Premium Limitations. With regard to a Policy's inside build-up, in the
case of Policies to which the Guideline Premium Test for federal income tax
law compliance applies, the Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the Death Benefit from gross income if total premium
payments do not exceed certain stated limits. In no event can the total of all
premiums paid under a Policy exceed such limits. If at any time a premium is
paid which would result in total premiums exceeding such limits, we will only
accept that portion of the premium which would make total premiums equal the
maximum amount which may be paid under the Policy. The excess will be promptly
refunded, and in the cases of premiums paid by check, after such check has
cleared. If there is an outstanding loan on the Policy, the excess may instead
be applied as a loan repayment.
The maximum premium limitations set forth in the Code depend in part upon
the amount of the Death Benefit at any time. As a result, any Policy changes
which affect the amount of the Death Benefit may affect whether cumulative
premiums paid under the Policy exceed the maximum premium limitations. To the
extent that any such change would result in cumulative premiums exceeding the
maximum premium limitations, we will not effect such change. (See "Federal
Income Tax Considerations," Page 33.)
Unless the Insured provides satisfactory evidence of insurability, we
reserve the right to limit the amount of any premium payment if it increases
the Net Amount at Risk.
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For Policies to which the Cash Value Accumulation Test for federal income
tax law compliance applies, the Internal Revenue Code does not provide any
limits on premium payments in determining whether a policy qualifies as life
insurance under the Code.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Loads. In the application for the Policy, you will indicate how
Net Premiums should be allocated among the Subaccounts of the Separate
Account. You may change these allocations at any time by written notice to the
Third Party Administrator. The percentages of each Net Premium that may be
allocated to any Subaccount must be in whole numbers of not less than 5%, and
the sum of the allocation percentages must be 100%. Except in the
circumstances described in the following paragraph, National Life will
allocate the Net Premiums as of the Valuation Date it receives such premium at
its Home Office or at the office of the Third Party Administrator, based on
the allocation percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums received
by National Life before the end of the free-look period will be allocated to
the Money Market Subaccount. For this purpose, we will assume that the free-
look period will end 20 days after the Policy's Date of Issue. On the first
Valuation Date 20 days or more after the Date of Issue of the Policy, we will
allocate the amount in the Money Market Subaccount to each of the Subaccounts
selected in the application based on the allocation percentage set forth in
the application for such Subaccount.
The values of the Subaccounts will vary with their investment experience.
You bear the entire investment risk. You should periodically review your
allocation percentages in light of market conditions and your overall
financial objectives.
Transfers. You may transfer the Account Value among the Subaccounts of
the Separate Account on any business day by making a written transfer request to
us. Transfer requests must be in a form acceptable to us. Transfers among the
Subaccounts of the Separate Account are made as of the Valuation Date on which
the request for transfer is received at the office of the Third Party
Administrator. You may transfer all or part of the amount in one of the
Subaccounts of the Separate Account to another Subaccount or Subaccounts.
However, Account Value may not be allocated to more than ten Subaccounts at any
one time.
Currently an unlimited number of transfers is permitted without charge,
and we have no current intent to impose a transfer charge in the foreseeable
future. However, we reserve the right, upon prior notice to Policy Owners, to
change this policy so as to deduct a transfer charge of up to $25 from each
transfer in excess of the twelfth transfer during any one Policy Year. All
transfers effected on the same Valuation Date are treated as one transfer
transaction. Transfers resulting from Policy loans, the exercise of the transfer
right for change of investment policy, and the reallocation from the Money
Market Subaccount following the free look period after the Date of Issue, will
not be subject to a transfer charge and will not count against the twelve free
transfers in any Policy Year. Under present law, transfers are not taxable
transactions.
Policy Lapse. The failure to make a premium payment will not itself cause
a Policy to lapse. Lapse will only occur when the Net Account Value is
insufficient to cover the Monthly Deductions and other charges under the Policy
and the Grace Period expires without a sufficient payment. During the first five
Policy Years, the Policy will not lapse so long as the Cumulative Minimum
Monthly Premium has been paid.
The Policy provides for a 61-day Grace Period that is measured from the
date on which notice is sent by National Life. The Policy does not lapse, and
the insurance coverage continues, until the expiration of this Grace Period. In
order to prevent lapse, you would have to during the Grace Period make a premium
payment equal to the sum of any amount by which the past Monthly Deductions have
been in excess of Net Account Value, plus three times the Monthly Deduction due
the date the Grace Period began. The notice sent by National Life will specify
the payment required to keep the Policy in force. Failure to
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make a payment at least equal to the required amount within the Grace Period
will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at
any time within five years after the beginning of the Grace Period by submitting
evidence of the Insured's insurability satisfactory to National Life and payment
of an amount sufficient to provide for two times the Monthly Deduction due on
the date the Grace Period began plus three times the Monthly Deduction due on
the effective date of reinstatement, which is, unless otherwise required by
state law, the Monthly Policy Date on or next following the date the
reinstatement application is approved. Upon reinstatement, the Account Value
will be based upon the premium paid to reinstate the Policy and the Policy will
be reinstated with the same Date of Issue as it had prior to the lapse. The
Policy Protection Period may not be reinstated.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) administering the Policy; (c) assuming certain mortality and
other risks in connection with the Policy; and (d) incurring expenses in
distributing the Policy including costs associated with printing prospectuses
and sales literature and sales compensation. National Life may realize a profit
from any charges. Any such profit may be used for any purpose, including payment
of distribution expenses.
PREMIUM LOADS
A Premium Load will be deducted from each premium payment. The Premium
Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in Policy Year 1, 13% of premiums
paid during the Policy Year up to the Target Premium, and 0.5% of premiums paid
in excess of the Target Premium. In Policy Years 2 through 7, the Distribution
Charge is equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in any such
Policy Year. In Policy Years 8 and thereafter, the Distribution Charge will be
5% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of
premiums paid in excess of the Target Premium in any such Policy Year. For this
purpose, the Target Premium equals 1.25 times the annual whole life premium
which would be calculated for the Policy using the applicable 1980 Commissioners
Standard Ordinary Mortality Table and an interest rate of 3.5%.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
Policy is sold.
MONTHLY DEDUCTIONS
Charges will be deducted from the Account Value on the Date of Issue and
on each Monthly Policy Date. The Monthly Deduction consists of four components -
(a) the Cost of Insurance Charge, (b) the Policy Administration Charge, (c) for
Policies issued on the basis of full medical underwriting, the Underwriting
Charge, and (d) for Policies containing a Term Rider, the charges associated
with the Term Rider. Because portions of the Monthly Deduction, such as the Cost
of Insurance Charge, can vary from Policy Month to Policy Month, the Monthly
Deduction may vary in amount from Policy Month to Policy Month. The Monthly
Deduction will be deducted on a pro rata basis from the Subaccounts of the
Separate Account.
Cost of Insurance Charge. 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.
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The Net Amount at Risk on any Monthly Policy Date is the amount by which
the Death Benefit, divided by a factor, exceeds the Account 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 Face Amount on the Date of Issue and any increases in Face
Amount. In determining the Net Amount at Risk for each increment of Face Amount,
the Account Value is first considered part of the Face Amount on the Date of
Issue. If the Account Value exceeds the Face Amount on the Date of Issue, it is
considered as part of any increases in Face Amount in the order such increases
took effect.
A cost of insurance rate is also determined separately for the Face
Amount on the Date of Issue and any increases in Face Amount. In calculating the
Cost of Insurance Charge, the rate for the Rate Class on the Date of Issue is
applied to the Net Amount at Risk for the Face Amount on the Date of Issue. For
each increase in Face Amount, the rate for the Rate Class applicable to the
increase is used. If, however, the Death Benefit is based on the Cash Surrender
Value times the Death Benefit Factor, the rate for the Rate Class for the Face
Amount on the Date of Issue will be used for the amount of the Death Benefit in
excess of the total Face Amount.
Any change in the Net Amount at Risk will affect the total Cost of
Insurance Charges you pay.
Cost of Insurance Rate. Policies may be issued (1) after full medical
underwriting of the proposed Insured, (2) on a guaranteed issue basis, where no
medical underwriting is required prior to issuance of a Policy, or (3) on a
simplified underwriting basis, under which medical underwriting is limited to
requiring the proposed Insured to answer three medical questions on the
application. Current cost of insurance rates for Policies issued on a guaranteed
issue basis or a simplified underwriting basis are higher than current standard
cost of insurance rates for healthy Insureds who undergo medical underwriting.
The guaranteed maximum cost of insurance rates are set forth in the
Policy, and will depend on the Insured's Attained Age, Rate Class, and the
applicable 1980 Commissioners Standard Ordinary Smoker/Nonsmoker/Unismoker
Mortality Table. If you are based in Montana you must generally select a
"unisex" Rate Class. The actual cost of insurance rates used ("current rates")
will depend on the Insured's Issue Age, Rate Class, underwriting method, and
Duration. We periodically review 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 persons of the same Issue Age, Rate Class, underwriting
method, and with Policies of the same Duration.
Rate Class. The Rate Class of the Insured will affect the guaranteed and
current cost of insurance rates. National Life currently places Insureds into,
for each of guaranteed issue, simplified issue, and full medical underwriting,
male non-smoker, female non-smoker, unisex non-smoker, male smoker, female
smoker, unisex nonsmoker, unisex unismoker, male unismoker, and female unismoker
Rate Classes. For full medical underwriting cases, substandard rate classes may
also apply. Substandard, Smoker, male, guaranteed issue and simplified issue
Rate Classes reflect higher mortality risks.
Term Rider Charge. For Policies which include the Term Rider, the charge
for the Term Rider will be the Supplemental Term Insurance Amount, divided by
1.00327234, times the same cost of insurance rates that apply to the Net Amount
at Risk for the Face Amount.
Policy Administration Charge. The Policy Administration Charge, which is
currently $5.50 per month, will be deducted from the Account Value on the Date
of Issue and each Monthly Policy Date as part of the Monthly Deduction. The
Policy Administration Charge may be increased, but is guaranteed never to exceed
$8.00 per month.
Underwriting Charge. Policies issued on the basis on full medical
underwriting will be assessed an Underwriting Charge, deducted monthly as part
of the Monthly Deduction. The Underwriting Charge totals $20 in Policy Year 1,
and $45 in each of the next four Policy Years. Policies issued on the basis of
guaranteed issue or simplified issue will not be assessed an Underwriting
Charge.
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MORTALITY AND EXPENSE RISK CHARGE
A daily Mortality and Expense Risk Charge will be assessed against the
Separate Account. The current annual rates are set forth below for the various
Policy Years of a Policy.
For Policy Years 1 - 7: 0.35% of Account Value in the Separate Account
For Policy Years 8 -10: 0.25% of Account Value in the Separate Account
For Policy Years 11-20: 0.15% of Account Value in the Separate Account;
and
For Policy Year 21 and thereafter: 0.10% of Account Value in the
Separate Account.
We may increase the above rates for the Mortality and Expense Risk Charge,
but the charge is guaranteed not to exceed 0.60% of Account Value in the
Separate Account at all times.
SEPARATE ACCOUNT ADMINISTRATION CHARGE
A daily Separate Account Administration Charge is assessed against the
Separate Account to cover the expense of separate account administration. This
daily charge is assessed at an annual rate of 0.10% of the Account Value in each
Subaccount of the Separate Account. This charge is guaranteed not to increase.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts. We
have no present intention to impose a transfer charge in the foreseeable future.
However, we reserve the right to impose in the future a transfer charge of up to
$25 on each transfer in excess of twelve transfers in any Policy Year.
If imposed, the transfer charge will be deducted from the Subaccounts
based on the proportion that each Subaccount's value bears to the total Account
Value in the Separate Account. All transfers effected on the same Valuation Date
would be treated as one transfer transaction. The transfer charge will not apply
to transfers resulting from Policy loans, the exercise of special transfer
rights, or the initial reallocation of Account Values from the Money Market
Subaccount to other Subaccounts, These transfers will not count against the
twelve free transfers in any Policy Year.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. The fees and expenses for the
Funds and their Portfolios are described briefly in connection with a general
description of each Fund.
More detailed information is contained in the Funds' Prospectuses which
accompany this Prospectus.
POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal, state
or local taxes (other than state premium taxes or the DAC Tax) that the Company
incurs that may be attributable to the Separate Account or to the Policies.
National Life, however, reserves the right in the future to make a charge for
any such tax or other economic burden resulting from the application of the tax
laws that it determines to be properly attributable to the Accounts or to the
Policies. If any tax charges are made in the future, they will be accumulated
daily and transferred from the Separate Account to National Life's general
account. Any investment earnings on tax charges accumulated in the Separate
Account will be retained by National Life.
