N-4/A 1 a2202548zn-4a.txt N-4/A As filed with the Securities and Exchange Commission on April 8, 2011 1933 Act Registration No. 333-171096 1940 Act Registration No. 811-09763 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. 1 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 156 /X/ Lincoln New York Account N for Variable Annuities (Exact Name of Registrant) Lincoln ChoicePlusSM Signature LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK (Name of Depositor) 100 Madison Street Suite 1860 Syracuse, NY 13202 (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, Including Area Code: (315) 428-8420 Robert O. Sheppard, Esquire Lincoln Life & Annuity Company of New York 100 Madison Street, Suite 1860 Syracuse, New York 13202 (Name and Address of Agent for Service) Copy to: Mary Jo Ardington, Esquire The Lincoln National Life Insurance Company 1300 South Clinton Street Post Office Box 1110 Fort Wayne, IN 46801 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. Title of Securities being registered: Interests in a separate account under individual flexible payment deferred variable annuity contracts. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) shall determine. Lincoln ChoicePlusSM Signature Lincoln New York Account N for Variable Annuities Individual Variable Annuity Contracts Home Office: Lincoln Life & Annuity Company of New York 100 Madison Street, Suite 1860 Syracuse, NY 13202 www.LincolnFinancial.com Servicing Office: Lincoln Life & Annuity Company of New York PO Box 2348 Fort Wayne, IN 46801-2348 1-888-868-2583 This prospectus describes individual flexible premium deferred variable annuity contracts that are issued by Lincoln Life & Annuity Company of New York. Two separate contracts are offered in this prospectus, each of which has different features and charges. You must choose from one of the following contracts: o ChoicePlusSM Signature 1 o ChoicePlusSM Signature 2 In deciding which contract to purchase, you should consider which features are important to you, and the amount of separate account and surrender charges you are willing to bear relative to your needs. In deciding whether to purchase any of the optional benefits, you should consider the desirability of the benefit relative to its additional cost and to your needs. These contracts are primarily for use with nonqualified plans and qualified retirement plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a variable or fixed amount, if available, or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. In the alternative, you generally may choose to receive a death benefit upon the death of the annuitant. The minimum initial purchase payment for the contract is $10,000. Additional purchase payments may be made to the contract and must be at least $100 per payment ($25 if transmitted electronically), and at least $300 annually. Except as noted below, you choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. If any portion of your contract value is in the fixed account, we promise to pay you your principal and a minimum interest rate. For the life of your contract or during certain periods, we may impose restrictions on the fixed account. The only fixed account available is for dollar cost averaging. All purchase payments (and any applicable persistency credits) for benefits on a variable basis will be placed in Lincoln New York Variable Annuity Account N for Variable Annuities (variable annuity account [VAA]). The VAA is a segregated investment account of Lincoln New York. You take all the investment risk on the contract value and the retirement income for amounts placed into one or more of the contract's variable options. If the subaccounts you select make money, your contract value goes up; if they lose money, it goes down. How much it goes up or down depends on the performance of the subaccounts you select. We do not guarantee how any of the variable options or their funds will perform. Also, neither the U.S. Government nor any federal agency insures or guarantees your investment in the contract. The contracts are not bank deposits and are not endorsed by any bank or government agency. The available funds are listed below: 1 AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Thematic Growth Portfolio AllianceBernstein VPS International Value Portfolio AllianceBernstein VPS Small/Mid Cap Value Portfolio BlackRock Variable Series Funds, Inc. (Class III): BlackRock Global Allocation V.I. Fund Delaware VIP (Reg. TM) Trust (Service Class): Delaware VIP (Reg. TM) Diversified Income Series Delaware VIP (Reg. TM) Emerging Markets Series Delaware VIP (Reg. TM) Limited-Term Diversified Income Series Delaware VIP (Reg. TM) REIT Series Delaware VIP (Reg. TM) Small Cap Value Series Delaware VIP (Reg. TM) Smid Cap Growth Series Delaware VIP (Reg. TM) U.S. Growth Series Delaware VIP (Reg. TM) Value Series DWS Variable Series II (Class B): DWS Alternative Asset Allocation Plus VIP Portfolio Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio Fidelity (Reg. TM) VIP Growth Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Franklin Templeton Variable Insurance Products Trust (Class 2): FTVIPT Franklin Income Securities Fund FTVIPT Mutual Shares Securities Fund Lincoln Variable Insurance Products Trust (Service Class): LVIP Baron Growth Opportunities Fund LVIP BlackRock Inflation Protected Bond Fund LVIP Capital Growth Fund LVIP Cohen & Steers Global Real Estate Fund LVIP Columbia Value Opportunities Fund LVIP Delaware Bond Fund LVIP Delaware Diversified Floating Rate Fund LVIP Delaware Social Awareness Fund LVIP Delaware Special Opportunities Fund LVIP Dimensional Non-U.S. Equity Fund* LVIP Dimensional U.S. Equity Fund* LVIP Global Income Fund LVIP Janus Capital Appreciation Fund LVIP JP Morgan High Yield Fund LVIP MFS International Growth Fund LVIP MFS Value Fund LVIP Mid-Cap Value Fund LVIP Mondrian International Value Fund LVIP Money Market Fund LVIP SSgA Bond Index Fund LVIP SSgA Conservative Index Allocation Fund LVIP SSgA Conservative Structured Allocation Fund LVIP SSgA Developed International 150 Fund LVIP SSgA Emerging Markets 100 Fund LVIP SSgA Global Tactical Allocation Fund LVIP SSgA International Index Fund LVIP SSgA Large Cap 100 Fund LVIP SSgA Moderate Index Allocation Fund LVIP SSgA Moderate Structured Allocation Fund LVIP SSgA Moderately Aggressive Index Allocation Fund LVIP SSgA Moderately Aggressive Structured Allocation Fund LVIP SSgA S&P 500 Index Fund** LVIP SSgA Small-Cap Index Fund LVIP SSgA Small/Mid Cap 200 Fund LVIP T. Rowe Price Growth Stock Fund LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP Templeton Growth Fund LVIP Total Bond Fund* LVIP Turner Mid-Cap Growth Fund LVIP Vanguard Domestic Equity ETF Fund* LVIP Vanguard International Equity ETF Fund* LVIP Wells Fargo Intrinsic Value Fund LVIP Conservative Profile Fund LVIP Moderate Profile Fund LVIP Moderately Aggressive Profile Fund 2 Lincoln Variable Insurance Products Trust (Service Class II): LVIP American Global Growth Fund LVIP American Global Small Capitalization Fund LVIP American Growth Fund LVIP American Growth Income Fund LVIP American International Fund MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Growth Series MFS (Reg. TM) VIT Utilities Series PIMCO Variable Insurance Trust (Advisor Class): PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio *Refer to Description of Funds for specific information regarding the availability of funds. **"S&P 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing the product. (Please see the Statement of Additional Information which sets forth additional disclaimers and limitations of liability on behalf of S&P.) This prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectuses for the funds that accompany this prospectus, and keep all prospectuses for future reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI is incorporated by reference into this prospectus and is legally part of this prospectus. For a free copy of the SAI, write: Lincoln Life & Annuity Company of New York, PO Box 2348, Fort Wayne, IN 46801-2348, or call 1-888-868-2583. The SAI and other information about Lincoln New York and the VAA are also available on the SEC's website (http://www.sec.gov). There is a table of contents for the SAI on the last page of this prospectus. April 29, 2011 3 Table of Contents
Item Page Special Terms 5 Expense Tables 7 Summary of Common Questions 14 Lincoln Life & Annuity Company of New York 16 Variable Annuity Account (VAA) 17 Investments of the Variable Annuity Account 17 Charges and Other Deductions 22 The Contracts 29 Contracts Offered in this Prospectus 29 Purchase Payments 30 Persistency Credits 30 Transfers On or Before the Annuity Commencement Date 31 Surrenders and Withdrawals 34 Death Benefit 35 Investment Requirements 38 Living Benefit Riders 39 Lincoln Lifetime IncomeSM Advantage 2.0 39 Lincoln SmartSecurity (Reg. TM) Advantage 48 i4LIFE (Reg. TM) Advantage 53 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 57 4LATER (Reg. TM) Advantage 61 Annuity Payouts 65 Fixed Side of the Contract 67 Distribution of the Contracts 70 Federal Tax Matters 70 Additional Information 75 Voting Rights 75 Return Privilege 76 Other Information 76 Legal Proceedings 76 Contents of the Statement of Additional Information (SAI) for Lincoln New York Account N for Variable Annuities 78
4 Special Terms In this prospectus, the following terms have the indicated meanings: 4LATER (Reg. TM) Advantage or 4LATER (Reg. TM) - An option that provides an Income Base during the accumulation period, which can be used to establish a Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage in the future. Account or variable annuity account (VAA) - The segregated investment account, Account N, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus. Account Value - Under i4LIFE (Reg. TM) Advantage, the initial Account Value is the contract value on the valuation date that i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value on a valuation date equals the total value of all of the contractowner's accumulation units plus the contractowner's value in the fixed account, reduced by regular income payments, Guaranteed Income Benefit payments, and withdrawals. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date and to calculate the i4LIFE (Reg. TM) Advantage Account Value during the Access Period. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout - An amount paid at regular intervals after the annuity commencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person you choose to receive any death benefit paid if you die before the annuity commencement date. Contractowner (you, your, owner) - The person who can exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the contractowner is the annuitant. Contract value (may be referenced to as account value in marketing materials) - At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract, if any. Contract year - Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit - Before the annuity commencement date, the amount payable to your designated beneficiary if the contractowner dies or, if selected, to the contractowner if the annuitant dies. See The Contracts - Death Benefit for a description of the various death benefit options. Earnings - The excess of contract value over persistency credits and purchase payments which have not yet been withdrawn from the contract. Good Order - The actual receipt at our Servicing Office of the requested transaction in writing or by other means we accept, along with all information and supporting legal documentation necessary to effect the transaction. The forms we provide will identify the necessary documentation. We may, in our sole discretion, determine whether any particular transaction request is in good order, and we reserve the right to change or waive any good order requirements at any time. Guaranteed Income Benefit - An option that provides a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. The calculation of the Guaranteed Income Benefit or the features applicable to the Guaranteed Income Benefit may vary based on the rider provisions applicable to certain contractowners. i4LIFE (Reg. TM) Advantage - An income program which combines periodic variable lifetime income payments with the ability to make withdrawals during a defined period. Lincoln New York (we, us, our) - Lincoln Life & Annuity Company of New York. Lincoln Lifetime IncomeSM Advantage 2.0 - Provides minimum guaranteed periodic withdrawals and income that may increase based on automatic enhancements and age-based increases to the income amount, regardless of the investment performance of the contract and provided certain conditions are met. Lincoln SmartSecurity (Reg. TM) Advantage - Provides minimum guaranteed periodic withdrawals for life, regardless of the investment performance of the contract and provided certain conditions are met, that may increase due to subsequent purchase payments and step-ups. Living Benefit - A general reference to certain riders that may be available for purchase that provide some type of a minimum guarantee while you are alive. These riders are the Lincoln SmartSecurity (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage 2.0, 4LATER (Reg. TM) Advantage, and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit). If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you may be subject to Investment Requirements. Persistency credit - If you select the Signature 2 contract, the additional amount credited to the contract after a specified contract anniversary. 5 Purchase payments - Amounts paid into the contract other than persistency credits. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 6 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options, and/or (if available) the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses:
Signature 1 Signature 2 Surrender charge (as a percentage of purchase payments surrendered/withdrawn):1 7.0% 7.0% Transfer charge:2 up to $25 up to $25 We also may apply an interest adjustment to amounts being withdrawn, surrendered or transferred from a guaranteed period account (except for dollar cost averaging and regular income payments under i4LIFE (Reg. TM) Advantage). See Fixed Side of the Contract.