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POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may, on any Valuation Date, borrow money from National Life
using the Policy as the only security for the loan. The amount of these loans
may not exceed the Policy's Net Account Value on the date of receipt of the loan
request, minus three times the Monthly Deduction for the next Monthly Policy
Date. While the Insured is living, you may repay all or a portion of a loan and
accrued interest. Loans may be taken by making a written request to the Third
Party Administrator. Loan proceeds will be paid within seven days of the
Valuation Date on which a valid loan request is received at the office of the
Third Party Administrator.
Interest Rate Charged. The interest rate charged on Policy loans will be
as follows:
Policy Years 1 - 7 : 4.60% per year
Policy Years 8 - 10 : 4.50% per year
Policy Years 11 - 20 : 4.40% per year
Policy Years 21 and thereafter: 4.35% per year
Interest is charged from the date of the loan and will be added to the
loan balance at the end of the Policy Year and bear interest at the same rate.
Allocation of Loans and Collateral. When a Policy loan is taken, Account
Value is held in the Loan Account as Collateral for the Policy loan. Account
Value is taken from the Subaccounts of the Separate Account based upon the
proportion that each Subaccount's value bears to the total Account Value in the
Separate Account. Any loan interest due and unpaid will be allocated among and
transferred from the Subaccounts of the Separate Account in proportion to the
Account Values held in the Subaccounts.
The Collateral for a Policy loan will initially be the loan amount. Any
loan interest due and unpaid will be added to the Policy loan. We will take
additional Collateral for such loan interest so added pro rata from the
Subaccounts of the Separate Account, and hold the Collateral in the Loan
Account. At any time, the amount of the outstanding loan under a Policy equals
the sum of all loans (including due and unpaid interest added to the loan
balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. We will credit the amount
held in the Loan Account as Collateral with interest at an effective annual rate
of 4%.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Account Value, and may permanently affect the Death
Benefit under the Policy. The effect on the Account Value and Death Benefit
could be favorable or unfavorable, depending on whether the investment
performance of the Subaccounts is less than or greater than the interest being
credited on the amounts held as Collateral in the Loan Account while the loan is
outstanding. Compared to a Policy under which no loan is made, values under a
Policy will be lower when the credited interest rate on Collateral is less than
the investment experience of assets held in the Separate Account. The longer a
loan is outstanding, the greater the effect a Policy loan is likely to have. The
Death Benefit will be reduced by the amount of any outstanding Policy loan.
Loan Repayments. We will assume that any payments made while there is an
outstanding loan on the Policy are premium payments, rather than loan
repayments, unless it receives written instructions that a payment is a loan
repayment. In the event of a loan repayment, the amount held as Collateral in
the Loan Account will be reduced by an amount equal to the repayment, and such
amount will be transferred to the Subaccounts of the Separate Account based on
the proportion that each Subaccount's value bears to the total Account Value in
the Separate Account.
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Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Net Account
Value. Therefore, the larger the amount of an outstanding loan, the more likely
it is that the Policy could lapse. (See "How the Duration of the Policy May
Vary," Page 20 and "Policy Lapse," Page 23.) In addition, if the Policy is not a
Modified Endowment Policy, lapse of the Policy with outstanding loans may result
in adverse federal income tax consequences. (See "Tax Treatment of Policy
Benefits," Page 34.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract"
will be treated as a taxable distribution. In addition, with certain exceptions,
a 10% additional income tax penalty will be imposed on the portion of any loan
that is included in income. (See "Distributions from Policies Classified as
Modified Endowment Contracts," Page 35.)
SURRENDER PRIVILEGE
At any time before the death of the Insured, you may surrender the Policy
for its Net Cash Surrender Value. The Net Cash Surrender Value will equal the
Cash Surrender Value less any Policy loan and accrued interest. The Net Cash
Surrender Value will be determined by National Life on the Valuation Date it
receives, at its Home Office or at the office of the Third Party Administrator,
a written surrender request signed by the Owner, and the Policy. Coverage under
the Policy will end on the day you mail or otherwise send the written surrender
request and the Policy to National Life. We will ordinarily mail surrender
proceeds to you within seven days of receipt of the request. (See "Other Policy
Provisions - Payment of Policy Benefits", Page 30.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 34).
WITHDRAWAL OF NET ACCOUNT VALUE
Before the death of the Insured and on any Valuation Date after the first
Policy Anniversary, you may withdraw a portion of the Policy's Net Account
Value. The maximum Withdrawal is the Net Account Value on the date of receipt of
the Withdrawal request, minus three times the Monthly Deduction for the most
recent Monthly Policy Date.
The Withdrawal will be taken from the Subaccounts of the Separate Account
based upon the proportion that each Subaccount's value bears to the total
Account Value in the Separate Account.
The effect of a Withdrawal on the Death Benefit and Face Amount will vary
depending upon the Death Benefit Option and federal tax death benefit compliance
test in effect and whether the Death Benefit is based on the applicable Death
Benefit Factor times the Cash Surrender Value. (See "Death Benefit Options,"
Page 17.)
Option A. The effect of a Withdrawal on the Face Amount and Death Benefit
under Option A and the Guideline Premium Test for tax law compliance is as
follows:
If the Face Amount divided by the Death Benefit Factor times the
Cash Surrender Value exceeds the Account Value just after the Withdrawal,
a Withdrawal will reduce the Face Amount and the 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 Insured
is under 40, there is no indebtedness and there is no Term Insurance
Amount. The applicable Death Benefit Factor is 250% for an Insured with an
Attained Age under 40, if the Guideline Premium Test is in effect as the
federal tax death benefit compliance test.
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Under Option A, a Policy with a Face Amount of $300,000 and an
Account Value of $30,000 will have a Death Benefit of $300,000. Assume
that the Owner takes a Withdrawal of $10,000 The Withdrawal will reduce
the Account Value to $20,000 ($30,000 - $10,000) after the Withdrawal. The
Face Amount divided by the Death Benefit Factor is $120,000 ($300,000 /
2.50), which exceeds the Account Value after the Withdrawal by $100,000
($120,000 - $20,000). The lesser of this excess and the amount of the
Withdrawal is $10,000, the amount of the Withdrawal. Therefore, the Face
Amount will be reduced by $10,000 to $290,000.
If the Face Amount plus the Term Insurance Amount, divided by the
applicable Death Benefit Factor times the Cash Surrender Value does not
exceed the Cash Surrender Value just after the Withdrawal, then the Face
Amount is not reduced. The Face Amount will be reduced by the lesser of
such excess or the amount of the Withdrawal.
A decrease in total insurance coverage shall apply first to any
Supplemental Term Insurance Amount provided by a Term Rider on this
Policy, then to any increase in Face Amount in reverse order in which they
were made, and then to the Face Amount on the Date of Issue.
Under Option A, a policy with a Face Amount of $300,000, an Account
Value of $150,000, and no Term Insurance Amount will have a Death Benefit
of $375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal of
$10,000. The Withdrawal will reduce the Account Value to $140,000
($150,000 - $10,000). The Face Amount divided by the applicable Death
Benefit Factor is $120,000, which does not exceed the Account Value after
the Withdrawal. Therefore, the Face Amount stays at $300,000 and the Death
Benefit is $350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Death Benefit plus any outstanding Policy loans and any
unpaid Monthly Deductions equals the Face Amount plus the Account Value, a
Withdrawal will reduce the Account Value by the amount of the Withdrawal
and thus the Death Benefit will also be reduced by the amount of the
Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Account Value of $90,000 will have a Death Benefit of $390,000 ($300,000 +
$90,000), assuming no outstanding Policy loans and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $20,000. The Withdrawal
will reduce the Account Value to $70,000 ($90,000 - $20,000) and the Death
Benefit to $370,000 ($300,000 + $70,000). The Face Amount is unchanged.
If the Death Benefit immediately prior to the Withdrawal is based
on the applicable Death Benefit Factor times the Cash Surrender Value, the
Death Benefit will be reduced to equal the greater of (a) the Face Amount
plus the Account Value after deducting the amount of the Withdrawal and
Withdrawal Charge and (b) the applicable Death Benefit Factor times the
Cash Surrender Value after deducting the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Account Value of $210,000 will have a Death Benefit of $525,000 ($210,000
X 2.5), assuming no Policy loans outstanding and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $60,000. The Withdrawal
will reduce the Account Value to $150,000 ($210,000 - $60,000), and the
Death Benefit to the greater of (a) the Face Amount plus the Account
Value, or $450,000 ($300,000 + $150,000) and (b) the Death Benefit based
on the applicable Death Benefit Factor times the Cash Surrender Value, or
$375,000 ($150,000 X 2.50). Therefore, the Death Benefit will be $450,000.
The Face Amount is unchanged.
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If you have elected the Cash Value Accumulation Test for tax law
compliance, a Withdrawal will decrease Face Amount by an amount equal to the
amount withdrawn times 1.00327374.
Because a Withdrawal can affect the Face Amount and the Death Benefit as
described above, a Withdrawal may also affect the Net Amount at Risk which is
used to calculate the Cost of Insurance Charge under the Policy. (See "Cost of
Insurance Charge," Page 24.) Since a Withdrawal reduces the Net Account Value,
the likelihood that the Policy will lapse is increased. (See "Policy Lapse,"
Page 23.) A request for Withdrawal may not be allowed if such Withdrawal would
reduce the Face Amount below the Minimum Face Amount for the Policy. Also, if a
Withdrawal would result in cumulative premiums exceeding the maximum premium
limitations applicable under the Code for life insurance under the Guideline
Premium Test, we will not allow such Withdrawal.
You may request a Withdrawal only by sending a signed written request to the
Third Party Administrator. A Withdrawal will ordinarily be paid within seven
days of the Valuation Date on which a valid Withdrawal request is received.
A Withdrawal of Net Account Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 34.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may cancel
the Policy and receive a refund equal to the gross premiums paid on the Policy.
This free-look period ends on the later of the end of the 10th day after you
receive the Policy, the end of the 10th day after we mail notice of the issuance
of the Policy to you, or any longer period provided by state law. To cancel the
Policy, you must return the Policy to National Life or to an agent of National
Life within this period with a written request for cancellation.
TRANSFER RIGHT FOR CHANGE IN INVESTMENT POLICY
If the investment policy of a Subaccount of the Separate Account is materially
changed, you may transfer the portion of the Account Value in such Subaccount to
another Subaccount, without regard to any limits on transfers or free transfers.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at which
time National Life will pay the Net Cash Surrender Value to the Owner in one sum
unless a Payment Option is chosen, and the Policy will terminate). However, for
a Policy to remain in force after the Insured reaches Attained Age 99, if the
Face Amount is greater than the Account Value, the Face Amount will
automatically be decreased to the current Account Value. Also, at Attained Age
99 Option B automatically becomes Option A, and no premium payments are allowed
after Attained Age 99, although loan repayments are allowed. The tax treatment
of a Policy's Account Value after Age 100 is unclear, and you may wish to
discuss this treatment with a tax advisor.
Payment of Policy Benefits. You may decide the form in which Death Benefit
proceeds will be paid. During the Insured's lifetime, you may arrange for the
Death Benefit to be paid in a lump sum or under a Settlement Option. These
choices are also available upon surrender of the Policy for its Net Cash
Surrender Value. If no election is made, payment will be made in a lump sum. The
Beneficiary may also arrange for payment of the Death Benefit in a lump sum or
under a Settlement Option. If paid in a lump sum, the Death Benefit under a
Policy will ordinarily be paid to the Beneficiary within seven days after
National Life receives proof of the Insured's death at its Home Office and all
other requirements are satisfied. If paid under a Settlement Option, the Death
Benefit will be applied to the Settlement Option
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within seven days after National Life receives proof of the Insured's death at
its Home Office and all other requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by us or
required by law is paid on the Death Benefit from the date of death until
payment is made.
Any amounts payable as a result of surrender, will ordinarily be paid
within seven days of receipt of written request at National Life's Home Office
or the office of the Third Party Administrator in a form satisfactory to
National Life. Any amounts payable as a result of a Withdrawal or Policy loan
will ordinarily be paid within seven days of the Valuation Date on which such
Withdrawal or Policy loan is validly requested.
Generally, the amount of a payment will be determined as of the date of
receipt by National Life or the Third Party Administrator of all required
documents. However, National Life may defer the determination or payment of such
amounts if the date for determining such amounts falls within any period during
which: (1) the disposal or valuation of a Subaccount's assets is not reasonably
practicable because the New York Stock Exchange is closed or conditions are such
that, under the SEC's rules and regulations, trading is restricted or an
emergency is deemed to exist; or (2) the SEC by order permits postponement of
such actions for the protection of National Life policyholders.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are is satisfied that the check or draft has been
paid by the bank upon which it was drawn.
The 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.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Net Cash Surrender Value or Death Benefit) are split between the parties.
There are different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy on
the life of the employee, the employer will pay the premiums and will have the
right to receive the Net Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Net Cash Surrender
Value. If the employee dies while such an arrangement is in effect, the employer
would receive from the Death Benefit the amount which the employer would have
been entitled to receive upon surrender of the Policy and the employee's
Beneficiary would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on National Life unless in writing and received by National Life.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all rights under the Policy. No
assignment binds National Life unless in writing and received by us. National
Life assumes no responsibility for determining whether an assignment is valid or
the extent of the assignee's interest. All assignments will be subject to any
Policy loan. The interest of any beneficiary or other person will be subordinate
to any assignment. A payee who is not also the Owner may not assign or encumber
Policy benefits, and to the extent permitted by applicable law, such benefits
are not subject to any legal process for the payment of any claim against the
payee.
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Misstatement of Age and Sex. If it is found that the amount of any benefit
provided by the Policy is incorrect because of misstatement as to age or sex (if
applicable), the Account Value and the Death Benefit will be equitably adjusted
on the basis of the correct facts. When adjusting the Account Value, the
adjustment will take effect on the Monthly Policy Date on or next following the
date we have proof to our satisfaction of such misstatement. When adjusting the
Death Benefit the adjustment shall take effect as of the Monthly Policy Date
preceding the date of death.
Suicide. In the event of the Insured's suicide, while sane or insane,
within two years from the Date of Issue of the Policy (except where state law
requires a shorter period), or within two years of the effective date of a
reinstatement (unless otherwise required by state law), National Life's
liability is limited to the payment to the beneficiary of a sum equal to the
premiums paid less any Policy loan and accrued interest and any Withdrawals
(since the date of reinstatement, in the case of a suicide within two years of
the effective date of a reinstatement), or other reduced amount provided by
state law.
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Death Benefit and for which an application is required, the amount
which National Life will pay with respect to the increase will be the Cost of
Insurance Charges previously made for such increase (unless otherwise required
by state law).
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force during
the Insured's lifetime for two years from its effective date.
Before such times, however, we may contest the validity of the Policy (or
changes) based on material misstatements in the initial or any subsequent
application.
Dividends. The Policy is participating; however, no dividends are expected
to be paid on the Policy. If dividends are ever declared, they will be paid in
cash.
Correspondence. All correspondence to you will be deemed to have been sent
to you if mailed to you at your last known address.
Settlement Options. In lieu of a single sum payment on death or surrender,
an election may be made to apply the Death Benefit under any one of the
fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. Interest at a rate of 3.5% per year will be paid
on the amount of the proceeds retained by National Life. Upon the earlier of the
payee's death or the end of a chosen period, the proceeds retained will be paid.
Payments for a Stated Time. Equal monthly payments, based on an interest
rate of 3.5% per annum, will be made for the number of years selected.
Payments for Life. Equal monthly payments, based on an interest rate of
3.5% per annum, will be made for a guaranteed period and thereafter during the
life of a chosen person. Guaranteed payment periods may be elected for 0, 10,
15, or 20 years or for a refund period, at the end of which the total payments
will equal the proceeds placed under the option.
Payments of a Stated Amount. Equal monthly payments will be made until the
proceeds, with interest at 3.5% per year on the unpaid balance, have been paid
in full. The total payments in any year must be at least $10 per month for each
thousand dollars of proceeds placed under this option.
Life Annuity. Equal monthly payments will be made in the same manner as in
the above Payments for Life option except that the amount of each payment will
be the monthly income provided by National Life's then current settlement rates
on the date the proceeds become payable. No additional interest will be paid.
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Joint and Two Thirds Annuity. Equal monthly payments, based on an interest
rate of 3.5% per year, will be made while two chosen persons are both living.
Upon the death of either, two-thirds of the amount of those payments will
continue to be made during the life of the survivor. We may require proof of the
ages of the chosen persons.
50% Survivor Annuity. Equal monthly payments, based on an interest rate of
3.5% per year, will be made during the lifetime of the chosen primary person.
Upon the death of the chosen primary person, 50% of the amount of those payments
will continue to be made during the lifetime of the secondary chosen person. We
may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first four
options listed above, but not the last three. 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.
SUPPLEMENTAL TERM INSURANCE RIDER
At your option, the Term Rider, which is subject to the restrictions and
limitations set forth in the Rider, may be included in a Policy. Election of the
Term Rider will result in the Death Benefit including the Supplemental Term
Insurance Amount. The charge for the Term Rider will be an amount included in
the Monthly Deduction equal to the Supplemental Term Insurance Amount, divided
by 1.00327234, times the cost of insurance rates which apply based on the
Insured's then Attained Age, sex (if applicable) and Rate Class applicable to
the Insured on the date of issue of the Term Rider. At issue, costs can be
decreased by purchasing a higher Supplemental Term Insurance Amount through the
use of the Term Rider, since there is no Target Premium associated with the
Supplemental Term Insurance Amount, which may have the effect of reducing the
Premium Loads.
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
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been adopted.
Guidance as to how Section 7702 is to be applied is limited. 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.
With respect to a Policy issued on the basis of a standard rate class,
National Life believes (largely in reliance on the Service's Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that such a
Policy should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e., a
Rate Class involving higher than standard mortality risk), there is less
guidance. Thus, it is not clear whether or not such a Policy would satisfy
section 7702.
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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 Separate 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
Separate 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. we believe that the Separate Account will,
thus, meet the diversification requirement, and we 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 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
Account Value. These differences could result in an Owner being treated as the
owner of a pro rata portion of the assets of the Separate 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. We 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 Separate 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. We believe 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 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, 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.
In addition, Federal, state and local transfer, and other tax consequences
of ownership or receipt of Policy proceeds depend on the circumstances of each
Owner or Beneficiary. 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
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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. In recent years, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a new
Policy or a change in an existing Policy should consult a tax advisor.
Generally, you will not be deemed to be in constructive receipt of the
Account Value, including increments thereof, until there is a distribution. The
tax consequences of distributions from, and loans taken from or secured by, a
Policy depend 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," which applies
to Policies entered into or materially changed after June 20, 1988.
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
Death Benefit and Account Value at the time of such change and the additional
premiums paid in the seven years following the material change. At the time a
premium is credited which would cause the Policy to become a Modified Endowment
Contract, we will notify your agent of action or actions that may be taken to
prevent the Policy from becoming a Modified Endowment Contract. If after 30 days
from contacting the agent, we have not heard from you, we will mail a letter
directly to you notifying you of actions that may be taken to prevent the Policy
from becoming a Modified Endowment Contract. If after 30 days from mailing such
notification we have received no response, we will assume you wish to take no
action. If you requests a refund of excess premium, the excess premium paid
(with appropriate interest) will be returned to you. The amount to be refunded
will be deducted from the Account Value in the Subaccounts of the Separate
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, you 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 Account
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 you
attain age 59-1/2, is attributable to your becoming disabled, or is part of a
series of substantially equal periodic payments for your life (or life
expectancy) or the joint lives (or joint life expectancies) of you and your
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
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Policy's 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 you 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
your indebtedness.
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 your
gross income (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 your gross income.
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.
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 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 Separate Account will be
invested in shares of corresponding Portfolios of the Funds. The Funds do not
hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act or other applicable law or governing documents to be
approved or ratified by the shareholders of a mutual fund. National Life is the
legal owner of Fund shares and as such has the right to vote upon any matter
that may be voted upon at a shareholders' meeting. However, in accordance with
the SEC's view of present applicable law, we will vote the shares of the Funds
at meetings of the shareholders of the appropriate Fund or Portfolio in
accordance with instructions received from Owners. Fund shares held in each
Subaccount of the Separate Account for which no timely instructions from Owners
are received will be voted by us in the same proportion as those shares in that
Subaccount for which instructions are received.
Each Owner having a voting interest will be sent proxy material and a form
for giving voting instructions. Owners may vote, by proxy or in person, only as
to the Portfolios that correspond to the Subaccounts in which their Policy
values are allocated. The number of shares held in each Subaccount attributable
to a Policy for which you may provide voting instructions will be determined by
dividing your Policy's Account Value in that Subaccount by the net asset value
of one share of the corresponding Portfolio as of the record date for the
shareholder meeting. Fractional shares will be counted. For each share of a
Portfolio for which Owners have no interest, we will cast votes, for or against
any matter, in the same proportion as Owners vote.
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If required by state insurance officials, National Life may disregard
voting instructions if such instructions would require shares to be voted so as
to cause a change in the investment objectives or policies of one or more of the
Portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, National Life may
disregard voting instructions in favor of certain changes initiated by an Owner
or the Fund's Board of Directors provided that National Life's disapproval of
the change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the portfolio's objectives and purposes, and the effect the change would have on
National Life. If we do disregard voting instructions, we will advise you of
that action and its reasons for such action in the next semi-annual report to
you.
Shares of the Funds are currently being offered to variable life insurance
and variable annuity separate accounts of life insurance companies other than
National Life that are not affiliated with National Life. National Life
understands that shares of these Funds also will be voted by such other life
insurance companies in accordance with instructions from their policyholders
invested in such separate accounts. This will dilute the effect of your voting
instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. To the extent that such laws or regulations
promulgated thereunder eliminate the necessity to solicit voting instructions
from Owners or restrict such voting rights, National Life reserves the right to
proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required: (1) to make
changes in the form of the Separate Account, if in its judgment such changes
would serve the interests of Owners or would be appropriate in carrying out the
purposes of the Policies, for example: (i) operating the Separate Account as a
management company under the 1940 Act; (ii) deregistering the Separate Account
under the 1940 Act if registration is no longer required; (iii) combining or
substituting separate accounts; (iv) transferring the assets of the Separate
Account to another separate account; (v) making changes necessary to comply
with, obtain or continue any exemptions from the 1940 Act; or (vi) making other
technical changes in the Policy to conform with any action described herein; (2)
if in its judgment a Portfolio no longer suits the investment goals of the
Policy, or if tax or marketing conditions so warrant, to substitute shares of
another investment portfolio for shares of such Portfolio; (3) to eliminate,
combine, or substitute Subaccounts and establish new Subaccounts, if in its
judgment marketing needs, tax considerations, or investment conditions so
warrant; and (4) to transfer assets from a Subaccount to another Subaccount or
separate account if the transfer in our judgment would best serve interests of
Policy Owners or would be appropriate in carrying out the purposes of the
Policies; and (5) to modify the provisions of the Policies to comply with
applicable laws. We have reserved all rights in respect of its corporate name
and any part thereof, including without limitation the right to withdraw its use
and to grant its use to one or more other separate accounts and other entities.
If your Policy has Account Value in a Subaccount that is eliminated, we
will give you at least 30 days notice before the elimination, and will request
that you designate the Subaccount or Subaccounts to which the Account Value in
the Subaccount to be eliminated should be transferred. If no such designation is
received prior to the date of the elimination, then the Account Value in such
Subaccount will be transferred to the Money Market Subaccount. In any case, if
in the future a transfer charge is imposed or limits on the number of transfers
or free transfers are established, no charge will be made for this transfer, and
it will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
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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 Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director 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
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 & Van
Director 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 Salmon &
Director 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.
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Patricia K. Woolf 1990 to present - Author, Consultant,
Director and lecturer at the Department of
Molecular Biology at Princeton University.
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer - Integon
Life Insurance Corporation; 1993 to 1996: Senior
Vice President & Chief Marketing Officer - Commercial
Union Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President &
Chief Financial Officer
Financial Officer; 1994 to 1998 - Vice President and
Controller, American Express Financial Advisors; 1991 to
1994 - Vice President and Chief Financial Officer of
ACUMA, Ltd.
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; 1987 to 1997 - Senior Vice President -
Sentinel Advisors Company.
Gregory H. Doremus 1998 to present: Senior Vice President -
Senior Vice President - New New Business & Customer Services; 1994 to 1998 -
Business & Customer Services Vice President - Customer Services; 1990 to 1994 -
Second Vice President - Client Services
Charles C. Kittredge 1997 to present: Senior Vice President - Sales
Senior Vice President - Sales and Distribution; 1993 to 1997: - Vice President -
and Distribution Agency Financial Planning & Services
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, a Vermont corporation formed in 1969, whose address is
National Life Drive, Montpelier, Vermont 05604, is a registered broker/dealer
under the Securities Exchange Act of 1934 (the "1934 Act") and a member of the
National Association of Securities Dealers, Inc. (the "NASD"). ESI is an
indirect wholly-owned subsidiary of National Life. ESI acts as the principal
underwriter, as defined in the 1940 Act, of the Policies, and for the Separate
Account pursuant to an Underwriting Agreement to which the Separate Account, ESI
and National Life are parties. The Policies are offered and sold only in those
states where their sale is lawful.
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The insurance underwriting and the determination of a proposed Insured's
Rate Class and whether to accept or reject an application for a Policy is done
by National Life. National Life will refund any premiums paid if a Policy
ultimately is not issued or will refund the applicable amount if the Policy is
returned under the free look provision.