1 For Signature 1, the surrender charge percentage is reduced over a 7-year period at the following rates: 7%, 7%, 6%, 6%, 5%, 4%, 3%. For Signature 2, the surrender charge percentage is reduced over a 4-year period at the following rate: 7%, 7%, 6%, 6%. We may reduce or waive this charge in certain situations. See Charges and Other Deductions - Surrender Charge. 2 The transfer charge will not be imposed on the first 12 transfers during a contract year. We reserve the right to charge a $25 fee for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross reinvestment transfers. The next table describes the fees and expenses that you will pay periodically during the time that you own the contract, not including fund fees and expenses. Periodic Charges for the Base Contract:
Signature 1 Signature 2 Annual Account Fee:1 $35 $35 Separate Account Annual Expenses (as a percentage of average daily net assets in the subaccounts): Account Value Death Benefit Mortality and Expense Risk Charge 1.15% 1.50% Administrative Charge 0.10% 0.10% Total Separate Account Expenses 1.25% 1.60% Guarantee of Principal Death Benefit Mortality and Expense Risk Charge 1.20% 1.55% Administrative Charge 0.10% 0.10% Total Separate Account Expenses 1.30% 1.65% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Mortality and Expense Risk Charge 1.45% 1.80% Administrative Charge 0.10% 0.10% Total Separate Account Expenses 1.55% 1.90%
1 The account fee will be waived if your contract value is $100,000 or more at the end of any particular contract year. This account fee will be waived after the fifteenth contract year. 7 Optional Living Benefit Rider charges are set forth below.
Optional Living Benefit Rider Charges - Other Than i4LIFE (Reg. TM) Advantage: Only one Living Benefit rider may be elected from this grouping. These charges apply to both the Signa- ture 1 and Signature 2 contracts and are added to the periodic charges for the base contract described above. Single Life Joint Life Lincoln Lifetime IncomeSM Advantage 2.0:1 Guaranteed Maximum Charge 2.00% 2.00% Current Charge 1.05% 1.25% Lincoln SmartSecurity (Reg. TM) Advantage:2 Guaranteed Maximum Charge 1.50% 1.50% Current Charge 0.65% 0.80% 4LATER (Reg. TM) Advantage:3 Guaranteed Maximum Charge 1.50% N/A Current Charge 0.65%
1 As an annualized percentage of the Income Base (initial purchase payment or contract value at the time of election), as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and decreased by Excess Withdrawals. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 Charge for a discussion of these changes to the Income Base. This charge is deducted from the contract value on a quarterly basis. 2 As an annualized percentage of the Guaranteed Amount (initial purchase payment or contract value at the time of election), as increased for subsequent purchase payments and step-ups and decreased for withdrawals. See Charges and Other Deductions - Lincoln SmartSecurity (Reg. TM) Advantage charge for further information. This charge is deducted from the contract value on a quarterly basis. 3 As an annualized percentage of the Income Base (initial purchase payment or contract value at the time of election), as increased for subsequent purchase payments, automatic 15% Enhancements, and Resets and decreased for withdrawals. See Charges and Other Deductions - 4LATER (Reg. TM) Advantage charge for further information. This charge is deducted from the subaccounts on a quarterly basis.
Optional Living Benefit Rider Charges - i4LIFE (Reg. TM) Advantage: i4LIFE (Reg. TM) Advantage can be elected with or without one of the following Guaranteed Income Benefits. It cannot be elected with any other Living Benefit rider except as set forth below. i4LIFE (Reg. TM) Advantage Without Guaranteed Income Benefit (version 4):* These charges replace the Separate Account Annual Expenses for the base contract. Signature 1 Signature 2 Account Value Death Benefit 1.65% 2.00% Guarantee of Principal Death Benefit 1.70% 2.05% Enhanced Guaranteed Minimum Death Benefit (EGMDB) 1.95% 2.30%
* As an annualized percentage of Account Value (contract value on the effective date of i4LIFE (Reg. TM)Advantage), computed daily. This charge is assessed only on and after the periodic income commencement date. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage charge for further information.
i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4):* These charges replace the Separate Account Annual Expenses for the base contract. Signature 1 Single Life Joint Life Account Value Death Benefit Guaranteed Maximum Charge 3.65% 3.65% Current Charge 2.30% 2.50% Guarantee of Principal Death Benefit Guaranteed Maximum Charge 3.70% 3.70% Current Charge 2.35% 2.55% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Guaranteed Maximum Charge 3.95% 3.95% Current Charge 2.60% 2.80% i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4):* These charges replace the Separate Account Annual Expenses for the base contract. Signature 2 Single Life Joint Life Account Value Death Benefit Guaranteed Maximum Charge 4.00% 4.00% Current Charge 2.65% 2.85% Guarantee of Principal Death Benefit Guaranteed Maximum Charge 4.05% 4.05% Current Charge 2.70% 2.90% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Guaranteed Maximum Charge 4.30% 4.30% Current Charge 2.95% 3.15%
* As an annualized percentage of Account Value, computed daily. This charge is assessed only on and after the periodic income commencement date. The percentage charge will change to the current charge in effect at the time of an automatic step-up of the Guaranteed Income Benefit, not to exceed the guaranteed 8 maximum charge percentage. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) charge for further information.
i4LIFE (Reg. TM) Advantage With 4LATER (Reg. TM) Advantage Guaranteed Income Benefit for purchasers who previously purchased 4LATER (Reg. TM) Advantage:* These charges replace the Separate Account Annual Expenses for the base contract. Signature 1 Signature 2 Account Value Death Benefit Guaranteed Maximum Charge 3.15% 3.50% Current Charge 2.30% 2.65% Guarantee of Principal Death Benefit Guaranteed Maximum Charge 3.20% 3.55% Current Charge 2.35% 2.70% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Guaranteed Maximum Charge 3.45% 3.80% Current Charge 2.60% 2.95%
* As an annualized percentage of Account Value, computed daily. This charge is assessed only on and after the periodic income commencement date. The percentage charge will change to the current charge in effect upon election of a new step-up period, not to exceed the guaranteed maximum charge percentage. See Charges and Other Deductions - 4LATER (Reg. TM) Advantage Guaranteed Income Benefit for further information.
i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4) for purchasers who pre- viously purchased Lincoln Lifetime IncomeSM Advantage 2.0: These charges replace the Separate Account Annual Expenses for the base contract. Signature 1 Single Life Joint Life Account Value Death Benefit* 1.25% 1.25% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge** Guarantee of Principal Death Benefit* 1.30% 1.30% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge** Enhanced Guaranteed Minimum Death Benefit (EGMDB)* 1.55% 1.55% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge** i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4) for purchasers who pre- viously purchased Lincoln Lifetime IncomeSM Advantage 2.0: These charges replace the Separate Account Annual Expenses for the base contract. Signature 2 Single Life Joint Life Account Value Death Benefit* 1.60% 1.60% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge** Guarantee of Principal Death Benefit* 1.65% 1.65% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge** Enhanced Guaranteed Minimum Death Benefit (EGMDB)* 1.90% 1.90% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Plus 2.00% Plus 2.00% Guaranteed Maximum Charge**
* As a percentage of daily net assets in the subaccounts. This charge is assessed on and after the periodic income commencement date. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. ** As an annualized percentage of the greater of the Income Base carried over from Lincoln Lifetime IncomeSM Advantage 2.0 (less the Guaranteed Annual Income amounts paid since the last Step-up) or contract value prior to electing i4LIFE (Reg. TM) Advantage. For previous purchasers of Lincoln Lifetime IncomeSM Advantage 2.0, the current charges for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) are 1.05% for the single life and 1.25% for the joint life option. This charge is deducted from contract value on a quarterly basis and only on and after the periodic income commencement date. The charge may be increased upon an automatic annual step-up and decreased upon an Excess Withdrawal. See Charges and Other Deductions- i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. The next table describes the separate account annual expenses (as a percentage of average daily net assets in the subaccounts) you pay on and after the annuity commencement date: Periodic Charges on and after the Annuity Commencement Date
Signature 1 Signature 2 Mortality and expense risk charge and administrative charge 1.25% 1.40
The next table describes the maximum Unscheduled Payment charge for the Lincoln SmartIncomeSM Inflation on and after the annuity commencement date:
Maximum Lincoln SmartIncomeSM Inflation Unscheduled Payment charge (as a percentage of the Unscheduled Payment) 7.0%
The Unscheduled Payment charge percentage is reduced over time. The later the Unscheduled Payment occurs, the lower the charge with respect to that Unscheduled Payment. A new Rider Year starts on each Rider Date anniversary. The charge is applied only to amounts in excess of the annual 10% Reserve Value free amount. See Charges and Other Deductions - Charges for Lincoln SmartIncomeSM Inflation. See The Contracts - Annuity Payouts for a detailed description of Lincoln SmartIncomeSM Inflation. 9 The next item shows the minimum and maximum total annual operating expenses charged by the funds that you may pay periodically during the time that you own the contract. The expenses are for the year ended December 31, 2010. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Maximum Minimum --------- -------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses): 2.58% 0.55% Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 2.14% 0.55%
* 42 of the funds have entered into contractual waiver or reimbursement arrangements that may reduce fund management and other fees and/or expenses during the period of the arrangement. These arrangements vary in length, but no arrangement will terminate before April 30, 2012. The following table shows the expenses charged by each fund for the year ended December 31, 2010: (as a percentage of each fund's average net assets):
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + AllianceBernstein VPS Global Thematic Growth Portfolio 0.75 % 0.25 % 0.24 % AllianceBernstein VPS International Value Portfolio 0.75 0.25 0.10 AllianceBernstein VPS Small/Mid Cap Value Portfolio 0.75 0.25 0.09 BlackRock Global Allocation V.I. Fund 0.65 0.25 0.06 Delaware VIP (Reg. TM) Diversified Income Series(1) 0.60 0.30 0.10 Delaware VIP (Reg. TM) Emerging Markets Series(1) 1.25 0.30 0.15 Delaware VIP (Reg. TM) Limited-Term Diversified Income Series(1) 0.50 0.30 0.10 Delaware VIP (Reg. TM) REIT Series(1) 0.75 0.30 0.12 Delaware VIP (Reg. TM) Small Cap Value Series(1) 0.73 0.30 0.10 Delaware VIP (Reg. TM) Smid Cap Growth Series(1) 0.75 0.30 0.14 Delaware VIP (Reg. TM) U.S. Growth Series(1) 0.65 0.30 0.10 Delaware VIP (Reg. TM) Value Series(1) 0.65 0.30 0.10 DWS Alternative Asset Allocation Plus VIP Portfolio(2) 0.24 0.25 0.70 Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio(3) 0.56 0.25 0.09 Fidelity (Reg. TM) VIP Growth Portfolio 0.56 0.25 0.11 Fidelity (Reg. TM) VIP Mid Cap Portfolio(4) 0.56 0.25 0.10 FTVIPT Franklin Income Securities Fund 0.45 0.25 0.02 FTVIPT Mutual Shares Securities Fund 0.60 0.25 0.14 LVIP American Global Growth Fund(5) 0.53 0.55 0.48 LVIP American Global Small Capitalization Fund(5) 0.71 0.55 0.45 LVIP American Growth Fund(5) 0.32 0.55 0.15 LVIP American Growth-Income Fund(5) 0.27 0.55 0.19 LVIP American International Fund(5) 0.49 0.55 0.27 LVIP Baron Growth Opportunities Fund(6) 1.00 0.25 0.09 LVIP BlackRock Inflation Protected Bond Fund 0.45 0.25 0.10 LVIP Capital Growth Fund 0.72 0.25 0.09 LVIP Cohen & Steers Global Real Estate Fund(7) 0.95 0.25 0.15 LVIP Columbia Value Opportunities Fund(8) 1.05 0.25 0.21 LVIP Delaware Bond Fund 0.32 0.35 0.07 LVIP Delaware Diversified Floating Rate Fund 0.60 0.25 0.18 Total Expenses Total (after Expenses Total Contractu (before Contractual ua Acquired any waivers/ waivers/ Fund waivers/ reimburse- reimburse Fees and reimburse- ments e- Expenses = ments) (if any) ments) AllianceBernstein VPS Global Thematic Growth Portfolio 0.00 % 1.24 % AllianceBernstein VPS International Value Portfolio 0.00 1.10 AllianceBernstein VPS Small/Mid Cap Value Portfolio 0.00 1.09 BlackRock Global Allocation V.I. Fund 0.02 0.98 Delaware VIP (Reg. TM) Diversified Income Series(1) 0.00 1.00 -0.05 % 0.95 % Delaware VIP (Reg. TM) Emerging Markets Series(1) 0.00 1.70 -0.05 1.65 Delaware VIP (Reg. TM) Limited-Term Diversified Income Series(1) 0.00 0.90 -0.05 0.85 Delaware VIP (Reg. TM) REIT Series(1) 0.00 1.17 -0.05 1.12 Delaware VIP (Reg. TM) Small Cap Value Series(1) 0.00 1.13 -0.05 1.08 Delaware VIP (Reg. TM) Smid Cap Growth Series(1) 0.00 1.19 -0.05 1.14 Delaware VIP (Reg. TM) U.S. Growth Series(1) 0.00 1.05 -0.05 1.00 Delaware VIP (Reg. TM) Value Series(1) 0.00 1.05 -0.05 1.00 DWS Alternative Asset Allocation Plus VIP Portfolio(2) 1.39 2.58 -0.44 2.14 Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio(3) 0.00 0.90 Fidelity (Reg. TM) VIP Growth Portfolio 0.00 0.92 Fidelity (Reg. TM) VIP Mid Cap Portfolio(4) 0.00 0.91 FTVIPT Franklin Income Securities Fund 0.00 0.72 FTVIPT Mutual Shares Securities Fund 0.00 0.99 LVIP American Global Growth Fund(5) 0.00 1.56 -0.35 1.21 LVIP American Global Small Capitalization Fund(5) 0.00 1.71 -0.31 1.40 LVIP American Growth Fund(5) 0.00 1.02 -0.03 0.99 LVIP American Growth-Income Fund(5) 0.00 1.01 -0.07 0.94 LVIP American International Fund(5) 0.00 1.31 -0.13 1.18 LVIP Baron Growth Opportunities Fund(6) 0.00 1.34 -0.05 1.29 LVIP BlackRock Inflation Protected Bond Fund 0.02 0.82 LVIP Capital Growth Fund 0.00 1.06 LVIP Cohen & Steers Global Real Estate Fund(7) 0.00 1.35 -0.22 1.13 LVIP Columbia Value Opportunities Fund(8) 0.00 1.51 -0.09 1.42 LVIP Delaware Bond Fund 0.00 0.74 LVIP Delaware Diversified Floating Rate Fund 0.00 1.03