Dealers are compensated for sales of the Policies by dealer concessions.
During the first seven Policy Years, the gross dealer concession will not be
more than 15% of the premiums paid up to the target Premium and 2.5% of the
premiums paid in excess of the Target Premium. For Policy Years after Policy
Year 7, the gross dealer concession will not be more than 5% of the premiums
paid, up to the Target Premium, and 2.5% of the premiums in excess of the Target
Premium. In addition, dealers will be paid amounts equal to 0.10% per annum of
the Account Value in the Separate Account for the first twenty Policy Years, and
0.05% per annum of such amount thereafter.
POLICY REPORTS
Within 30 days after each Policy Anniversary, a statement will be sent to
you describing the status of your Policy, including setting forth the Face
Amount, the current Death Benefit, any Policy loans and accrued interest, the
current Account Value, the amount held as Collateral in the Loan Account, the
value in each Subaccount of the Separate Account, premiums paid since the last
report, charges deducted since the last report, any Withdrawals since the last
report, and the current Net Cash Surrender Value. In addition, a statement will
be sent to you showing the status of your Policy following the transfer of
amounts from one Subaccount of a Separate Account to another, the taking out of
a loan, a repayment of a loan, a Withdrawal and the payment of any premiums
(excluding those paid by bank draft or otherwise under the Automatic Payment
Plan).
You will receive a semi-annual report containing the financial statements
of each Fund in which your Policy has Account Value, as required by the 1940
Act.
THIRD PARTY ADMINISTRATOR
McCamish Systems, LLC, which is located at 6425 Powers Ferry Road, Third
Floor, Atlanta, Georgia 30339, will act as administrator of the Policies on
behalf of National Life.
STATE REGULATION
National Life is subject to regulation and supervision by the Insurance
Department of the State of Vermont which periodically examines its affairs. It
is also subject to the insurance laws and regulations of all jurisdictions where
it is authorized to do business. A copy of the Policy form has been filed with,
and where required approved by, insurance officials in each jurisdiction where
the Policies are sold. National Life is required to submit annual statements of
its operations, including financial statements, to the insurance departments of
the various jurisdictions in which it does business for the purposes of
determining solvency and compliance with local insurance laws and regulations.
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
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can be no assurance that National Life will be successful, or that interaction
with other service providers will not impair National Life's services at that
time.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by Kiri
Parankirnathan, A.S.A., M.A.A.A., President of Life Product Developers, Inc.
LEGAL MATTERS
Sutherland Asbill & Brennan, LLP of Washington, D.C. has provided advice
on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by D. Russell Morgan, Counsel of
National Life.
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
filed against National Life on behalf of purported classes of persons who
purchased certain insurance products from National Life. A proposed settlement
of these lawsuits has been announced, and is currently subject to the approval
of the court. National Life does not believe that these lawsuits, whether
settled or litigated, 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 pages beginning
with page F-1 below. The financial statements of National Life should be
considered only as bearing upon National Life's ability to meet its obligations
under the Policies.
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GLOSSARY
ACCOUNT VALUE The sum of the Policy's values in the Separate Account and the Loan
Account.
ATTAINED AGE The Issue Age of the Insured plus the number of full Policy Years which
have passed since the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to receive all or some of the
Death Benefit when the Insured dies. The Beneficiary is designated in
the application or if subsequently changed, as shown in the latest
change filed with National Life. The interest of any Beneficiary who
dies before the Insured shall vest in the Owner unless otherwise stated.
CASH SURRENDER VALUE The Account Value of the Policy reflecting, in Policy Years 1 and 2, the
Distribution Charge Refund. The Cash Surrender Value is equal to the
Account Value on the second Policy Anniversary and thereafter.
COLLATERAL The Account Value in the Loan Account which secures the amount of any
Policy loan.
CUMULATIVE MINIMUM MONTHLY
PREMIUM The sum of the Minimum Monthly Premiums in effect on each Monthly
Policy Date since the Date of Issue (including the current month).
DAC TAX A tax attributable to Specified Policy Acquisition Expenses under
Internal Revenue Code Section 848.
DATE OF ISSUE The date on which the Policy is issued, which is set forth in the
Policy. It is used to determine Policy Years, Policy Months and Monthly
Policy Dates, as well as to measure suicide and contestable periods.
DEATH BENEFIT Under Option A, the greater of (a) the Face Amount or (b) the Death
Benefit Factor times the Cash Surrender Value on the date of death;
under Option B, the greater of (a) the Face Amount plus the Account
Value on the date of death, or (b) the Death Benefit Factor times the
Cash Surrender Value on the date of death; in each case plus any
dividends payable, plus any Supplemental Term Insurance Amount, less
any outstanding Policy loan and accrued interest, and less any unpaid
Monthly Deductions.
DEATH BENEFIT FACTOR A percentage specified in either the Cash Value Accumulation Test or the
Guideline Premium Test for qualification of a Policy as life insurance
under the Internal Revenue Code, which when multiplied by the Cash
Surrender Value, must always be less than or equal to the Death Benefit
plus any outstanding Policy loans, accrued interest thereon, and any
unpaid Monthly Deductions, and minus
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any dividends payable and any Supplemental term Insurance Amount.
DEATH BENEFIT STANDARD The Death Benefit Factor multiplied by the Cash Surrender Value of the
Policy on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans plus
accrued interest.
DISTRIBUTION CHARGE An amount deducted from each premium to cover the cost of distribution
of the Policy. The Distribution Charge is equal to, in Policy Year 1,
13% of premiums paid during the Policy Year up to the Target Premium,
and 0.5% of premiums paid in excess of the target premium during the
Policy Year. In Policy Years 2 through 7, the Distribution Charge is
equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in
any such Policy Year. In Policy Years 8 and thereafter, the
Distribution Charge will be 5% of premiums paid during a Policy Year up
to the Target Premium, and 2.5% of premiums paid in excess of the
Target Premium in any such Policy Year.
DISTRIBUTION CHARGE REFUND An amount which will be added to Account Value as of the time of the
applicable first year premium payments, to determine the proceeds
payable to the Owner upon surrender during in Policy Years 1 or 2. Such
amount shall be equal to the lesser of (a) the Premium Loads on all
premiums paid in the first Policy Year, less 2% of such premiums paid in
the first Policy Year, or (b) one third of the Premium Loads paid on all
premiums paid in the first Policy Year, plus 2% of such premiums, less
the Premium Tax Charge. The Distribution Charge Refund is zero at all
times after the first Policy Year.
DURATION The number of full years the insurance has been in force; for the Face
Amount on the Date of Issue, measured from the Date of Issue; for any
increase in Face Amount, measured from the effective date of such
increase.
FACE AMOUNT The Face Amount of the Policy on the Date of Issue plus any increases in
Face Amount and minus any decreases in Face Amount.
GRACE PERIOD A 61-day period measured from the date on which notice of pending lapse
is sent by National Life, during which the Policy will not lapse and
insurance coverage continues. To prevent lapse, the Owner must during
the Grace Period make a premium payment at least equal to three times
the Monthly Deduction due the date when the Grace Period began, plus any
Premium Loads.
HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont
05604.
INSURED The person upon whose life the Policy is issued.
ISSUE AGE The age of the Insured at his or her birthday nearest the Date of Issue.
The Issue Age is stated in the Policy.
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LOAN ACCOUNT Account Value which is held in National Life's general account as
Collateral for Policy loans.
MINIMUM FACE AMOUNT The Minimum Face Amount is $5000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. The Minimum Initial
Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust, or a partnership, is
$50,000.
MINIMUM MONTHLY PREMIUM An amount stated in the Policy, the payment of which each month will
keep the Policy from entering a Grace Period during the Policy
Protection Period.
MONTHLY DEDUCTION The amount deducted in advance from the Account Value on each
Monthly Policy Date. It includes the Policy Administration Charge, the
Cost of Insurance Charge, and, if applicable, the Underwriting Charge
and the charge for the Term Rider.
MONTHLY POLICY DATE The day in each calendar month which is the same day of the month as the
Date of Issue, or the last day of any month having no such date, except
that whenever the Monthly Policy Date would otherwise fall on a date
other than a Valuation Date, the Monthly Policy Date will be deemed to
be the next Valuation Date.
NET ACCOUNT VALUE The Account Value of a Policy less any outstanding Policy loans and
accrued interest thereon.
NET AMOUNT AT RISK The amount by which (a) the Death Benefit, plus any outstanding Policy
loans and accrued interest, and plus any unpaid Monthly Deductions, and
divided by 1.0032734 (to take into account earnings of 4% per annum
solely for the purpose of computing Net Amount at Risk), exceeds (b) the
Account Value.
NET CASH SURRENDER VALUE The Cash Surrender Value of a policy less any outstanding Policy Loans
and accrued interest thereon.
NET PREMIUM The remainder of a premium after the deduction of the Premium Loads.
OWNER The person(s) or entity(ies) entitled to exercise the rights granted in
the Policy.
POLICY ADMINISTRATION CHARGE A charge currently in the amount of $5.50 per month included in the
Monthly Deduction, which is intended to reimburse National Life for
ordinary administrative expenses. National Life reserves the right to
increase this charge up to an amount equal to $8.00 per month.
POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year.
POLICY PROTECTION PERIOD The first five years after the Date of Issue of a Policy during which
the Policy will not lapse regardless of whether net Account value is
sufficient to cover the Monthly Deductions, provided that premium
44
52
payments at least equal to the Cumulative Minimum Monthly Premium
have been paid.
POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary.
PREMIUM LOADS A charge deducted from each premium payment, which consists of the
Distribution Charge and the applicable Premium Tax Charge
PREMIUM TAX CHARGE A charge deducted from each premium payment to cover the cost of all
applicable state and local premium taxes.
RATE CLASS The classification of the Insured for cost of insurance purposes. The
Rate Classes are: for each of guaranteed issue, simplified issue, and
full medical underwriting, there are male non-smoker, female
non-smoker, unisex non-smoker, male smoker, female smoker, unisex
nonsmoker, unisex unismoker, male unismoker, and female unismoker.
For full medical underwriting cases, substandard rate classes may also
apply.
SUPPLEMENTAL TERM INSURANCE
AMOUNT Additional insurance coverage provided by the Term Rider, equal to,
under Option A, the Term Insurance Amount stated in the Policy less any
excess of (a) the Policy's Death Benefit Standard over (b) the Policy's
Face Amount on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans and
accrued interest thereon, but not less than zero. Under Option B, the
Supplemental Term Insurance Amount is equal to the Term Insurance
Amount stated in the Policy less any excess of (a) the Policy's Death
Benefit Standard over (b) the Policy's Face Amount on the date of the
Insured's death, plus the Account Value of the Policy on the date of the
Insured's Death, less the amount of any Monthly Deductions then due,
and less any outstanding Policy loans and accrued interest thereon, but
not less than zero.
TARGET PREMIUM An amount equal to 1.25 times the annual whole life premium which
would apply to a Policy calculated by using the applicable 1980
Commissioners Standard Ordinary Mortality Table and an interest rate of
3.5%.
TERM INSURANCE AMOUNT An amount stated in the Policy on which the Supplemental Term
Insurance Amount is based.
TERM RIDER An optional benefit that may be included in a Policy at the owner's
option, which provides additional insurance coverage in the form of the
Supplemental Term Insurance Amount.
THIRD PARTY ADMINISTRATOR The administrator of the Policy appointed by National Life, McCamish
Systems, LLC, located at 6425 Powers Ferry Road, Third Floor, Atlanta,
Georgia 30339.
VALUATION DATE Each day that the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is
restricted by directive of the Securities and Exchange Commission.
Unless otherwise indicated, whenever an event occurs
45
53
or a transaction is to be effected on a day that is not a Valuation Date,
it will be deemed to have occurred on the next Valuation Date.
VALUATION PERIOD The time between two successive Valuation Dates. Each Valuation Period
includes a Valuation Date and any non-Valuation Date or consecutive
non-Valuation Dates immediately preceding it.
WITHDRAWAL A payment made at the request of the Owner pursuant to the right in the
Policy to withdraw a portion of the Policy's Net Account Value.
46
54
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Account Values and
Net Cash Surrender Values of a Policy may change with the investment experience
of the Separate Account. The tables show how the Death Benefits, Account Values
and Net Cash Surrender Values of a Policy issued to an Insured of a given age,
sex and Rate Class would vary over time if the investment return on the assets
held in each Portfolio of each of the Funds were a uniform, gross annual rate of
0%, 6% and 12%.
The tables on Pages A-2 to A-10 illustrate a Policy issued to a male
Insured, Age 40 in the full medical underwriting nonsmoker Rate Class with a
Face Amount of $250,000 and Planned Periodic Premiums of $3,000 paid at the
beginning of each Policy Year. The Death Benefits, Account Values and Net Cash
Surrender Values would be lower if the Insured was in a smoker or substandard
class, a guaranteed issue class or a simplified issue class, since the cost of
insurance charges are higher for these classes. Also, the values would be
different from those shown if the gross annual investment returns averaged 0%,
6% and 12% over a period of years, but fluctuated above and below those averages
for individual Policy Years.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the applicable 1980 CSO Table); the columns under the heading
"Current" assume that throughout the life of the Policy, the monthly charge for
cost of insurance is based on the current cost of insurance rate, and the
Mortality and Expense Risk Charge and the Policy Administration Charge are at
the current rates.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of these other asset charges
reflected in the Current and Guaranteed illustrations, not including the
Mortality and Expense Risk Charge or the Separate Account Administration
Charges, is 0.88%. This charge is based on an assumption that an Owner
allocates the Policy values equally among the Subaccounts of the Separate
Account. These asset charges take into account expense reimbursement
arrangements expected to be in place for 1999. 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 Separate Account. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated and no Policy loans are made. The tables are also based on the
assumption that the Owner has not requested an increase or decrease in the Face
Amount, that no Withdrawals have been made and no transfers have been made in
any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, the
Death Benefit compliance test, Face Amount and Planned Periodic Premiums
requested and the application of the Term Rider, if requested.
A-1
55
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,834 1,981 250,000 2,305 2,453 250,000
2 6,458 3,515 3,661 250,000 4,465 4,611 250,000
3 9,930 5,131 5,131 250,000 6,562 6,562 250,000
4 13,577 6,675 6,675 250,000 8,600 8,600 250,000
5 17,406 8,150 8,150 250,000 10,575 10,575 250,000
6 21,426 9,591 9,591 250,000 12,534 12,534 250,000
7 25,647 10,950 10,950 250,000 14,426 14,426 250,000
8 30,080 12,521 12,521 250,000 16,563 16,563 250,000
9 34,734 14,001 14,001 250,000 18,633 18,633 250,000
10 39,620 15,383 15,383 250,000 20,632 20,632 250,000
11 44,751 16,664 16,664 250,000 22,581 22,581 250,000
12 50,139 17,830 17,830 250,000 24,446 24,446 250,000
13 55,796 18,867 18,867 250,000 26,218 26,218 250,000
14 61,736 19,763 19,763 250,000 27,889 27,889 250,000
15 67,972 20,501 20,501 250,000 29,453 29,453 250,000
16 74,521 21,066 21,066 250,000 30,905 30,905 250,000
17 81,397 21,443 21,443 250,000 32,252 32,252 250,000
18 88,617 21,622 21,622 250,000 33,486 33,486 250,000
19 96,198 21,588 21,588 250,000 34,598 34,598 250,000
20 104,158 21,314 21,314 250,000 35,568 35,568 250,000
25 150,340 15,158 15,158 250,000 38,206 38,206 250,000
30 209,282 0 0 250,000 35,966 35,966 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
56
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,963 2,119 250,000 2,449 2,606 250,000
2 6,458 3,882 4,045 250,000 4,892 5,056 250,000
3 9,930 5,845 5,845 250,000 7,411 7,411 250,000
4 13,577 7,847 7,847 250,000 10,014 10,014 250,000
5 17,406 9,890 9,890 250,000 12,701 12,701 250,000
6 21,426 12,013 12,013 250,000 15,523 15,523 250,000
7 25,647 14,172 14,172 250,000 18,435 18,435 250,000
8 30,080 16,677 16,677 250,000 21,775 21,775 250,000
9 34,734 19,228 19,228 250,000 25,233 25,233 250,000
10 39,620 21,819 21,819 250,000 28,811 28,811 250,000
11 44,751 24,450 24,450 250,000 32,546 32,546 250,000
12 50,139 27,107 27,107 250,000 36,405 36,405 250,000
13 55,796 29,780 29,780 250,000 40,384 40,384 250,000
14 61,736 32,458 32,458 250,000 44,485 44,485 250,000
15 67,972 35,125 35,125 250,000 48,708 48,708 250,000
16 74,521 37,768 37,768 250,000 53,058 53,058 250,000
17 81,397 40,372 40,372 250,000 57,549 57,549 250,000
18 88,617 42,929 42,929 250,000 62,184 62,184 250,000
19 96,198 45,427 45,427 250,000 66,967 66,967 250,000
20 104,158 47,840 47,840 250,000 71,891 71,891 250,000
25 150,340 57,582 57,582 250,000 99,212 99,212 250,000
30 209,282 59,028 59,028 250,000 131,852 131,852 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
57
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 2,092 2,258 250,000 2,594 2,759 250,000
2 6,458 4,265 4,447 250,000 5,335 5,519 250,000
3 9,930 6,621 6,621 250,000 8,330 8,330 250,000
4 13,577 9,171 9,171 250,000 11,607 11,607 250,000
5 17,406 11,939 11,939 250,000 15,193 15,193 250,000
6 21,426 14,985 14,985 250,000 19,169 19,169 250,000
7 25,647 18,288 18,288 250,000 23,525 23,525 250,000
8 30,080 22,206 22,206 250,000 28,661 28,661 250,000
9 34,734 26,468 26,468 250,000 34,308 34,308 250,000
10 39,620 31,106 31,106 250,000 40,519 40,519 250,000
11 44,751 36,159 36,159 250,000 47,401 47,401 250,000
12 50,139 41,660 41,660 250,000 54,978 54,978 250,000
13 55,796 47,648 47,648 250,000 63,322 63,322 250,000
14 61,736 54,169 54,169 250,000 72,514 72,514 250,000
15 67,972 61,272 61,272 250,000 82,651 82,651 250,000
16 74,521 69,017 69,017 250,000 93,841 93,841 250,000
17 81,397 77,472 77,472 250,000 106,217 106,217 250,000
18 88,617 86,723 86,723 250,000 119,916 119,916 253,765
19 96,198 96,865 96,865 250,000 135,018 135,018 277,592
20 104,158 108,001 108,001 250,000 151,596 151,596 302,931
25 150,340 181,722 181,722 317,218 262,788 262,788 458,730
30 209,282 290,477 290,477 449,563 439,943 439,943 680,888
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
58
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,834 1,981 250,000 2,305 2,453 250,000
2 6,458 3,515 3,661 250,000 4,465 4,611 250,000
3 9,930 5,131 5,131 250,000 6,562 6,562 250,000
4 13,577 6,675 6,675 250,000 8,600 8,600 250,000
5 17,406 8,150 8,150 250,000 10,575 10,575 250,000
6 21,426 9,591 9,591 250,000 12,534 12,534 250,000
7 25,647 10,950 10,950 250,000 14,426 14,426 250,000
8 30,080 12,521 12,521 250,000 16,563 16,563 250,000
9 34,734 14,001 14,001 250,000 18,633 18,633 250,000
10 39,620 15,383 15,383 250,000 20,632 20,632 250,000
11 44,751 16,664 16,664 250,000 22,581 22,581 250,000
12 50,139 17,830 17,830 250,000 24,446 24,446 250,000
13 55,796 18,867 18,867 250,000 26,218 26,218 250,000
14 61,736 19,763 19,763 250,000 27,889 27,889 250,000
15 67,972 20,501 20,501 250,000 29,453 29,453 250,000
16 74,521 21,066 21,066 250,000 30,905 30,905 250,000
17 81,397 21,443 21,443 250,000 32,252 32,252 250,000
18 88,617 21,622 21,622 250,000 33,486 33,486 250,000
19 96,198 21,588 21,588 250,000 34,598 34,598 250,000
20 104,158 21,314 21,314 250,000 35,568 35,568 250,000
25 150,340 15,158 15,158 250,000 38,206 38,206 250,000
30 209,282 0 0 0 35,966 35,966 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
59
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,963 2,119 250,000 2,449 2,606 250,000
2 6,458 3,882 4,045 250,000 4,892 5,056 250,000
3 9,930 5,845 5,845 250,000 7,411 7,411 250,000
4 13,577 7,847 7,847 250,000 10,014 10,014 250,000
5 17,406 9,890 9,890 250,000 12,701 12,701 250,000
6 21,426 12,013 12,013 250,000 15,523 15,523 250,000
7 25,647 14,172 14,172 250,000 18,435 18,435 250,000
8 30,080 16,677 16,677 250,000 21,775 21,775 250,000
9 34,734 19,228 19,228 250,000 25,233 25,233 250,000
10 39,620 21,819 21,819 250,000 28,811 28,811 250,000
11 44,751 24,450 24,450 250,000 32,546 32,546 250,000
12 50,139 27,107 27,107 250,000 36,405 36,405 250,000
13 55,796 29,780 29,780 250,000 40,384 40,384 250,000
14 61,736 32,458 32,458 250,000 44,485 44,485 250,000
15 67,972 35,125 35,125 250,000 48,708 48,708 250,000
16 74,521 37,768 37,768 250,000 53,058 53,058 250,000
17 81,397 40,372 40,372 250,000 57,549 57,549 250,000
18 88,617 42,929 42,929 250,000 62,184 62,184 250,000
19 96,198 45,427 45,427 250,000 66,967 66,967 250,000
20 104,158 47,840 47,840 250,000 71,891 71,891 250,000
25 150,340 57,582 57,582 250,000 99,212 99,212 250,000
30 209,282 59,028 59,028 250,000 131,852 131,852 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
60
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 2,092 2,258 250,000 2,594 2,759 250,000
2 6,458 4,265 4,447 250,000 5,335 5,519 250,000
3 9,930 6,621 6,621 250,000 8,330 8,330 250,000
4 13,577 9,171 9,171 250,000 11,607 11,607 250,000
5 17,406 11,939 11,939 250,000 15,193 15,193 250,000
6 21,426 14,985 14,985 250,000 19,169 19,169 250,000
7 25,647 18,288 18,288 250,000 23,525 23,525 250,000
8 30,080 22,206 22,206 250,000 28,661 28,661 250,000
9 34,734 26,468 26,468 250,000 34,308 34,308 250,000
10 39,620 31,106 31,106 250,000 40,519 40,519 250,000
11 44,751 36,159 36,159 250,000 47,401 47,401 250,000
12 50,139 41,660 41,660 250,000 54,978 54,978 250,000
13 55,796 47,648 47,648 250,000 63,322 63,322 250,000
14 61,736 54,169 54,169 250,000 72,514 72,514 250,000
15 67,972 61,272 61,272 250,000 82,651 82,651 250,000
16 74,521 69,017 69,017 250,000 93,841 93,841 250,000
17 81,397 77,472 77,472 250,000 106,217 106,217 250,000
18 88,617 86,723 86,723 250,000 119,917 119,917 250,000
19 96,198 96,865 96,865 250,000 135,099 135,099 250,000
20 104,158 108,001 108,001 250,000 151,938 151,938 250,000
25 150,340 183,681 183,681 250,000 269,036 269,036 328,224
30 209,282 309,909 309,909 359,495 462,836 462,836 536,890
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
61
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,829 1,976 251,829 2,304 2,452 252,304
2 6,458 3,501 3,646 253,501 4,461 4,607 254,461
3 9,930 5,102 5,102 255,102 6,553 6,553 256,553
4 13,577 6,626 6,626 256,626 8,583 8,583 258,583
5 17,406 8,075 8,075 258,075 10,546 10,546 260,546
6 21,426 9,484 9,484 259,484 12,489 12,489 262,489
7 25,647 10,804 10,804 260,804 14,361 14,361 264,361
8 30,080 12,326 12,326 262,326 16,471 16,471 266,471
9 34,734 13,749 13,749 263,749 18,508 18,508 268,508
10 39,620 15,062 15,062 265,062 20,466 20,466 270,466
11 44,751 16,263 16,263 266,263 22,365 22,365 272,365
12 50,139 17,336 17,336 267,336 24,168 24,168 274,168
13 55,796 18,265 18,265 268,265 25,866 25,866 275,866
14 61,736 19,039 19,039 269,039 27,447 27,447 277,447
15 67,972 19,636 19,636 269,636 28,903 28,903 278,903
16 74,521 20,042 20,042 270,042 30,229 30,229 280,229
17 81,397 20,240 20,240 270,240 31,432 31,432 281,432
18 88,617 20,220 20,220 270,220 32,499 32,499 282,499
19 96,198 19,968 19,968 269,968 33,423 33,423 283,423
20 104,158 19,458 19,458 269,458 34,177 34,177 284,177
25 150,340 11,908 11,908 261,908 35,291 35,291 285,291
30 209,282 0 0 0 30,717 30,717 280,717
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-8
62
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 1,958 2,114 251,958 2,448 2,605 252,448
2 6,458 3,866 4,029 253,866 4,887 5,051 254,887
3 9,930 5,812 5,812 255,812 7,400 7,400 257,400
4 13,577 7,788 7,788 257,788 9,993 9,993 259,993
5 17,406 9,797 9,797 259,797 12,666 12,666 262,666
6 21,426 11,875 11,875 261,875 15,466 15,466 265,466
7 25,647 13,975 13,975 263,975 18,348 18,348 268,348
8 30,080 16,405 16,405 266,405 21,648 21,648 271,648
9 34,734 18,861 18,861 268,861 25,053 25,053 275,053
10 39,620 21,334 21,334 271,334 28,564 28,564 278,564
11 44,751 23,821 23,821 273,821 32,213 32,213 282,213
12 50,139 26,302 26,302 276,302 35,960 35,960 285,960
13 55,796 28,761 28,761 278,761 39,800 39,800 289,800
14 61,736 31,181 31,181 281,181 43,723 43,723 293,723
15 67,972 33,536 33,536 283,536 47,726 47,726 297,726
16 74,521 35,807 35,807 285,807 51,803 51,803 301,803
17 81,397 37,968 37,968 287,968 55,964 55,964 305,964
18 88,617 40,002 40,002 290,002 60,201 60,201 310,201
19 96,198 41,884 41,884 291,884 64,505 64,505 314,505
20 104,158 43,578 43,578 293,578 68,854 68,854 318,854
25 150,340 47,544 47,544 297,544 91,245 91,245 341,245
30 209,282 37,732 37,732 287,732 113,189 113,189 363,189
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-9
63
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
Guaranteed Current
Premium --------------------------------------------- -----------------------------------------------
End of Accumulated Net Cash Net Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
1 3,150 2,087 2,252 252,087 2,592 2,758 252,592
2 6,458 4,247 4,430 254,247 5,330 5,514 255,330
3 9,930 6,582 6,582 256,582 8,317 8,317 258,317
4 13,577 9,101 9,101 259,101 11,582 11,582 261,582
5 17,406 11,824 11,824 261,824 15,149 15,149 265,149
6 21,426 14,807 14,807 264,807 19,096 19,096 269,096
7 25,647 18,025 18,025 268,025 23,410 23,410 273,410
8 30,080 21,827 21,827 271,827 28,487 28,487 278,487
9 34,734 25,937 25,937 275,937 34,052 34,052 284,052
10 39,620 30,377 30,377 280,377 40,153 40,153 290,153
11 44,751 35,175 35,175 285,175 46,887 46,887 296,887
12 50,139 40,349 40,349 290,349 54,266 54,266 304,266
13 55,796 45,918 45,918 295,918 62,348 62,348 312,348
14 61,736 51,909 51,909 301,909 71,194 71,194 321,194
15 67,972 58,339 58,339 308,339 80,878 80,878 330,878
16 74,521 65,236 65,236 315,236 91,481 91,481 341,481
17 81,397 72,626 72,626 322,626 103,108 103,108 353,108
18 88,617 80,546 80,546 330,546 115,857 115,857 365,857
19 96,198 89,033 89,033 339,033 129,835 129,835 379,835
20 104,158 98,111 98,111 348,111 145,148 145,148 395,148
25 150,340 153,249 153,249 403,249 247,595 247,595 497,595
30 209,282 226,263 226,263 476,263 411,337 411,337 661,337
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-10
64
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
JUNE 30, 1998
* * * * *
(UNAUDITED)
F-1
65
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30,
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 357,119 $ 276,253
Available-for-sale debt and equity securities, at fair value 5,384,143 5,113,445
Mortgage loans 1,061,460 964,005
Policy loans 771,240 793,959
Real estate investments 80,722 115,972
Other invested assets 122,267 81,214
- -------------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,776,951 7,344,848
Deferred policy acquisition costs 385,511 437,433
Due and accrued investment income 121,454 116,647