10
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + LVIP Delaware Social Awareness Fund 0.39 % 0.35 % 0.08 % LVIP Delaware Special Opportunities Fund 0.40 0.35 0.08 LVIP Dimensional Non-U.S. Equity Fund(9) 0.25 0.25 0.55 LVIP Dimensional U.S. Equity Fund(9) 0.25 0.25 0.55 LVIP Global Income Fund(10) 0.65 0.25 0.15 LVIP Janus Capital Appreciation Fund(12) 0.75 0.25 0.09 LVIP J.P. Morgan High Yield Fund(11) 0.65 0.25 0.21 LVIP MFS International Growth Fund(13) 0.90 0.25 0.15 LVIP MFS Value Fund 0.64 0.25 0.07 LVIP Mid-Cap Value Fund(14) 0.94 0.25 0.14 LVIP Mondrian International Value Fund 0.74 0.25 0.11 LVIP Money Market Fund 0.36 0.25 0.06 LVIP SSgA Bond Index Fund(15) 0.40 0.25 0.09 LVIP SSgA Conservative Index Allocation Fund(16) 0.25 0.25 0.50 LVIP SSgA Conservative Structured Allocation Fund(16) 0.25 0.25 0.18 LVIP SSgA Developed International 150 Fund(17) 0.75 0.25 0.18 LVIP SSgA Emerging Markets 100 Fund(18) 1.09 0.25 0.21 LVIP SSgA Global Tactical Allocation Fund 0.25 0.25 0.14 LVIP SSgA International Index Fund(19) 0.40 0.25 0.24 LVIP SSgA Large Cap 100 Fund(20) 0.52 0.25 0.07 LVIP SSgA Moderate Index Allocation Fund(21) 0.25 0.25 0.27 LVIP SSgA Moderate Structured Allocation Fund(21) 0.25 0.25 0.07 LVIP SSgA Moderately Aggressive Index Allocation Fund(21) 0.25 0.25 0.21 LVIP SSgA Moderately Aggressive Structured Allocation Fund(21) 0.25 0.25 0.10 LVIP SSgA Small/Mid Cap 200 Fund(22) 0.69 0.25 0.12 LVIP SSgA S&P 500 Index Fund 0.22 0.25 0.08 LVIP SSgA Small-Cap Index Fund 0.32 0.25 0.12 LVIP T. Rowe Price Growth Stock Fund 0.71 0.25 0.08 LVIP T. Rowe Price Structured Mid-Cap Growth Fund 0.74 0.25 0.09 LVIP Templeton Growth Fund 0.73 0.25 0.10 LVIP Total Bond Fund(23) 0.25 0.25 0.55 LVIP Turner Mid-Cap Growth Fund(24) 0.88 0.25 0.18 LVIP Vanguard Domestic Equity ETF Fund(25) 0.25 0.25 0.55 LVIP Vanguard International Equity ETF Fund(25) 0.25 0.25 0.55 LVIP Wells Fargo Intrinsic Value Fund(26) 0.75 0.25 0.09 LVIP Conservative Profile Fund 0.25 0.25 0.05 LVIP Moderate Profile Fund 0.25 0.25 0.03 LVIP Moderately Aggressive Profile Fund 0.25 0.25 0.04 MFS (Reg. TM) VIT Growth Series 0.75 0.25 0.10 MFS (Reg. TM) VIT Utilities Series 0.73 0.25 0.08 PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio(27) 0.74 0.25 0.04 Total Expenses Total (after Expenses Total Contractu (before Contractual ua Acquired any waivers/ waivers/ Fund waivers/ reimburse- reimburse Fees and reimburse- ments e- Expenses = ments) (if any) ments) LVIP Delaware Social Awareness Fund 0.00 % 0.82 % LVIP Delaware Special Opportunities Fund 0.00 0.83 LVIP Dimensional Non-U.S. Equity Fund(9) 0.48 1.53 -0.50 % 1.03 % LVIP Dimensional U.S. Equity Fund(9) 0.29 1.34 -0.50 0.84 LVIP Global Income Fund(10) 0.00 1.05 -0.05 1.00 LVIP Janus Capital Appreciation Fund(12) 0.00 1.09 -0.08 1.01 LVIP J.P. Morgan High Yield Fund(11) 0.00 1.11 -0.04 1.07 LVIP MFS International Growth Fund(13) 0.00 1.30 -0.05 1.25 LVIP MFS Value Fund 0.00 0.96 LVIP Mid-Cap Value Fund(14) 0.00 1.33 -0.04 1.29 LVIP Mondrian International Value Fund 0.00 1.10 LVIP Money Market Fund 0.00 0.67 LVIP SSgA Bond Index Fund(15) 0.01 0.75 -0.09 0.66 LVIP SSgA Conservative Index Allocation Fund(16) 0.16 1.16 -0.55 0.61 LVIP SSgA Conservative Structured Allocation Fund(16) 0.17 0.85 -0.23 0.62 LVIP SSgA Developed International 150 Fund(17) 0.00 1.18 -0.38 0.80 LVIP SSgA Emerging Markets 100 Fund(18) 0.00 1.55 -0.72 0.83 LVIP SSgA Global Tactical Allocation Fund 0.63 1.27 LVIP SSgA International Index Fund(19) 0.00 0.89 -0.03 0.86 LVIP SSgA Large Cap 100 Fund(20) 0.00 0.84 -0.18 0.66 LVIP SSgA Moderate Index Allocation Fund(21) 0.17 0.94 -0.32 0.62 LVIP SSgA Moderate Structured Allocation Fund(21) 0.17 0.74 -0.12 0.62 LVIP SSgA Moderately Aggressive Index Allocation Fund(21) 0.18 0.89 -0.26 0.63 LVIP SSgA Moderately Aggressive Structured Allocation Fund(21) 0.18 0.78 -0.15 0.63 LVIP SSgA Small/Mid Cap 200 Fund(22) 0.00 1.06 -0.29 0.77 LVIP SSgA S&P 500 Index Fund 0.00 0.55 LVIP SSgA Small-Cap Index Fund 0.00 0.69 LVIP T. Rowe Price Growth Stock Fund 0.00 1.04 LVIP T. Rowe Price Structured Mid-Cap Growth Fund 0.00 1.08 LVIP Templeton Growth Fund 0.00 1.08 LVIP Total Bond Fund(23) 0.19 1.24 -0.50 0.74 LVIP Turner Mid-Cap Growth Fund(24) 0.00 1.31 -0.08 1.23 LVIP Vanguard Domestic Equity ETF Fund(25) 0.14 1.19 -0.50 0.69 LVIP Vanguard International Equity ETF Fund(25) 0.26 1.31 -0.50 0.56 LVIP Wells Fargo Intrinsic Value Fund(26) 0.00 1.09 -0.05 1.04 LVIP Conservative Profile Fund 0.65 1.20 LVIP Moderate Profile Fund 0.73 1.26 LVIP Moderately Aggressive Profile Fund 0.76 1.30 MFS (Reg. TM) VIT Growth Series 0.00 1.10 MFS (Reg. TM) VIT Utilities Series 0.00 1.06 PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio(27) 0.12 1.15 -0.12 1.03
11 (1) The Service Class shares are subject to a 12b-1 fee of 0.30% of average daily net assets. The Series' distributor, Delaware Distributors, L.P., has contracted to limit the 12b-1 fees to no more than 0.25% of average daily net assets from April 29, 2011 to April 30, 2012. (2) Through April 30, 2012, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses of the fund to the extent necessary to maintain the fund's operating expenses at 0.75% for Class B shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and acquired funds (underlying funds) fees and expenses (estimated at 1.39%). The agreement may be terminated with the consent of the fund's Board. (3) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.90% for Service Class 2. These offsets may be discontinued at any time. (4) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the funds' custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.91% for Service Class 2. These offsets may be discontinued at any time. (5) The amounts set forth under "Management Fee" and "Other Expenses" reflect the aggregate expenses of the Feeder Fund and the Master Fund. Other Expenses are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class II to the extent that the Other Expenses of the Feeder Fund exceed 0.10% of average daily net assets. The agreement will continue at least through April 30, 2012. (6) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.29% of the average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (7) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.22% of the first $250 million of average net assets of the fund and 0.32% of the excess over $250 million of average daily nets assets of the fund. The agreement will continue at least through April 30, 2012. (8) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.09% on the first $60 million of average daily net assets of the Fund. The agreement will continue at least through April 30, 2012. (9) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (10) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (11) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.07% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (12) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.15% on the first $100 million of average daily net assets of the Fund; and 0.10% on the next $150 million of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (13) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% on the first $400 million of average daily net assets of the Fund. The agreement will continue at least through April 30, 2012. (14) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% of the first $25 million of average net assets of the Fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the Fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (15) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.07% on the first $500 million of average daily net assets of the fund and 0.12% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2012. (16) Other Expenses and AFFE are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.45% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (17) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.35% on the first $100 million of average daily net assets of the fund and 0.43% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (18) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.69% on the first $100 million of average daily net assets of the Fund and 0.76% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (19) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.03% on the first $500 million of average daily net assets of the fund and 0.05% of average daily net assets of the fund in excess of $500 million. The agreement will continue at least through April 30, 2012. (20) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.12% on the first $100 million of average daily net assets of the fund and 0.22% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (21) Other Expenses and AFFE are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.45% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (22) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.29% on the first $100 million of average daily net assets of the fund and 0.39% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (23) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (24) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund; 0.10% on the first $25 million of average daily net assets of the fund and 0.05% on the 12 next $50 million of average daily net assets. The agreement will continue at least through April 30, 2012. (25) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (26) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.03% on the first $250 million of average daily net assets of the fund; 0.08% on the next $500 million and 0.13% of average daily net assets in excess of $750 million. The agreement will continue at least through April 30, 2012. (27) PIMCO has contractually agreed to waive the Portfolio's advisory fee and the supervisory and administrative fee in an amount equal to the management fee and administration services fee, respectively, paid by the PIMCO Cayman Commodity Portfolio I Ltd. (the "Subsidiary") to PIMCO. The Subsidiary pays PIMCO a management fee and an administrative services fee at the annual rates of 0.49% and 0.20%, respectively, of its net assets. This waiver may not be terminated by PIMCO and will be in effect through at least May 1, 2012 and will remain in effect as long as PIMCO's contract with the Subsidiary is in place. Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase ("redemption fees") which are not reflected in the table above. As of the date of this prospectus, none have done so. See The Contracts - Market Timing for a discussion of redemption fees. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. EXAMPLES This Example is intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include contractowner transaction expenses, contract fees, separate account annual expenses, and fund fees and expenses. The Example assumes that you invest $10,000 in a Signature 1 contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year, the maximum fees and expenses of any of the funds and that the EGMDB and Lincoln Lifetime IncomeSM Advantage 2.0 at the guaranteed maximum charge are in effect. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ----------- --------- --------- --------- $1,315 $2,460 $3,625 $6,377
2) If you annuitize or do not surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years -------- --------- --------- --------- $615 $1,860 $3,125 $6,377
The Example assumes that you invest $10,000 in a Signature 2 contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year, the maximum fees and expenses of any of the funds and that the EGMDB and Lincoln Lifetime IncomeSM Advantage 2.0 at the guaranteed maximum charge are in effect. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ----------- --------- --------- --------- $1,349 $2,556 $3,276 $6,626
2) If you annuitize or do not surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years -------- --------- --------- --------- $649 $1,956 $3,276 $6,626