Premiums and fees receivable 12,867 13,701
Deferred income taxes 27,557 32,276
Amounts recoverable from reinsurers 216,217 184,648
Present value of future profits of insurance acquired 49,481 70,387
Property and equipment, net 58,924 62,091
Other assets 112,135 72,617
Separate account assets 249,897 203,109
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,010,994 $ 8,537,757
=========================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,820,243 $ 3,759,577
Policyowners' accounts 3,305,714 3,141,108
Policyowners' deposits 40,807 40,163
Policy claims payable 32,252 29,108
Policyowners' dividends 59,438 59,003
Other liabilities and accrued expenses 537,122 429,436
Debt 78,087 80,083
Separate account liabilities 228,962 184,580
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,102,625 7,723,058
- -------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 56,951 41,314
POLICYOWNERS' EQUITY:
Net unrealized gains on available-for-sale securities 91,304 37,347
Retained earnings 760,114 736,038
- -------------------------------------------------------------------------------------------------------------------------
Total policyowners' equity 851,418 773,385
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 9,010,994 $ 8,537,757
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-2
66
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
REVENUES:
Insurance premiums $ 172,183 $ 183,987
Universal life and investment-type policy fees 23,868 22,194
Net investment income 282,293 265,007
Realized investment gains/(losses) 10,216 (1,898)
Mutual fund commission and fee income 24,645 19,689
Other income 8,957 9,503
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 522,162 498,482
- -------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 82,965 51,618
Policy benefits 189,210 151,449
Policyowners' dividends 52,680 52,675
Interest credited to policyowners' accounts 40,192 93,720
Operating expenses 64,673 81,081
Sales practice remediation costs 40,575 -
Commissions and expense allowances 47,944 48,791
Net deferral of policy acquisition costs (3,474) (8,091)
- -------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 514,765 471,243
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 7,397 27,239
Income tax (benefit)/expense (268) 7,273
- -------------------------------------------------------------------------------------------------------------------------
Income before minority interests 7,665 19,966
Minority interests 3,423 3,969
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME 4,242 15,997
RETAINED EARNINGS:
Beginning of period 755,872 720,041
- -------------------------------------------------------------------------------------------------------------------------
End of period $ 760,114 $ 736,038
=========================================================================================================================
NET UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of period $ 85,017 $ 28,867
Change during period 6,287 8,480
- -------------------------------------------------------------------------------------------------------------------------
End of period $ 91,304 $ 37,347
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
67
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated balance sheet and unaudited
consolidated statement of operations and policyowners' equity of National Life
Insurance Company and subsidiaries have been prepared in conformity with
generally accepted accounting principles (GAAP). These financial statements do
not include a consolidated statement of cash flows or substantially all of the
disclosures required under GAAP.
The consolidated balance sheet and statement of operations and policyowners'
equity include the accounts of National Life Insurance Company and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
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.
NOTE 2 - SALES REMEDIATION COSTS
During 1997, several class action lawsuits were filed against National Life
Insurance Company (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. National Life agreed to a settlement of
these class action lawsuits in June, 1998. This settlement was approved by the
court in October, 1998. The settlement will provide class members with various
policy enhancement options and new product purchase discounts. Class members
may instead pursue alternative dispute resolution according to predetermined
guidelines. Management believes that while the ultimate cost of this litigation
is still uncertain, it is unlikely (after considering existing provisions) to
have a material adverse effect on National Life's financial position.
F-4
68
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997 AND 1996
F-5
69
[PRICE WATERHOUSE LLP LETTERHEAD]
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.
/s/ PRICE WATERHOUSE LLP
F-6
70
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.
F-7
71
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.
F-8
72
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.
F-9
73
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.
F-10
74
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.
F-11
75
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.
F-12
76
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
================================================================================
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77
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
=================================================================================================================================
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78
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
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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
======================================================================
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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.
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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 Estimated Fair
Value 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.
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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
liabilities $ 112,577 $ 164,233
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
===================================================================
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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
F-20
84
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
===================================================================================================================================
F-21
85
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.
F-22
86
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.
F-23
87
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.
NOTE 11 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
ACCOUNTANTS' REPORT
In June 1998, National Life agreed to a settlement of the outstanding class
action litigation involving the company's sales practices. This settlement was
approved by the court in October, 1998. National Life has established an
additional provision of $40.6 million (before offsetting tax effects) in its
1998 financial statements.
F-24
88
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1996 AND 1995
F-25
89
[PRICE WATERHOUSE LLP LETTERHEAD]
Report of Independent Accountants
April 15, 1997
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 cash flows
present fairly, in all material respects, the financial position of National
Life Insurance Company and its subsidiaries at December 31, 1996 and 1995, 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.
As discussed in Note 2, the Company changed its accounting policies to adopt
pronouncements of the Financial Accounting Standards Board, which are effective
for 1996 financial statements and require restatement of all prior periods
presented.
/s/ PRICE WATERHOUSE LLP
F-26
90
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 268,235 $ 310,905
Debt and equity securities
Available-for-sale, at fair value 4,393,046 3,240,480
Held-to-maturity, at amortized cost 590,700 477,708
Mortgage loans 907,024 649,892
Policy loans 796,193 735,852
Real estate investments 99,442 97,612
Other invested assets 78,596 25,733
- -----------------------------------------------------------------------------------------------------
Total cash and invested assets 7,133,236 5,538,182
Deferred policy acquisition costs 421,584 327,629
Due and accrued investment income 120,753 96,852
Premiums and fees receivable 25,874 23,648
Deferred income taxes 33,514 1,924
Amounts recoverable from reinsurers 190,873 161,997
Present value of future profits of insurance acquired 80,957 -
Property and equipment, net 64,302 62,418
Other assets 51,453 49,810
Separate account assets 181,771 177,890
- -----------------------------------------------------------------------------------------------------
Total assets $ 8,304,317 $ 6,440,350
=====================================================================================================
LIABILITIES:
Policy liabilities:
Policy benefit liabilities $ 3,701,597 $ 3,484,844
Policyowners' account balances 3,051,973 1,431,386
Policyowners' deposits 37,524 36,642
Policy claims payable 31,217 25,545
Policyowners' dividends 51,792 47,025
Other liabilities and accrued expenses 394,127 396,407
Debt 82,682 69,679
Separate account liabilities 165,234 167,162
- -----------------------------------------------------------------------------------------------------
Total liabilities 7,516,146 5,658,690
- -----------------------------------------------------------------------------------------------------
MINORITY INTERESTS 39,263 1,569
POLICYOWNERS' EQUITY:
Net unrealized gain on available-for-sale securities 28,867 77,173
Retained earnings 720,041 702,918
- -----------------------------------------------------------------------------------------------------
Total policyowners' equity 748,908 780,091
- -----------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 8,304,317 $ 6,440,350
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
F-27
91
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
REVENUES:
Insurance premiums $ 406,286 $ 418,227
Universal life and investment-type policy charges 41,745 36,900
Net investment income 517,268 396,079
Realized investment (losses) gains (2,070) 33,925
Investment advisory fees 42,256 34,278
Other income 21,278 19,845
- --------------------------------------------------------------------------------------------------
Total revenue 1,026,763 939,254
- --------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Policy benefits 297,564 278,123
Policyowners' dividends 105,690 98,952
Interest credited to policyowners' account balances 170,955 90,037
Increase in reserves 166,668 187,433
Operating expenses 148,716 124,425
Commissions and expense allowances 95,517 80,050
Deferral of acquisition costs (53,600) (44,331)
Amortization of deferred policy acquisition costs 40,248 42,234
- --------------------------------------------------------------------------------------------------
Total benefits and expenses 971,758 856,923
- --------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 55,005 82,331
Income taxes 31,957 31,365
Minority interests in subsidiary earnings 5,925 2,968
- --------------------------------------------------------------------------------------------------
NET INCOME 17,123 47,998
RETAINED EARNINGS:
Beginning of year 702,918 654,920
- --------------------------------------------------------------------------------------------------
End of year $ 720,041 $ 702,918
==================================================================================================
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of year $ 77,173 $ (23,195)
Change during year (48,306) 100,368
- --------------------------------------------------------------------------------------------------
End of year $ 28,867 $ 77,173
==================================================================================================
The accompanying notes are an integral part of these financial statements.
F-28
92
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,123 $ 47,998
Adjustments to reconcile net income to net cash provided by operations:
Change in due and accrued investment income (1,502) (4,785)
Realized investment gains (2,070) (33,925)
Change in policy benefit liabilities 144,723 146,727
Change in deferred policy acquisition costs (9,956) (2,097)
Depreciation 4,283 3,709
Change in policyowners' dividends 4,975 (5,102)
Change in deferred income taxes (13,646) (9,771)
Other (8,538) 30,154
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 135,392 172,908
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 2,157,236 1,814,927
Investment maturities and repayments 340,412 89,919
Cost of investments acquired (2,714,560) (2,126,075)
Acquisition of LSW National Holdings, net (81,551) -
Other 4,793 27,587
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (293,670) (193,642)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyowners' account balances:
Deposits, including interest credited 535,932 279,889
Withdrawals, including policy charges (418,775) (239,354)
Net (decrease) increase in borrowings under repurchase agreements (51,013) 51,013
Net increase in securities lending liabilities 31,717 31,489
Other 17,747 3,012
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 115,608 126,049
- -----------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (42,670) 105,315
CASH AND CASH EQUIVALENTS:
Beginning of year 310,905 205,590
- -----------------------------------------------------------------------------------------------------
End of year $ 268,235 $ 310,905
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
F-29
93
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848 and is
among ten oldest insurance companies and the 25 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 1,000 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 services and products, including
life insurance, annuities, disability income insurance and mutual funds.
National Life primarily develops and distributes traditional and universal
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 50 general agencies in major metropolitan areas
throughout the United States. National Life also distributes its products
through brokers and banks. National Life has more than 250,000 policyowners and
is licensed to do business in all 50 states and the District of Columbia. About
27% 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 Funds, a family of twelve
mutual funds that is one of America's oldest mutual funds. The Sentinel Funds'
$2.3 billion of net assets are managed on behalf of about 102,300 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. LSW's
customer focus has been mainly on teachers and employees of non-profit
institutions, with particular concentration in the west and the southwest. About
60% 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.
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.
F-30
94
ACCOUNTING CHANGES
Prior to these 1996 financial statements, National Life prepared its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Vermont Department of Banking, Insurance, Securities
and Health Care Administration, its domicillary insurance regulator. Prior to
1996, statutory basis financial statements were considered in conformity with
GAAP for mutual life insurance companies.
In 1993 through 1995, the Financial Accounting Standards Board and the American
Institute of Certified Public Accountants issued certain pronouncements that
redefined generally accepted accounting principles for mutual life insurance
companies. Beginning in 1996, statutory basis financial statements are no longer
considered in conformity with GAAP.
The accompanying GAAP financial statements apply all applicable authoritative
accounting pronouncements required to meet the new standards. The 1995
information included in these financial statements has been restated on a GAAP
basis to enhance comparability with the 1996 information, consistent with the
transition provisions of the new accounting standards. The cumulative effect on
1995 beginning policyowners' equity was as follows (in thousands):
Effect on beginning
policyowners' equity
- ----------------------------------------------------------------------------------------------
Asset valuation reserve $ 49,681
Interest maintenance reserve 31,663
Surplus notes (69,675)
Non-admitted assets 16,492
Investments 7,294
Deferred policy acquisition costs 437,516
Deferred income taxes 33,292
Policy liabilities (174,976)
Policyowners' dividends 60,945
Benefit plans (40,113)
Net unrealized loss on available-for-sale securities (23,195)
Other changes, net (14,133)
- ----------------------------------------------------------------------------------------------
Increase in policyowners' equity from conversion to GAAP 314,791
Statutory surplus, December, 31, 1994; aspreviously reported 316,934
- ----------------------------------------------------------------------------------------------
GAAP policyowners' equity, January 1, 1995 $ 631,725
==============================================================================================
January 1, 1995:
Net unrealized loss on available-for-sale securities $ (23,195)
Retained earnings 654,920
- ----------------------------------------------------------------------------------------------
Total policyowners' equity $ 631,725
==============================================================================================
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
Debt and equity 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 securities are reported at estimated fair value.
Held-to-maturity 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
F-31
95
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 and
income taxes.
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
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.
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.
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.
F-32
96
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' account balances. Revenues for these policies consist
of mortality charges, policy administration charges and surrender charges
deducted from policyowners' account balances. 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.
F-33
97
NOTE 3 - 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
Unrealized Unrealized Estimated Fair
1996 Amortized Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
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
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046
===================================================================================================================================
Held-to-maturity:
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 3,059 545,794
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 590,700 $ 25,029 $ 3,310 $ 612,417
===================================================================================================================================
1995
- -----------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. government obligations $ 310,430 $ 15,105 $ 12 $ 325,523
Government agencies, authorities and subdivisions 97,474 9,502 87 106,889
Public utilities 245,525 23,935 524 268,936
Corporate 1,515,959 143,525 674 1,658,810
Private placements 150,866 11,439 1,753 160,552
Mortgage-backed securities 667,827 29,203 535 696,495
- -----------------------------------------------------------------------------------------------------------------------------------
2,988,081 232,709 3,585 3,217,205
Preferred stocks 14,217 453 423 14,247
Common stocks 7,428 1,637 37 9,028
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 3,009,726 $ 234,799 $ 4,045 $ 3,240,480
===================================================================================================================================
Held-to-maturity:
Government agencies, authorities and subdivisions $ 21,708 $ 1,276 $ 6 $ 22,978
Public utilities 9,839 778 - 10,617
Corporate 32,358 3,353 - 35,711
Private placements 413,803 38,629 1,951 450,481
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 477,708 $ 44,036 $ 1,957 $ 519,787
===================================================================================================================================
F-34
98
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):
1996 1995
- --------------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains on available-for-sale securities $ (153,543) $ 305,859
Net unrealized gains on separate account seed money 1,225 -
Related minority interests 2,474 -
Related deferred policy acquisition costs 61,726 (151,447)
Related present value of future profits on insurance acquired 11,639 -
Related deferred income taxes 28,173 (54,044)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net unrealized gains (losses) (48,306) 100,368
Balance, beginning of year 77,173 (23,195)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 28,867 $ 77,173
====================================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 77,211 $ 230,754
Net unrealized gains on separate account seed money 1,225 -
Related minority interests 2,474 -
Related deferred policy acquisition costs (50,300) (112,026)
Related present value of future profits on insurance acquired 11,639 -
Related deferred income taxes (13,382) (41,555)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 28,867 $ 77,173
====================================================================================================================
In December 1995, securities with an estimated fair value and an amortized cost
of $70.7 million and $67.7 million, respectively were reclassified from
held-to-maturity to available-for-sale consistent with the transition provisions
of the Financial Accounting Standards Board Special Report "A Guide to
Implementation of Statement 115 on Accounting for Certain Debt and Equity
Securities".
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1996 are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Available-for-sale Held-to-maturity
---------------------------------------------------------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 47,136 $ 47,520 $ 9,562 $ 9,727
Due after one year through five years 384,967 396,911 122,675 125,576
Due after five years through ten years 1,607,585 1,616,822 260,462 271,399
Due after ten years 1,163,295 1,209,956 198,001 205,715
Mortgage-backed securities 1,093,428 1,099,484 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 4,296,411 $ 4,370,693 $ 590,700 $ 612,417
===============================================================================================================================
Information relating to debt security sale transactions for the years ended
December 31 are shown below (in thousands):
Available-for-sale
-----------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------
Proceeds from sales $ 1,990,175 $ 1,575,695
Gross realized gains $ 46,092 $ 54,877
Gross realized losses $ 42,759 $ 12,216
There were no sales of held-to-maturity securities in 1996 or 1995.
F-35
99
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 slightly higher than 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 $159.4 million and $127.7
million at December 31, 1996 and 1995, 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.
The repurchase liability is included in other liabilities and was $51.0 million
at December 31, 1995. There were no open transactions at December 31, 1996.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
Mortgage Loans Real Estate
------------------------------------------------
1996 1995 1996 1995
------------------------------------------------
GEOGRAPHIC REGION
-----------------
New England 5.0% 8.9%
Middle Atlantic 10.1 14.6 - 0.1%
East North Central 9.4 12.0 19.6% 20.5
West North Central 3.9 2.8 0.1 0.1
South Atlantic 28.9 29.2 42.0 48.6
East South Central 4.4 5.1 4.2 -
West South Central 11.5 2.4 29.5 27.0
Mountain 17.6 15.8
Pacific 9.2 9.2 4.6 3.7
--------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
============================================================================================
PROPERTY TYPE
-------------
Residential 0.3% -
Apartment 23.4 27.3%
Retail 19.5 27.7 10.5% 10.7%
Office Building 34.9 27.0 11.3 10.2
Industrial 19.9 15.3 71.6 73.4
Hotel/Motel 1.1 1.4
Other Commercial 0.9 1.3 6.6 5.7
--------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
============================================================================================
F-36
100
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
1996 1995
- -------------------------------------------------------------------------------------------------
Unimpaired loans $ 876,994 $ 615,359
Impaired loans without valuation allowances 6,146 13,667
--------------------------------------
Subtotal 883,140 629,026
--------------------------------------
Impaired loans with valuation allowances 31,167 29,341
Related valuation allowances (7,283) (8,475)
--------------------------------------
Subtotal 23,884 20,866
- -------------------------------------------------------------------------------------------------
Total $ 907,024 $ 649,892
=================================================================================================
Impaired loans:
Average recorded investment $ 40,161 $ 41,483
Interest income recognized $ 5,026 $ 4,856
Interest received $ 5,170 $ 4,900
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):
1996 1995
-----------------------------------------------------------------------------------------------------------------
Additions for impaired loans charged to realized losses $ 3,944 $ 2,240
Impairment losses charged to valuation allowances (7,559) (6,671)
Changes to previously established valuation allowances 2,423 3,367
----------------------------------------------------------------------------------------------------------------
Decrease in valuation allowances (1,192) (1,064)
Balance, beginning of year 8,475 9,539
----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 7,283 $ 8,475
================================================================================================================
NET INVESTMENT INCOME
Net investment income is presented net of related investment expenses of $31.4
million and $32.5 million for the years ended December 31, 1996 and 1995,
respectively.
NOTE 4 - 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. National Life has assumed a small amount
of yearly renewable term reinsurance from non-affiliated insurers. 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.
F-37
101
The effects of reinsurance for the years ended December 31, were as follows (in
thousands):
1996 1995
-------------------------------------------------------------------
Insurance premiums:
Direct premiums $ 474,998 $ 487,411
Reinsurance assumed 959 672
Reinsurance ceded (69,671) (69,856)
-------------------------------------------------------------------
$ 406,286 $ 418,227
===================================================================
Policy benefits:
Direct policy benefits $ 363,405 $ 351,635
Reinsurance assumed 62 -
Reinsurance ceded (65,903) (73,512)
-------------------------------------------------------------------
$ 297,564 $ 278,123
===================================================================
Policyowners' dividends:
Direct policyowners'
dividends $ 112,050 $ 104,845
Reinsurance ceded (6,360) (5,893)
-------------------------------------------------------------------
$ 105,690 $ 98,952
===================================================================
Increase in policy liabilities:
Direct increase in policy
liabilities $ 164,233 $ 181,145
Reinsurance assumed (20) -
Reinsurance ceded 2,455 6,288
-------------------------------------------------------------------
$ 166,668 $ 187,433
===================================================================
NOTE 5 - 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):
1996 1995
----------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------
Current $ 45,603 $ 41,136
Deferred (13,646) (9,771)
------------------------------------------------------- ------------
Income taxes $ 31,957 $ 31,365
======================================================= ============
Expected income taxes $ 17,178 35.0% $ 27,777 35.0%
Differential earnings amount 6,007 12.2 - -
Net change in tax reserves 10,290 21.0 4,233 5.3
Other (1,518) (3.1) (645) (.8)
----------------------------------------------------------------------------------------------
Income taxes $ 31,957 $ 31,365
======================================================= ============
Effective federal income tax rate 65.1% 39.5%
========================================== ============ ============
F-38
102
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
1996 1995
----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Policy liabilities $ 160,933 $ 122,832
Other liabilities and accrued expenses 47,703 44,960
Other 10,495 10,873
----------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 219,131 178,665
----------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,454 120,081
Present value of future profits of insurance acquired 24,262 -
Net unrealized gain on available-for-sale debt and equity securities 13,382 41,555
Debt and equity securities 9,352 4,678
Other 13,167 10,427
----------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 185,617 176,741
----------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 33,514 $ 1,924
============================================================================================================================
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 6 - 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. National Life
makes annual contributions to the plan of the maximum amount deductible for
income tax purposes. 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 agents and a non-contributory defined
supplemental benefit plan for certain executives. These non-qualified plans are
not funded.
F-39
103
The status of the defined benefit plans at December 31, were as follows (in
thousands):
1996 1995
----------------------------------------------------------------
Funded plan Unfunded plans Funded plan Unfunded plans
-----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $ 83,362 $ 63,255 $ 76,764 $ 62,981
Non-vested 476 19 444 15
-----------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 83,838 $ 63,274 $ 77,208 $ 62,996
-----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 108,564 $ 66,402 $ 102,525 $ 67,473
Plan assets at fair value (97,566) - (90,095) -
-----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 10,998 66,402 12,430 67,473
Unrecognized net gain (loss) 512 (1,292) (2,527) (2,538)
-----------------------------------------------------------------------------------------------------------------------------
Accrued pension cost (included in other liabilities) $ 11,510 $ 65,110 $ 9,903 $ 64,935
=============================================================================================================================
The components of net periodic pension cost for the years ended December 31,
were as follows (in thousands):
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Service cost (benefits earned during the current period) $ 4,384 $ 3,706
Interest cost on projected benefit obligation 11,788 11,331
Actual return on plan assets (10,230) (15,090)
Net amortization and deferrals (99) 5,438
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost (included in operating expenses) $ 5,843 $ 5,385
===========================================================================================================================
The actuarial assumptions used in determining pension benefit obligations at
December 31, were as follows:
1996 1995
-------------------------------------------------------------------------------------
Discount rate 7.00% 7.75%
Rate of increase in future compensation levels 5.00% 5.00%
Expected long term return on plan assets 7.00% 7.75%
-------------------------------------------------------------------------------------
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.