For more information, see Charges and Other Deductions in this prospectus, and the prospectus for the funds. Premium taxes may also apply, although they do not appear in the examples. The examples do not reflect persistency credits. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income payments or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage, Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage, 4LATER (Reg. TM) Guaranteed Income Benefit and Annuity Payouts. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. 13 Summary of Common Questions What kind of contract am I buying? It is an individual variable and interest adjusted, if applicable, annuity contract between you and Lincoln New York. This prospectus primarily describes the variable side of the contract. You may purchase either of the contracts offered in this prospectus: ChoicePlusSM Signature 1 and ChoicePlusSM Signature 2. As described in this prospectus, the Signature 1 contract provides for lower mortality and expense risk charges and a longer surrender charge period than the Signature 2 contract. The Signature 2 contract provides persistency credits after the fourth contract anniversary. See The Contracts - Contracts Offered in this Prospectus. What is the variable annuity account (VAA)? It is a separate account we established under New York insurance law, and registered with the SEC as a unit investment trust. VAA assets are allocated to one or more subaccounts, according to your investment choices. VAA assets are not chargeable with liabilities arising out of any other business which we may conduct. See Variable Annuity Account. What are Investment Requirements? If you elect one of the following riders: Lincoln Lifetime IncomeSM Advantage 2.0, 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, you will be subject to certain requirements for your subaccount investments. You will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. What are my investment choices? Based upon your instruction for purchase payments, the VAA applies your purchase payments (and any applicable persistency credits) to buy shares in one or more of the investment options. In turn, each fund holds a portfolio of securities consistent with its investment policy. See Investments of the Variable Annuity Account - Description of the Funds. You may also allocate purchase payments to the fixed account. Who invests my money? Several different investment advisers manage the investment options. See Investments of the Variable Annuity Account - Description of the Funds. How does the contract work? If we approve your application, we will send you a contract. When you make purchase payments during the accumulation phase, you buy accumulation units. If you decide to receive an annuity payout, your accumulation units are converted to annuity units. Your annuity payouts will be based on the number of annuity units you receive and the value of each annuity unit on payout days. See The Contracts. What charges do I pay under the contract? We apply a charge to the daily net asset value of the VAA that consists of a mortality and expense risk charge according to the death benefit you select. There is an administrative charge in addition to the mortality and expense risk charge. The charges for any riders applicable to your contract will also be deducted from your contract value. See Charges and Other Deductions. If you withdraw purchase payments, you may pay a surrender charge of a certain percentage of the surrendered or withdrawn purchase payment, depending upon which contract you have purchased, and how long those payments have been invested in the contract. For purposes of calculating surrender charges, we assume that all withdrawals prior to the seventh anniversary of Signature 1 and the fourth anniversary of Signature 2 come first from purchase payments. We may waive surrender charges in certain situations. See Charges and Other Deductions-Surrender Charge. We reserve the right to charge a $25 fee for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross-reinvestment transfers. The transfer charge will not be imposed on the first 12 transfers during the contract year. We will deduct any applicable premium tax from purchase payments or contract value, unless the governmental entity dictates otherwise, at the time the tax is incurred or at another time we choose. See Expense Tables and Charges and Other Deductions for additional fees and expenses in these contracts. The funds' investment management fees, expenses and expense limitations, if applicable, are more fully described in the prospectuses for the funds. The surrender, withdrawal or transfer of value from a fixed account guaranteed period may be subject to the interest adjustment, if applicable. See Fixed Side of the Contract. Charges may also be imposed during the regular income or annuity payout period, including i4LIFE (Reg. TM) Advantage, if elected. See The Contracts and Annuity Payouts. For information about the compensation we pay for sales of contracts, see The Contracts - Distribution of the Contracts. What purchase payments do I make, and how often? Subject to the minimum and maximum payment amounts, your payments are completely flexible. Please check with your investment representative about making additional purchase payments since the requirements of your state may vary. See The Contracts - Purchase Payments. 14 What is a persistency credit? If you purchase the Signature 2 contract, a persistency credit of 0.0875% of contract value less purchase payments that have been in the contract less than four years will be credited on a quarterly basis after the fourth anniversary. See The Contracts - Persistency Credits. Annuity contracts that have no provision for persistency credits may have lower mortality and expense risk charges and/or lower surrender charges. We encourage you to talk with your financial adviser and determine which annuity contract is most appropriate for you. How will my annuity payouts be calculated? If you decide to annuitize, you may select an annuity option and start receiving annuity payouts from your contract as a fixed option or variable option or a combination of both. See Annuity Payouts - Annuity Options. Remember that participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios. What happens if I die before I annuitize? Your beneficiary will receive death benefit proceeds based upon the death benefit you select. Your beneficiary has options as to how the death benefit is paid. In the alternative, you may choose to receive a death benefit on the death of the annuitant. See The Contracts - Death Benefit. May I transfer contract value between variable options and between the variable and fixed sides of the contract? Yes, subject to currently effective restrictions. For example, transfers made before the annuity commencement date are generally restricted to no more than twelve (12) per contract year. See The Contracts - Transfers On or Before the Annuity Commencement Date and Transfers After the Annuity Commencement Date. See also the Fixed Side of the Contract. Transfers from the fixed account may be subject to an interest adjustment. What are Living Benefit Riders? Living Benefit riders are optional riders available to purchase for an additional fee. These riders provide different types of minimum guarantees if you meet certain conditions. These riders are the Lincoln SmartSecurity (Reg. TM) Advantage (a withdrawal benefit rider) and Lincoln Lifetime IncomeSM Advantage 2.0 (an income benefit rider) , 4LATER (Reg. TM) Advantage, and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit) (both of which are annuity payout riders). If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit (especially during times of poor investment performance), and you will be subject to Investment Requirements (unless you elect i4LIFE (Reg. TM) Advantage without the Guaranteed Income Benefit). Excess withdrawals under certain Living Benefit Riders may result in a reduction or premature termination of those benefits or of those riders. If you are not certain how an excess withdrawal will reduce your future guaranteed amounts, you should contact either your registered representative or us prior to requesting a withdrawal to find out what, if any, impact the excess withdrawal will have on any guarantees under the living benefit rider. These riders are discussed in detail in this prospectus. In addition, an overview of these riders is provided with this prospectus. What is Lincoln Lifetime IncomeSM Advantage 2.0? Lincoln Lifetime IncomeSM Advantage 2.0 is a rider that you may purchase for an additional charge and which provides on an annual basis guaranteed periodic withdrawals up to a guaranteed amount based on an Income Base, a 5% Enhancement to the Income Base or automatic annual step-ups to the Income Base, and age-based increases to the guaranteed periodic withdrawal amount. Withdrawals may be made up to the Guaranteed Annual Income amount as long as that amount is greater than zero. To continue these payments, an annuity payout option must be elected by the last day of the contractowner's 85th birth year on qualified contracts and by the last day of the contractowner's 99th birth year on nonqualified contracts. The Income Base is not available as a separate benefit upon death or surrender and is increased by subsequent purchase payments, 5% Enhancements to the Income Base, automatic annual step-ups to the Income Base and is decreased by certain withdrawals in accordance with provisions described in the prospectus. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage 2.0 and another one of the Living Benefit riders. By electing this rider you will be subject to Investment Requirements. See The Contracts - Investment Requirements. What is the Lincoln SmartSecurity (Reg. TM) Advantage? This benefit, which may be available for purchase at an additional charge, provides a Guaranteed Amount equal to the initial purchase payment (or contract value at the time of election) as adjusted. You may access this benefit through periodic withdrawals. Excess withdrawals will adversely affect the Guaranteed Amount. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage. You cannot simultaneously elect Lincoln SmartSecurity (Reg. TM) Advantage with any other Living Benefit rider. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - Investment Requirements. What is i4LIFE (Reg. TM) Advantage? i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable lifetime income payments, a death benefit, and the ability to make withdrawals during a defined period of time (Access Period). For an additional charge, you may purchase a minimum payout floor, the Guaranteed Income Benefit. We assess a charge, imposed only during the i4LIFE (Reg. TM) Advantage payout phase, based on the i4LIFE (Reg. TM) Advantage death benefit you choose and whether or not the Guaranteed Income Benefit is in effect. What is the Guaranteed Income Benefit? The Guaranteed Income Benefit provides a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - Investment Requirements. The i4LIFE (Reg. TM) Guaranteed Income Benefit is purchased when you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period subject to terms and conditions at that time. The minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage 2.0 15 have features that may be used to establish the amount of the Guaranteed Income Benefit. You may use your Guaranteed Amount from Lincoln SmartSecurity (Reg. TM) Advantage or your Income Base from Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit at the time you terminate Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage. 4LATER (Reg. TM) Advantage is purchased prior to the time you elect i4LIFE (Reg. TM) Advantage and provides a guaranteed value, the Income Base, which can be used to establish the Guaranteed Income Benefit floor in the future. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, and Lincoln Lifetime IncomeSM Advantage 2.0 - i4LIFE (Reg. TM) Advantage option. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See The Contracts - Surrenders and Withdrawals. If you surrender the contract or make a withdrawal, certain charges may apply. See Charges and Other Deductions. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days of the date you first receive the contract. You need to return the contract, postage prepaid, to our Servicing Office. You assume the risk of any market drop on purchase payments you allocate to the variable side of the contract. See Return Privilege. Where may I find more information about accumulation unit values? Because the subaccounts which are available under the contracts did not begin operation before the date of this prospectus, financial information for the subaccounts is not included in this Prospectus or in the SAI. Investment Results At times, the VAA may compare its investment results to various unmanaged indices or other variable annuities in reports to shareholders, sales literature and advertisements. The results will be calculated on a total return basis for various periods, with or without contingent deferred sales charges. Results calculated without contingent deferred sales charges will be higher. Total returns include the reinvestment of all distributions, which are reflected in changes in unit value. Note that there can be no assurance that any money market fund will be able to maintain a stable net asset value per share. During extended periods of low interest rates and due in part to the contract fees and expenses, the yields of any subaccount investing in a money market fund may also become extremely low and possibly negative. The annual performance of the subaccounts is based on past performance and does not indicate or represent future performance. Lincoln Life & Annuity Company of New York Lincoln New York (the Company) is a stock life insurance company chartered in New Jersey in 1897 and redomesticated to New York on April 2, 2007. Lincoln New York is a subsidiary of The Lincoln National Life Insurance Company (Lincoln Life). Lincoln Life is an Indiana-domiciled insurance corporation, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln New York is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, such as those associated with death benefit options and Living Benefit riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. With respect to the issuance of the contracts, Lincoln New York does not file periodic financial reports with the SEC pursuant to the exemption for life insurance companies provided under Rule 12h-7 of the Securities Exchange Act of 1934. We issue other types of insurance policies and financial products as well, and we also pay our obligations under these products from our assets in the general account. Moreover, unlike assets held in the VAA, the assets of the general account are subject to the general liabilities of the Company and, therefore, to the Company's general creditors. In the event of an insolvency or receivership, payments we make from our general account to satisfy claims under the contract would generally receive the same priority as our other contractowner obligations. 16 Our Financial Condition. Among the laws and regulations applicable to us as an insurance company are those which regulate the investments we can make with assets held in our general account. In general, those laws and regulations determine the amount and type of investments which we can make with general account assets. In addition, state insurance regulations require that insurance companies calculate and establish on their financial statements, a specified amount of reserves in order to meet the contractual obligations to pay the claims of our policyholders. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product. State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer's operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value. How to Obtain More Information. We encourage both existing and prospective policyholders to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would like a free copy of the SAI, please write to us at: PO Box 2348 , Fort Wayne, IN 46801-2348, or call 1-888-868-2583 . In addition, the Statement of Additional Information is available on the SEC's website at http://www.sec.gov. You may obtain our audited statutory financial statements and any unaudited statutory financial statements that may be available by visiting our website at www.LincolnFinancial.com. You also will find on our website information on ratings assigned to us by one or more independent rating organizations. These ratings are opinions of an operating insurance company's financial capacity to meet the obligations of its insurance and annuity contracts based on its financial strength and/or claims-paying ability. Additional information about rating agencies is included in the Statement of Additional Information. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Through its affiliates, Lincoln Financial Group offers annuities, life, group life and disability insurance, 401(k) and 403(b) plans and comprehensive financial planning and advisory services. Variable Annuity Account (VAA) On March 11, 1999, the VAA was established as an insurance company separate account under New York law. It is registered with the SEC as a unit investment trust under the provisions of the Investment Company Act of 1940 (1940 Act). The VAA is a segregated investment account, meaning that its assets may not be charged with liabilities resulting from any other business that we may conduct. Income, gains and losses, whether realized or not, from assets allocated to the VAA are, in accordance with the applicable annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln New York. We are the issuer of the contracts and the obligations set forth in the contract, other than those of the contractowner, are ours. The VAA satisfies the definition of a separate account under the federal securities laws. We do not guarantee the investment performance of the VAA. Any investment gain or loss depends on the investment performance of the funds. You assume the full investment risk for all amounts placed in the VAA. The VAA is used to support other annuity contracts offered by us in addition to the contracts described in this prospectus. The other annuity contracts supported by the VAA generally invest in the same funds as the contracts described in this prospectus. These other annuity contracts may have different charges that could affect the performance of their subaccounts, and they offer different benefits. Financial Statements The December 31, 2010 financial statements of the VAA and the December 31, 2010 financial statements of Lincoln New York are located in the SAI. If you would like a free copy of the SAI, complete and mail the request on the last page of this prospectus, or call 1-888-868-2583. Investments of the Variable Annuity Account You decide the subaccount(s) to which you allocate purchase payments. There is a separate subaccount which corresponds to each class of each fund. You may change your allocation without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The funds are required to redeem fund shares at net asset value upon our request. 17 Investment Advisers As compensation for its services to the fund, the investment adviser receives a fee from the fund which is accrued daily and paid monthly. This fee is based on the net assets of each fund, as defined in the prospectus for the fund. Certain Payments We Receive with Regard to the Funds With respect to a fund, including affiliated funds, the adviser and/or distributor, or an affiliate thereof, may make payments to us (or an affiliate). It is anticipated that such payments will be based on a percentage of assets of the particular fund attributable to the contracts along with certain other variable contracts issued or administered by us (or an affiliate). These percentages are negotiated and vary with each fund. Some funds may pay us significantly more than other funds and the amount we receive may be substantial. These percentages currently range up to 0.25%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings. The AllianceBernstein, BlackRock, Delaware, DWS, Fidelity, Franklin Templeton, Lincoln, MFS and PIMCO Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.55% based on the amount of assets invested in those funds. Payments made out of the assets of the fund will reduce the amount of assets that otherwise would be available for investment, and will reduce the fund's investment return. The dollar amount of future asset-based fees is not predictable because these fees are a percentage of the fund's average net assets, which can fluctuate over time. If, however, the value of the fund goes up, then so would the payment to us (or our affiliates). Conversely, if the value of the funds goes down, payments to us or our affiliates would decrease. Description of the Funds Each of the subaccounts of the VAA is invested solely in shares of one of the funds available under the contract. Each fund may be subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund. We select the funds offered through the contract based on several factors, including, without limitation, asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, and the capability and qualification of each sponsoring investment firm. Another factor we consider during the initial selection process is whether the fund or an affiliate of the fund will make payments to us or our affiliates. We review each fund periodically after it is selected. Upon review, we may remove a fund or restrict allocation of additional purchase payments to a fund if we determine the fund no longer meets one or more of the factors and/or if the fund has not attracted significant contractowner assets. Finally, when we develop a variable annuity product in cooperation with a fund family or distributor (e.g., a "private label" product), we generally will include funds based on recommendations made by the fund family or distributor, whose selection criteria may differ from our selection criteria. Certain funds offered as part of this contract have similar investment objectives and policies to other portfolios managed by the adviser. The investment results of the funds, however, may be higher or lower than the other portfolios that are managed by the adviser or sub-adviser. There can be no assurance, and no representation is made, that the investment results of any of the funds will be comparable to the investment results of any other portfolio managed by the adviser or sub-adviser, if applicable. Certain funds invest substantially all of their assets in other funds. As a result, you will pay fees and expenses at both fund levels. This will reduce your investment return. These arrangements are referred to as funds of funds or master-feeder funds. Funds of funds or master-feeder structures may have higher expenses than funds that invest directly in debt or equity securities. Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for each fund. You should read each fund prospectus carefully before investing. Prospectuses for each fund are available by contacting us. In addition, if you receive a summary prospectus for a fund, you may obtain a full statutory prospectus by referring to the contact information for the fund company on the cover page of the summary prospectus. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein VPS Global Thematic Growth Portfolio: Long-term growth of capital. o AllianceBernstein VPS International Value Portfolio: Long-term growth of capital. o AllianceBernstein VPS Small/Mid Cap Value Portfolio: Long-term growth of capital. 18 BlackRock Variable Series Funds, Inc.,advised by BlackRock Advisors, LLC and subadvised by BlackRock Investment Management, LLC o BlackRock Global Allocation V.I. Fund: High total investment return. Delaware VIP (Reg. TM) Trust, advised by Delaware Management Company* o Diversified Income Series: Long-term total return. o Emerging Markets Series: Long-term capital appreciation. o Limited-Term Diversified Income Series: Long-term total return. o REIT Series: Total return. o Small Cap Value Series: Capital appreciation. o Smid Cap Growth Series: Long-term capital appreciation. o U.S. Growth Series: Long-term capital appreciation. o Value Series: Capital appreciation. DWS Variable Series II, advised by Deutsche Investment Management Americas, Inc. and subadvised by RREEF America L.L.C. o DWS Alternative Asset Allocation Plus VIP Portfolio: Capital Appreciation Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company and subadvised by FMR CO., Inc. o Contrafund (Reg. TM) Portfolio: Long-term capital appreciation. o Growth Portfolio: Capital appreciation. o Mid Cap Portfolio: Long-term growth of capital. Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund and the Franklin Small-Mid Cap Growth Securities Fund and by Franklin Mutual Advisers, LLC for the Mutual Shares Securities Fund. o Franklin Income Securities Fund: Maximize income. o Mutual Shares Securities Fund: Capital appreciation. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP American Global Growth Fund: Long-term growth; a master-feeder fund. o LVIP American Global Small Capitalization Fund: Long-term growth; a master-feeder fund. o LVIP American Growth Fund: Long-term growth; a master-feeder fund. o LVIP American Growth-Income Fund: Long-term growth and income; a master-feeder fund. o LVIP American International Fund: Long-term growth; a master-feeder fund. o LVIP Baron Growth Opportunities Fund: Capital appreciation. (Subadvised by BAMCO, Inc.) o LVIP BlackRock Inflation Protected Bond Fund: Maximize real return. (Subadvised by BlackRock Financial Management, Inc.) o LVIP Capital Growth Fund: Capital growth. (Subadvised by Wellington Management) o LVIP Cohen & Steers Global Real Estate Fund: Total Return. (Subadvised by Cohen & Steers Capital Management) o LVIP Columbia Value Opportunities Fund: Long-term capital appreciation. (Subadvised by Columbia Management Advisors, LLC) o LVIP Delaware Bond Fund: Current income. (Subadvised by Delaware Management Company)* o LVIP Delaware Diversified Floating Rate Fund: Total return. (Subadvised by Delaware Management Company)* o LVIP Delaware Social Awareness Fund: Capital appreciation. (Subadvised by Delaware Management Company)* o LVIP Delaware Special Opportunities Fund: Capital appreciation. (Subadvised by Delaware Management Company)* 19 o LVIP Dimensional U.S. Equity Fund: Capital appreciation; a fund of funds. This fund will be available on or about May 23, 2011. Consult your financial advisor. o LVIP Dimensional Non-U.S. Equity Fund: Capital appreciation; a fund of funds. This fund will be available on or about May 23, 2011. Consult your financial advisor. o LVIP Global Income Fund: Current income consistent with preservation of capital. (Subadvised by Mondrian Investment Partners Limited and Franklin Advisors, Inc.) o LVIP Janus Capital Appreciation Fund: Long-term growth. (Subadvised by Janus Capital Management LLC) o LVIP J.P. Morgan High Yield Fund: High level of current income. (Subadvised by J.P. Morgan Investment Management, Inc.) o LVIP MFS International Growth Fund: Long-term capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP MFS Value Fund: Capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP Mid-Cap Value Fund: Long-term capital appreciation. (Subadvised by Wellington Management) o LVIP Mondrian International Value Fund: Long-term capital appreciation. (Subadvised by Mondrian Investment Partners Limited) o LVIP Money Market Fund: Current income/Preservation of capital. (Subadvised by Delaware Management Company)* o LVIP SSgA Bond Index Fund: Replicate Barclays Aggregate Bond Index (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Conservative Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Conservative Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Developed International 150 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Emerging Markets 100 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Global Tactical Allocation Fund: Long-term growth of capital; a fund of funds. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA International Index Fund: Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Large Cap 100 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Moderate Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderate Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderately Aggressive Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderately Aggressive Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Small-Mid Cap 200 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA S&P 500 Index Fund: Replicate S&P 500 Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small-Cap Index Fund: Replicate Russell 2000 Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP T. Rowe Price Growth Stock Fund: Long-term growth of capital. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP T. Rowe Price Structured Mid-Cap Growth Fund: Maximum capital appreciation. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP Templeton Growth Fund: Long-term growth of capital. (Subadvised by Templeton Investment Counsel, LLC) 20 o LVIP Total Bond Fund: Total return consistent with capital appreciation. This fund will be available on or about May 23, 2011. Consult your financial advisor. o LVIP Turner Mid-Cap Growth Fund: Capital appreciation. (Subadvised by Turner Investment Partners, Inc.) o LVIP Vanguard Domestic Equity ETF Fund: Capital appreciation; a fund of funds. This fund will be available on or about May 23, 2011. Consult your financial advisor. o LVIP Vanguard International Equity ETF Fund: Capital appreciation; a fund of funds. This fund will be available on or about May 23, 2011. Consult your financial advisor. o LVIP Wells Fargo Intrinsic Value Fund: Income. (Subadvised by Metropolitan West Capital Management, LLC) o LVIP Conservative Profile Fund: Current income; a fund of funds. o LVIP Moderate Profile Fund: Growth and income; a fund of funds. o LVIP Moderately Aggressive Profile Fund: Growth and income; a fund of funds. MFS (Reg. TM) Variable Insurance TrustSM, advised by Massachusetts Financial Services Company o Growth Series: Capital appreciation. o Utilities Series: Total return. PIMCO Variable Insurance Trust, advised by PIMCO o PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio: Maximum real return. *Investments in Delaware Investments VIP Series, Delaware Funds, LVIP Delaware Funds or Lincoln Life accounts managed by Delaware Investment Advisors, a series of Delaware Management Business Trust, are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46008 583 542 and its holding companies, including their subsidiaries or related companies, and are subject to investment risk, including possible delays in prepayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Series or Funds or accounts, the repayment of capital from the Series or Funds or account, or any particular rate of return. Fund Shares We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. Redeemed shares are retired, but they may be reissued later. Shares of the funds are not sold directly to the general public. They are sold to us, and may be sold to other insurance companies, for investment of the assets of the subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts. When a fund sells any of its shares both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When a fund sells any of its shares to separate accounts of unaffiliated life insurance companies, it is said to engage in shared funding. The funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various contractowners participating in a fund could conflict. Each of the fund's Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. The funds do not foresee any disadvantage to contractowners arising out of mixed or shared funding. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a fund. This might force a fund to sell portfolio securities at disadvantageous prices. See the prospectuses for the funds. Reinvestment of Dividends and Capital Gain Distributions All dividends and capital gain distributions of the funds are automatically reinvested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as additional units, but are reflected as changes in unit values. Addition, Deletion or Substitution of Investments We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. 21 Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. Charges and Other Deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, cross-reinvestment, portfolio rebalancing, and automatic withdrawal services - See Additional Services and the SAI for more information on these programs); o maintaining records; o administering annuity payouts; o furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values); o reconciling and depositing cash receipts; o providing contract confirmations; o providing toll-free inquiry services; and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts live longer than we assumed when we calculated our guaranteed rates (these rates are incorporated in the contract and cannot be changed); o the risk that lifetime payments to individuals from Lincoln SmartSecurity (Reg. TM) Advantage or guaranteed withdrawals under Lincoln Lifetime IncomeSM Advantage 2.0 will exceed the contract value; o the risk that death benefits paid will exceed the actual contract value; o the risk that more owners than expected will qualify for waivers of the surrender charge; o the risk that, if the i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit or 4LATER (Reg. TM) Guaranteed Income Benefit is in effect, the required regular income payments will exceed the account value; and o the risk that our costs in providing the services will exceed our revenues from contract charges (which we cannot change). The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the description of the charge. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts. Deductions from the VAA We apply a charge to the average daily net asset value of the subaccounts based on which contract and death benefit you choose. Those charges are equal to an annual rate of: 22
Guarantee of Enhanced Guaranteed Account Value Principal Death Minimum Death Death Benefit Benefit Benefit (EGMDB) --------------- ----------------- --------------------- Signature 1: Mortality and expense risk charge 1.15% 1.20% 1.45% Administrative charge 0.10% 0.10% 0.10% Total annual charge for each subaccount 1.25% 1.30% 1.55% Signature 2: Mortality and expense risk charge 1.50% 1.55% 1.80% Administrative charge 0.10% 0.10% 0.10% Total annual charge for each subaccount 1.60% 1.65% 1.90%
Surrender Charge A surrender charge applies (except as described below) to surrenders and withdrawals of purchase payments that have been invested for the periods indicated as follows:
Surrender charge as a percentage of the surrendered or withdrawn purchase payments ---------------------------- Number of contract anniversaries since purchase payment was invested Signature 1 Signature 2 0.............................................................. .............. 7.0% 7.0% 1.............................................................. .............. 7.0% 7.0% 2.............................................................. .............. 6.0% 6.0% 3.............................................................. .............. 6.0% 6.0% 4.............................................................. .............. 5.0% 0.0% 5.............................................................. .............. 4.0% 0.0% 6.............................................................. .............. 3.0% 0.0% 7.............................................................. .............. 0.0% 0.0%
A surrender charge does not apply to: o A surrender or withdrawal of a purchase payment beyond the seventh anniversary for Signature 1 or fourth anniversary for Signature 2, since the purchase payment was invested; o Withdrawals of contract value during a contract year to the extent that the total contract value withdrawn during the current contract year does not exceed the free amount. The free amount is equal to the greater of 10% of the current contract value or 10% of the total purchase payments (this does not apply upon surrender of the contract); o Purchase payments used in the calculation of the initial benefit payment to be made under an annuity payout option, other than the i4LIFE (Reg. TM) Advantage option; o A surrender or withdrawal of any purchase payments, as a result of permanent and total disability of the contractowner. Permanent and total disability is a disability that prevents the contractowner from engaging in any occupation for renumeration or profit and which has existed continuously for a period of 12 months and begins prior to the 65th birthday of the disabled contractowner, provided that written proof of total disability is sent to us at our servicing office; o When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (however, the surrender charge schedule of the original contract will continue to apply to the spouse's contract); o A surrender or withdrawal of any purchase payments, as a result of the admittance of the contractowner to an accredited nursing home or equivalent health care facility, where the admittance into the facility occurs after the effective date of the contract and the owner has been confined for at least 90 consecutive days; o A surrender or withdrawal of any purchase payments as a result of the diagnosis of a terminal illness of the contractowner. Diagnosis of a terminal illness must be after the effective date of the contract and results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; o A surrender of the contract as a result of the death of the contractowner or annuitant; o A surrender or annuitization of any applicable persistency credits; 23 o Purchase payments when used in the calculation of the initial Account Value under the i4LIFE (Reg. TM) Advantage option; o Regular income payments made under i4LIFE (Reg. TM) Advantage, including any payments to provide the 4LATER (Reg. TM) or i4LIFE (Reg. TM) Guaranteed Income Benefits, or periodic payments made under any annuity payout option made available by us; o Withdrawals up to the Maximum Annual Withdrawal Amount under the Lincoln SmartSecurity (Reg. TM) Advantage or Guaranteed Annual Income amount under Lincoln Lifetime IncomeSM Advantage 2.0, subject to certain conditions. For purposes of calculating the surrender charge on withdrawals, we assume that: 1. The free amount will be withdrawn from purchase payments on a "first in-first out (FIFO)" basis. 2. Prior to the seventh anniversary for the Signature 1 contract, and the fourth anniversary for the Signature 2 contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) until exhausted; then o from earnings until exhausted. 3. On or after the seventh anniversary for the Signature 1 contract, and the fourth anniversary for the Signature 2 contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then o from earnings and persistency credits, if any, or until exhausted; then o from purchase payments (on a FIFO basis) to which a surrender charge still applies until exhausted. We apply the surrender charge as a percentage of purchase payments, which means that you would pay the same surrender charge at the time of surrender regardless of whether your contract value has increased or decreased. The surrender charge is calculated separately for each purchase payment. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. Account Fee During the accumulation period, we will deduct $35 from the contract value on each contract anniversary to compensate us for the administrative services provided to you; this $35 account fee will also be deducted from the contract value upon surrender. This fee will be waived after the fifteenth contract year. The account fee will be waived for any contract with a contract value that is equal to or greater than $100,000 on the contract anniversary. Transfer Fee We reserve the right to charge a fee of up to $25 for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross-reinvestment transfers. The transfer charge will not be imposed on the first 12 transfers during the contract year. Rider Charges A fee or expense may also be deducted in connection with any benefits added to the contract by rider or endorsement. Lincoln Lifetime IncomeSM Advantage 2.0 Charge. While this rider is in effect, there is a charge for the Lincoln Lifetime IncomeSM Advantage 2.0, if elected. The rider charge is currently equal to an annual rate of 1.05% (0.2625% quarterly) for the Lincoln Lifetime IncomeSM Advantage 2.0 single life option and 1.25% (0.3125% quarterly) for the Lincoln Lifetime IncomeSM Advantage 2.0 joint life option. The charge is applied to the Income Base (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and decreased for Excess Withdrawals. We will deduct the cost of this rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the rider's effective date. This deduction will be made in proportion to the value in each subaccount and any fixed account of the contract on the valuation date the rider charge is assessed. The amount we deduct will increase or decrease as the Income Base increases or decreases, because the charge is based on the Income Base. Refer to the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base section for a discussion and example of the impact of the changes to the Income Base. The annual rider percentage charge may increase each time the Income Base increases as a result of the Automatic Annual Step-up, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. Therefore, your percentage charge for this rider could increase every Benefit Year anniversary. If your percentage charge is increased, you may opt out of the Automatic Annual Step-up by giving us notice within 30 days after the Benefit Year anniversary if you do not want your percentage charge to change. If you opt out of the step-up, your current charge will remain in effect and the Income Base will be returned to the prior 24 Income Base. This opt out will only apply for this particular Automatic Annual Step-up. You will need to notify us each time the percentage charge increases if you do not want the Automatic Annual Step-up. By opting out of an Automatic Annual Step-up, you will continue to be eligible for the 5% Enhancement through the end of the current Enhancement Period, but the percentage charge could increase to the then current charge on 5% Enhancements after the 10th Benefit Year anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. During the first ten Benefit Years an increase in the Income Base as a result of the 5% Enhancement will not cause an increase in the annual rider percentage charge but will increase the dollar amount of the charge. After the 10th Benefit Year anniversary the annual rider percentage charge may increase each time the Income Base increases as a result of the 5% Enhancement, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. If your percentage charge is increased, you may opt-out of the 5% Enhancement by giving us notice within 30 days after the Benefit Year anniversary if you do not want your percentage charge to change. If you opt out of the 5% Enhancement, your current charge will remain in effect and the Income Base will be returned to the prior Income Base. This opt-out will only apply for this particular 5% Enhancement. You will need to notify us each time thereafter (if an Enhancement would cause your percentage charge to increase) if you do not want the 5% Enhancement. The rider percentage charge will increase to the then current rider percentage charge, if after the first Benefit Year anniversary, cumulative purchase payments added to the contract after the first Benefit Year, equal or exceed $100,000. You may not opt-out of this rider charge increase. See The Contracts Living Benefit Riders - Lincoln Lifetime IncomeSM Advantage 2.0 - Income Base. The rider charge will be discontinued upon termination of the rider. The pro-rata amount of the rider charge will be deducted upon termination of the rider (except for death) or surrender of the contract. If the contract value is reduced to zero while the contractowner is receiving a Guaranteed Annual Income, no rider charge will be deducted. Lincoln SmartSecurity (Reg. TM) Advantage Charge. While this Rider is in effect, there is a charge for the Lincoln SmartSecurity (Reg. TM) Advantage, if elected. The Rider charge is currently equal to an annual rate of: 1) 0.65% of the Guaranteed Amount (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option; or 2) 0.80% of the Guaranteed Amount (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. The charge is applied to the Guaranteed Amount (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments and step-ups and decreased for withdrawals. We will deduct the cost of this Rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of the Rider. This deduction will be made in proportion to the value in each subaccount of the contract on the valuation date the Rider charge is assessed. The amount we deduct will increase or decrease as the Guaranteed Amount increases or decreases, because the charge is based on the Guaranteed Amount. Refer to the Lincoln SmartSecurity (Reg. TM) Advantage, Guaranteed Amount section, for a discussion and example of the impact of changes to the Guaranteed Amount. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the annual Rider percentage charge will not change upon each automatic step-up of the Guaranteed Amount for the 10-year period. If you elect to step-up the Guaranteed Amount for another step-up period (including if we administer the step-up election for you or if you make a change from a Joint Life to a Single Life option after a death or divorce), a pro-rata deduction of the Rider charge based on the Guaranteed Amount immediately prior to the step-up will be made on the valuation date of the step-up. This deduction covers the cost of the Rider from the time of the previous deduction to the date of the step-up. After a contractowner's step-up, we will deduct the Rider charge for the stepped-up Guaranteed Amount on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the step-up. At the time of the elected step-up, the Rider percentage charge will change to the current charge in effect at that time (if the current charge has changed), but it will never exceed the guaranteed maximum annual percentage charge of 1.50% of the Guaranteed Amount. If you never elect to step-up your Guaranteed Amount, your Rider percentage charge will never change, although the amount we deduct will change as the Guaranteed Amount changes. The Rider charge will be discontinued upon the earlier of the annuity commencement date, election of i4LIFE (Reg. TM) Advantage or termination of the Rider. The pro-rata amount of the Rider charge will be deducted upon termination of the Rider or surrender of the contract. 4LATER (Reg. TM) Advantage Charge. Prior to the periodic income commencement date (which is defined as the valuation date the initial regular income payment under i4LIFE (Reg. TM) Advantage is determined), the annual 4LATER (Reg. TM) charge is currently 0.65% of the Income Base. The Income Base (an amount equal to the initial purchase payment or contract value at the time of election), as adjusted, is a value that will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. The Income Base is increased for subsequent purchase payments, automatic 15% enhancements and resets, and decreased for withdrawals. An amount equal to the quarterly 4LATER (Reg. TM) Rider charge multiplied by the Income Base will be deducted from the subaccounts on every third month anniversary of the later of the 25 4LATER (Reg. TM) Rider Effective Date or the most recent reset of the Income Base. This deduction will be made in proportion to the value in each subaccount on the valuation date the 4LATER (Reg. TM) Rider charge is assessed. The amount we deduct will increase as the Income Base increases, because the charge is based on the Income Base. As described in more detail below, the only time the Income Base will change is when there are additional purchase payments, withdrawals, automatic enhancements at the end of the 3-year waiting periods or in the event of a Reset to the current Account Value. If you purchase 4LATER (Reg. TM) in the future, the percentage charge will be the charge in effect at the time you elect 4LATER (Reg. TM). Upon a reset of the Income Base, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge based on the Income Base immediately prior to the reset will be made on the valuation date of the reset. This deduction covers the cost of the 4LATER (Reg. TM) Rider from the time of the previous deduction to the date of the reset. After the reset, we will deduct the 4LATER (Reg. TM) Rider charge for the reset Income Base on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the reset. At the time of the reset, the annual charge will be the current charge in effect for new purchases of 4LATER (Reg. TM) at the time of reset, not to exceed the guaranteed maximum charge of 1.50% of the Income Base. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM)Rider charge will be made to cover the cost of 4LATER (Reg. TM)since the previous deduction. i4LIFE (Reg. TM) Advantage Charge. i4LIFE (Reg. TM) Advantage is subject to a charge, computed daily based on the Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value equals the total value of all accumulation units plus interest credited on the fixed account, and will be reduced by regular income payments and Guaranteed Income Benefit payments made as well as any withdrawals taken. The annual rate of the i4LIFE (Reg. TM) Advantage charge is:
Signature 1 Signature 2 ------------- ------------ o Account Value Death Benefit 1.65% 2.00% o Guarantee of Principal Death Benefit 1.70% 2.05% o Enhanced Guaranteed Minimum Death Benefit (EGMDB) 1.95% 2.30%
This charge consists of a mortality and expense risk and administrative charge (charges for the Guaranteed Income Benefit are not included and are listed below). i4LIFE (Reg. TM) Advantage and the charge will begin on the periodic income commencement date which is the valuation date on which the regular income payment is determined and the beginning of the Access Period. Refer to the i4LIFE (Reg. TM) Advantage section for explanations of the Access Period, Account Value and Periodic Income Commencement Date. After the Access Period ends, the charge will be the percentage charge for the i4LIFE (Reg. TM) Advantage Account Value death benefit. If you dropped Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4), the charges that you will pay will be different. See the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 Charge. i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit Charge. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (version 4) charge is subject to a current annual charge of 0.65% (0.85% for joint life option) of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows:
Signature 1 Signature 2 Signature 1 Signature 2 Single Life option Single Life option Joint Life option Joint Life option -------------------- -------------------- ------------------- ------------------ o Account Value Death Benefit 2.30% 2.65% 2.50% 2.85% o Guarantee of Principal Death Benefit 2.35% 2.70% 2.55% 2.90% o Enhanced Guaranteed Minimum Death Benefit (EGMDB) 2.60% 2.95% 2.80% 3.15%
The Guaranteed Income Benefit percentage charge will not change unless there is an automatic step-up of the Guaranteed Income Benefit (version 4) during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). At the time of the step-up, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 2.00% of Account Value. If we automatically administer the step-up for you and your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date on which the step-up occurred. If we receive notice of your request to reverse the step-up, on a going forward basis we will decrease the percentage charge to the percentage charge in effect before the step-up occurred. Any increased charges paid between the time of the step-up and the date we receive your notice to reimburse the 26 step-up will not be reimbursed. Future step-ups will continue even after you decline a current step-up. We will provide you with written notice when a step-up will result in an increase to the current charge so that you may give us timely notice if you wish to reverse a step-up. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate, but the i4LIFE (Reg. TM) Advantage charge will continue. i4LIFE (Reg. TM) Advantage with 4LATER (Reg. TM) Guaranteed Income Benefit Charge for purchasers who previously purchased 4LATER (Reg. TM) Advantage. The 4LATER (Reg. TM) Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.65% of the Account Value which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows:
Signature 1 Signature 2 ------------- ------------ o Account Value Death Benefit 2.30% 2.65% o Guarantee of Principal Death Benefit 2.35% 2.70% o Enhanced Guaranteed Minimum Death Benefit (EGMDB) 2.60% 2.95%
On and after the periodic income commencement date, the 4LATER (Reg. TM) Guaranteed Income Benefit charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of Account Value. This is a change to the calculation of the 4LATER (Reg. TM) charge because after the periodic income commencement date, when the 4LATER (Reg. TM) Guaranteed Income Benefit is established, the Income Base is no longer applicable. The percentage 4LATER (Reg. TM) charge is the same immediately before and after the periodic income commencement date; however, the charge is multiplied by the Income Base (on a quarterly basis) prior to the periodic income commencement date and then multiplied by the daily Account Value after the periodic income commencement date. After the periodic income commencement date, the 4LATER (Reg. TM) Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) Guaranteed Income Benefit percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50% of Account Value. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Rider annual charge will also terminate, but the i4LIFE (Reg. TM) Advantage charge will continue. i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Charge for purchasers who previously purchased Lincoln Lifetime IncomeSM Advantage 2.0. If you drop Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit (version 4) under i4LIFE (Reg. TM) Advantage you will pay a quarterly charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase) starting with the first three-month anniversary of the effective date of i4LIFE (Reg. TM) Advantage and every three months thereafter. The initial charge is equal to a current annual rate of 1.05% (0.2625% quarterly) for the single life option and 1.25% (0.3125% quarterly) for the joint life option. The charge is a percentage of the greater of the Income Base carried over from Lincoln Lifetime IncomeSM Advantage 2.0 (less the Guaranteed Annual Income amounts paid since the last automatic Step-up) or contract value immediately prior to electing i4LIFE Advantage (Reg. TM). This is the charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit for previous purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. This charge is in addition to the daily mortality and expense risk and administrative charge for your death benefit option set out under Deductions from the VAA. Purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed that in the future the guaranteed maximum initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) will be the guaranteed maximum charge then in effect at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. The charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 will not change unless there is an automatic step-up of the Guaranteed Income Benefit to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of the prospectus). At such time, the charge will increase by an amount equal to the prior charge rate (or initial charge rate if the first anniversary of the rider's effective date) multiplied by the percentage increase to the Guaranteed Income Benefit and by the percentage increase, if any, to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge. This means that the charge may change annually. The charge may also be reduced if a withdrawal above the Regular Income Payment is taken. Upon each of these types of withdrawals, the rider charge will be reduced in the same proportion that the withdrawal reduced the Account Value. The following example shows how the initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 is calculated as well as adjustments due to increases to the Guaranteed Income Benefit and the Lincoln Lifetime IncomeSM Advantage 2.0 charge. The example is a nonqualified contract and assumes the contractowner is 60 years old on the effective date of electing the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. Pursuant to the provisions of the Guaranteed Income Benefit (version 4) the initial Guaranteed Income Benefit is set at 4% of the Income Base based upon the contractowner's age (see Guaranteed Income Benefit (version 4) for a 27 more detailed description). The example also assumes that the current charge for Lincoln Lifetime IncomeSM Advantage 2.0 is 1.05%. The first example assumes an increase to the initial charge based upon an increase to the Guaranteed Income Benefit due to the automatic step-up: 1/1/10 Contract value as of the last valuation date under Lincoln Lifetime IncomeSM $ 100,000 Advantage 2.0 1/1/10 Income Base as of the last valuation date under Lincoln Lifetime IncomeSM $ 125,000 Advantage 2.0 1/1/10 Initial Annual Charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit $1,312.50 (version 4) ($125,000 * 1.05% current charge for Lincoln Lifetime IncomeSM Advantage 2.0) 1/2/10 i4LIFE (Reg. TM) Advantage Account Value $ 100,000 1/2/10 Amount of initial i4LIFE (Reg. TM) Advantage Regular Income Payment $ 5,051 1/2/10 Initial Guaranteed Income Benefit (4% * $125,000 Income Base) $ 5,000 1/2/11 Recalculated Regular Income Payment $ 6,900 1/2/11 New Guaranteed Income Benefit (75% * $6,900 Regular Income Payment) $ 5,175 1/2/11 Annual Charge for i4LIFE (Reg. TM)Advantage with Guaranteed Income Benefit (version $1,358.44 4) ($1,312.50 * ($5,175/$5,000))