National Life also sponsors four defined benefit postretirement plans. The plans
provide medical and dental benefits 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 coinsurance. 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.
F-40
104
The plans' combined status at December 31, were as follows (in thousands):
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees $ 13,902 $ 14,003
Fully eligible active plan participants 3,365 2,951
Other active plan participants 7,084 6,456
- ----------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 24,351 23,410
Unrecognized actuarial gain 930 338
Unrecognized prior service cost (1,296) (1,368)
- ----------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost (included in other liabilities) $ 23,985 $ 22,380
======================================================================================================================
The components of net periodic postretirement benefit cost for the years ended
December 31, were as follows (in thousands):
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Service cost (benefits earned during the current period) $ 667 $ 444
Interest cost on accumulated postretirement benefit obligation 1,652 1,518
Amortization of prior service cost over 10 years 72 72
- ---------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost (included in operating expenses) $ 2,391 $ 2,034
=====================================================================================================================
The discount rate used in determining the APBO was 7.0% for 1996 and 1995. The
health care cost trend rates for 1997 are 6.8% and 7.2% for the employee and
agent medical plans, respectively, and 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 $1.1 million and the 1996
service and interest cost components of net periodic postretirement benefit cost
by about $0.1 million.
During 1995 plan amendments were enacted which increased some of the medical
plan benefits for active and retired employees. These changes increased the APBO
by approximately $1.4 million, which is amortized over the average remaining
years of service of the plan participants of ten years.
NOTE 7 - DERIVATIVES
National Life purchases option contracts on the Standard & Poor's 500 (S&P 500)
index to hedge obligations relating to equity indexed annuity products. When the
S&P 500 index increases, increases in the intrinsic value of the purchased
options are offset by increases in equity indexed annuities account values. When
the S&P 500 index decreases, National Life's loss is limited to the premium paid
for the options.
National Life purchases options only from highly rated institutions. 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 and increases in the intrinsic value of purchased options 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.
At December 31, 1996, National Life held purchased options with a notional
amount of $61.1 million. These options had a net book value of $6.5 million,
consisting of $3.0 million of net amortized cost and $3.5 million of intrinsic
value.
F-41
105
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 268,235 $ 268,235 $ 310,905 $ 310,905
Debt and equity securities:
Available-for-sale 4,393,046 4,393,046 3,240,480 3,240,480
Held-to-maturity 590,700 612,417 477,708 519,787
Mortgage loans 907,024 924,732 649,892 706,309
Policy loans 796,193 715,914 735,852 665,151
Derivatives 6,496 5,123 - -
Investment products 2,341,273 2,336,171 872,551 832,013
Debt 82,682 80,149 69,679 70,771
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.
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.
F-42
106
NOTE 9 - DEBT
Debt consists of the following (in thousands):
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
National Life - 8 1/4% Surplus Notes:
$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. $ 69,682 $ 69,679
LSW National Holdings, Inc. - 6.1% Term Note:
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). 13,000
- ---------------------------------------------------------------------------------------------------------------------------
Total debt $ 82,682 $ 69,679
===========================================================================================================================
The aggregate annual maturities of debt for the next five years are as follows:
1997 $ 2,600
1998 4,400
1999 3,000
2000 3,000
2001 -
NOTE 10 - 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 but New York
and has assets of $1.8 billion. LSW's customer focus has been mainly on teachers
and employees of non-profit institutions, with particular concentration in the
west and the southwest.
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.
F-43
107
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 and 1995 are shown in the
table below. These pro forma results are not necessarily indicative of the
actual results which might have occurred had National Life owned LSW since that
date.
1996 1995
- -------------------------------------------------------------------------
Revenues $ 1,026,763 $ 1,060,948
Net income 17,356 45,905
Noncash investing activities relating to the acquisition that are not reflected
in the 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
==================================================================================
NOTE 11 - 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):
1996 1995
----------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- -----------------------------------------------------------------------------------------------
Statutory surplus/net income (loss) $ 305,611 $ 11,684 $ 312,488 $ (3,757)
Asset valuation reserve 57,054 - 55,570 -
Interest maintenance reserve 57,169 1,540 55,629 23,966
Surplus notes (69,681) (3) (69,678) (3)
Non-admitted assets 18,391 - 18,352 -
Investments 18,504 290 5,043 5,191
Deferred policy acquisition costs 443,583 3,970 439,613 2,097
Deferred income taxes 58,737 9,179 42,934 9,341
Policy liabilities (193,798) (9,874) (179,310) (4,335)
Policyowners' dividends 62,528 (1,142) 63,670 2,725
Benefit plans (36,094) 4,403 (38,869) 1,244
Other changes, net (1,963) (2,924) (2,524) 11,529
- -----------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 720,041 $ 17,123 $ 702,918 $ 47,998
===============================================================================================
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.
F-44
108
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VI, Section 2 of the Bylaws of National Life Insurance Company
("National Life" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify directors, officers and
employees of the Company or any other corporation served at the request of the
Company, and their heirs, executors and administrators, shall be indemnified to
the maximum extent permitted by law against all costs and expenses, including
judgments paid, settlement costs, and counsel fees, reasonably incurred in the
defense of any claim in which such person is involved by virtue of his or her
being or having been such a director, officer, or employee.
The Bylaws are filed as Exhibit 1.A.(7) to this Registration Statement.
Vermont law authorizes Vermont corporations to provide indemnification to
directors, officers and other persons.
National Life owns a directors and officers liability insurance policy
covering liabilities that directors and officers of National Life and its
subsidiaries and affiliates may incur in acting as directors and officers.
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or other
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
REPRESENTATION RELATING TO FEES AND CHARGES
National Life Insurance Company ("the Company") hereby represents that the
fees and charges deducted under the variable life insurance policies described
in the prospectuses contained in this registration statement are, in the
aggregate, reasonable in relationship to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
109
PART II
110
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) D. Russell Morgan, Esq.*
(b) Kiri Parankirinathan, A.S.A., M.A.A.A.*
(c) Sutherland, Asbill & Brennan,LLP.*
(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 Provider Policy Form (Sex
Distinct)
(b) Supplemental Term Insurance Rider
(c) Endorsement for Unisex Policies
(6) (a) Charter documents of National Life Insurance Company.**
(b) Bylaws of National Life Insurance Company.**
(7) Not Applicable.
(8) (a) Form of Participation Agreement by and among Market
Street Fund, Inc., National Life Insurance Company and
Equity Services, Inc.***
(a)(2) Form of Amendment No. 2 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company*****
(a)(3) Form of Amendment No. 3 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company) +++
(a)(4) Form of Amendment No. 4 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company)*
111
(b) Form of Participation Agreement by and among The Alger
American Fund, National Life Insurance Company and Fred
Alger and Company***
(b)(2) Form of Amended Schedule A to the Participation
Agreement by and among The Alger American Fund,
National Life Insurance Company and Fred Alger and
Company+
(b)(3) Form of Amendment No. 2 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company and Fred Alger and Company+++
(b)(4) Form of Amendment No. 3 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company and Fred Alger and Company*
(c) Form of Shareholder Services Agreement by and among
National Life Insurance Company and American Century
Investment Management, Inc.*****
(c)(2) Form of Amendment No. 1 to Participation Agreement by
and among National Life Insurance Company and American
Century Investment Management, Inc.*
(d) Form of Participation Agreement by and among National
Life Insurance Company, Goldman Sachs Variable
Insurance Trust and Goldman Sachs & Co.*****
(d)(1) Form of Amended Schedules to the Participation
Agreement by and among National Life Insurance Company,
Goldman Sachs Variable Insurance Trust and Goldman
Sachs & Co.*****
(e) Form of Participation Agreement by and among National
Life Insurance Company and J. P. Morgan Series Trust
II*****
(e)(2) Form of Amendment No. 1 to Participation Agreement by
and among National Life Insurance Company and J. P.
Morgan Series Trust II*
(f) Form of Participation Agreement by and among
National Life Insurance Company, Neuberger & Berman
Advisers Managers Trust, Advisers Managers Trust, and
Neuberger & Berman Management Incorporated*****
(f)(2) Form of Amendment No. 1 to Participation Agreement by
and among National Life Insurance Company, Neuberger &
Berman Advisers Managers Trust, Advisers Managers
Trust, and Neuberger & Berman Management Incorporated*
(g) Form of Participation Agreement by and among National
Life Insurance Company and Strong Variable Insurance
Funds, Inc., Strong Special Fund II, Strong Opportunity
Fund II, Inc., Strong Capital Management, Inc., and
Strong Funds Distributors, Inc. *
(9) Not Applicable.
(10)(a) Sentinel Benefit Provider Application Form.
(11) Memorandum describing issuance, transfer and redemption
procedures.*
2. Opinion and Consent of D. Russell Morgan., as to the legality of the
securities being offered.*
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
112
6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.*
7. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Sutherland, Asbill & Brennan, LLP.*
8. Powers of Attorney for Directors.
A. Robert E. Boardman
B. David R. Coates
C. Benjamin F. Edwards III
D. Earle H. Harbison
E. Roger B. Porter
F. E. Miles Prentice III
G. Thomas P. Salmon
H. A. Gary Shilling
I. Patricia K. Woolf
- -----------------------------
*To be filed by Amendment
**Incorporated herein by reference to the Form S-6 Registration Statement (File
No. 33-91938) for National Variable Life Insurance Account (VariTrak) filed on
May 5, 1995.
***Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement (File No. 33-91938) for National Variable Life
Insurance Account (VariTrak) filed December 29, 1995.
****Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No.33-91938) for National Variable
Life Insurance Account (VariTrak) filed March 12, 1996, Accession Number
0000950133-96-000202
*****Incorporated hereby by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 333-44723) for National Variable
Life Insurance Account (Sentinel Estate Provider filed April 16, 1998),
Accession Number 0000950133-98-001468
+Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
N-4 Registration Statement (file No. 333-19583) for National Variable Annuity
Account II (Sentinel Advantage) filed May 28, 1997.
++Incorporated hereby by referenced to Pre-Effective Amendment No. 1 to the Form
N-4 Registration Statement (File No. 333-47363 ) for LSW Variable Annuity
Account I (RetireMax) filed July 31, 1998.
113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, National Variable Life Insurance Account, has duly caused this
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 November, 1998.
NATIONAL VARIABLE LIFE
INSURANCE ACCOUNT (Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
------------------------- ---------------------------
Christine M. Bilbrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National Life
Insurance Company has duly caused this 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 ___ day of
November, 1998.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
------------------------- ---------------------------
Christine M. Bilbrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
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 11/9/98
- --------------------- and Chief Executive Officer, ---------
Patrick E. Welch and Director
/s/ Thomas H. MacLeay President & Chief Operating 11/9/98
- ----------------------- Officer, and Director ---------
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & 11/9/98
- ----------------------- Chief Financial Officer ---------
William A. Smith
Robert E. Boardman* Director
- ------------------ ---------
Robert E. Boardman
David R. Coates* Director
- ---------------- ---------
David R. Coates
115
Benjamin F. Edwards III* Director
- ----------------------- ------------
Benjamin F. Edwards III
Charles H. Erhart, Jr.* Director
- ---------------------- -------------
Charles H. Erhart, Jr.
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
Thomas P. Salmon* Director
- ----------------- -------------
Thomas P. Salmon
A. Gary Shilling* Director
- ----------------- -------------
A. Gary Shilling
Director
Thomas R. Williams -------------
Patricia K. Woolf* Director
- ------------------ -------------
Patricia K. Woolf
*By /s/ Patrick E. Welch Date: November 9, 1998
-----------------------------
Patrick E. Welch
Pursuant to Power of Attorney
116
EXHIBIT INDEX
1.
A.
(5) (a) Specimen Sentinel Benefit Provider Policy Form (Sex Distinct).
(b) Supplemental Term Insurance Rider
(c) Endorsement for Unisex Policies
(10)(a) Sentinel Benefit Provider Application Form
7. Consent of Independent Accountants.
8. Powers of Attorney for Directors.
A. Robert E. Boardman
B. David R. Coates
C. Benjamin F. Edwards III
D. Earle H. Harbison
E. Roger B. Porter
F. E. Miles Prentice III
G. Thomas P. Salmon
H. A. Gary Shilling
I. Patricia K. Woolf