If the Lincoln Lifetime IncomeSM Advantage 2.0 charge has also increased, subject to a maximum charge of 2.00%, the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) charge will increase upon a step-up. Continuing the above example: 1/2/11 Annual Charge for Lincoln Lifetime IncomeSM Advantage 2.0 $1,358.44 1/2/12 Recalculated Regular Income Payment $ 7,400 1/2/12 New Guaranteed Income Benefit (75% * $7,400 Regular Income Payment) $ 5,550 Assume the Lincoln Lifetime IncomeSM Advantage 2.0 charge increases from 1.05% to 1.15%. 1/2/12 Annual Charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version $1,595.63 4) ($1,358.44 * ($5,550/$5,175) * (1.15%/1.05%))
The new annual charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is $1,595.63 which is equal to the current annual charge of $1,358.44 multiplied by the percentage increase of the Guaranteed Income Benefit ($5,550/$5,175) times the percentage increase to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge (1.15%/1.05%). If the Lincoln Lifetime IncomeSM Advantage 2.0 percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date on which the step-up occurred. If we receive this notice, we will decrease the percentage charge, on a going forward basis, to the percentage charge in effect before the step-up occurred. If the Guaranteed Income Benefit increased due to the step-up we would decrease the Guaranteed Income Benefit to the Guaranteed Income Benefit in effect before the step-up occurred. Future step-ups as described in the rider would continue. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, i4LIFE (Reg. TM) Advantage will also be terminated and the i4LIFE (Reg. TM) Advantage and Guaranteed Income Benefit Charges will cease. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value, unless the governmental entity dictates otherwise, when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium tax rates generally depend upon the law of your state of residence. The tax rates range from zero to 3.5%. Currently, there is no premium tax levied for New York residents. Other Charges and Deductions The surrender, withdrawal or transfer of value from a fixed account guaranteed period may be subject to the interest adjustment if applicable. See Fixed Side of the Contract. The mortality and expense risk and administrative charge of 1.25% for Signature 1 contracts and 1.40% for Signature 2 contracts of the value in the VAA will be assessed on all variable annuity payouts (except for the i4LIFE (Reg. TM) Advantage, which has a different charge), including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the services will exceed our revenues from contract charges. 28 There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. Additional Information The charges described previously may be reduced or eliminated for any particular contract. However, these reductions may be available only to the extent that we anticipate lower distribution and/or administrative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges, or when required by law. Lower distribution and administrative expenses may be the result of economies associated with: o the use of mass enrollment procedures, o the performance of administrative or sales functions by the employer, o the use by an employer of automated techniques in submitting deposits or information related to deposits on behalf of its employees, or o any other circumstances which reduce distribution or administrative expenses. The exact amount of charges and fees applicable to a particular contract will be stated in that contract. The Contracts Contracts Offered in this Prospectus This prospectus describes two separate annuity contracts: o ChoicePlusSM Signature 1 o ChoicePlusSM Signature 2 Each contract offers you the ability to choose any of the death benefits, Living Benefit riders, and payout options described in this prospectus. Each contract has its own mortality and expense risk charge and applicable surrender charge. In deciding what contract to purchase, you should consider the amount of mortality and expense risk and surrender charges you are willing to bear relative to your needs. In deciding whether to purchase any of the enhanced death benefits or other optional benefits, you should consider the desirability of the benefit relative to its additional cost and to your needs. Enhanced death benefits and other optional benefits are described later in this prospectus. You should check with your investment representative regarding availability. ChoicePlusSM Signature 1 The Signature 1 annuity contract has a total mortality and risk expense and administrative charge ranging from 1.25% to 1.55%, depending on which death benefit you have elected. It has a declining seven-year surrender charge on each purchase payment. All of the death benefits, optional Living Benefit riders, and payout options described in this prospectus, are available for additional charges. ChoicePlusSM Signature 2 The Signature 2 annuity contract has a total mortality and risk expense and administrative charge ranging from 1.60% to 1.90%, depending on which death benefit you have elected. It has a declining four-year surrender charge on each purchase payment. Contractowners of the Signature 2 annuity contract will receive persistency credits on a quarterly basis after the fourth contract anniversary. See The Contracts - Persistency Credits. All of the death benefits, optional Living Benefit riders and payout options described in this prospectus, are available for additional charges. Purchase of Contracts If you wish to purchase a contract, you must apply for it through a sales representative authorized by us. The completed application is sent to us and we decide whether to accept or reject it. If the application is accepted, a contract is prepared and executed by our legally authorized officers. The contract is then sent to you through your sales representative. See Distribution of the Contracts. When a completed application and all other information necessary for processing a purchase order is received in good order at our Servicing Office, an initial purchase payment will be priced no later than two business days after we receive the order. If you submit your application and/or initial purchase payment to your agent, we will not begin processing your purchase order until we receive the application and initial purchase payment from your agent's broker-dealer. While attempting to finish an incomplete application, we may hold the initial purchase payment for no more than five business days unless we receive your consent to our retaining the payment until the application is completed. If the incomplete application cannot be completed within those five days and we have not received your consent, you will be informed of the reasons, and the purchase payment will be returned immediately. Once the application is complete, we will allocate your initial purchase payment within two business days. 29 Who Can Invest To apply for a contract, you must be of legal age in a state where the contracts may be lawfully sold and also be eligible to participate in any of the qualified or nonqualified plans for which the contracts are designed. At the time of issue, the contractowner, joint owner and annuitant must be under age 86. Certain death benefit options may not be available at all ages. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver's license, photo i.d. or other identifying documents. In accordance with money laundering laws and federal economic sanction policy, the Company may be required in a given instance to reject a purchase payment and/or freeze a contractowner's account. This means we could refuse to honor requests for transfers, withdrawals, surrenders or death benefits. Once frozen, monies would be moved from the VAA to a segregated interest-bearing account maintained for the contractowner, and held in that account until instructions are received from the appropriate regulator. Do not purchase this contract if you plan to use it, or any of its riders, for speculation, arbitrage, viatical arrangement, or other similar investment scheme. The contract may not be resold, traded on any stock exchange, or sold on any secondary market. If you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract and/or a new surrender charge period may be imposed with the purchase of, or transfer into, this contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum annual amount for additional purchase payments is $300. The minimum payment to the contract at any one time must be at least $100 ($25 if transmitted electronically). If a minimum purchase payment is not submitted, we will contact you to see if additional money will be sent, or if we should return the purchase payment to you. Purchase payments in total may not equal or exceed $2 million without our approval. If you stop making purchase payments, the contract will remain in force as a paid-up contract. However, we may terminate the contract as allowed by New York's non-forfeiture law for individual deferred annuities. Purchase payments may be made or, if stopped, resumed at any time until the annuity commencement date, the surrender of the contract, or the death of the contractowner, whichever comes first. Upon advance written notice, we reserve the right to limit purchase payments made to the contract. Persistency Credits Contractowners of the Signature 2 contract will receive a persistency credit on a quarterly basis after the fourth contract anniversary. The amount of the persistency credit is calculated by multiplying the contract value, less any purchase payments that have not been invested in the contract for at least four years, by 0.0875%. This persistency credit will be allocated to the variable subaccounts and the fixed subaccounts in proportion to the contract value in each variable subaccount and fixed subaccount at the time the persistency credit is paid into the contract. There is no additional charge to receive this persistency credit, and in no case will the persistency credit be less than zero. The amount of any persistency credit received will be noted on your quarterly statement. Confirmation statements for each individual transaction will not be issued. Valuation Date Accumulation and annuity units will be valued once daily at the close of trading (normally, 4:00 p.m., New York time) on each day the New York Stock Exchange is open (valuation date). On any date other than a valuation date, the accumulation unit value and the annuity unit value will not change. Allocation of Purchase Payments Purchase payments allocated to the variable account are placed into the VAA's subaccounts, according to your instructions. You may also allocate purchase payments in the fixed account, if available. The minimum amount of any purchase payment which can be put into any one subaccount is $20. The minimum amount of any purchase payment which can be put into a fixed account is $2,000, subject to state approval. 30 If we receive your purchase payment from you or your broker-dealer in good order at our Servicing Office prior to 4:00 p.m., New York time, we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If we receive your purchase payment in good order at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valuation date. If you submit your purchase payment to your representative, we will generally not begin processing the purchase payment until we receive it from your representative's broker-dealer. If your broker-dealer submits your purchase payment to us through the Depository Trust and Clearing Corporation (DTCC) or, pursuant to terms agreeable to us, uses a proprietary order placement system to submit your purchase payment to us, and your purchase payment was placed with your broker-dealer prior to 4:00 p.m., New York time, then we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If your purchase payment was placed with your broker-dealer at or after 4:00 p.m. New York time, then we will use the accumulation unit value computed on the next valuation date. The number of accumulation units determined in this way is not impacted by any subsequent change in the value of an accumulation unit. However, the dollar value of an accumulation unit will vary depending not only upon how well the underlying fund's investments perform, but also upon the expenses of the VAA and the underlying funds. Valuation of Accumulation Units Purchase payments allocated to the VAA are converted into accumulation units. This is done by dividing the amount allocated by the value of an accumulation unit for the valuation period during which the purchase payments are allocated to the VAA. The accumulation unit value for each subaccount was or will be established at the inception of the subaccount. It may increase or decrease from valuation period to valuation period. Accumulation unit values are affected by investment performance of the funds, fund expenses, and the contract charges. The accumulation unit value for a subaccount for a later valuation period is determined as follows: 1. The total value of the fund shares held in the subaccount is calculated by multiplying the number of fund shares owned by the subaccount at the beginning of the valuation period by the net asset value per share of the fund at the end of the valuation period, and adding any dividend or other distribution of the fund if an ex-dividend date occurs during the valuation period; minus 2. The liabilities of the subaccount at the end of the valuation period; these liabilities include daily charges imposed on the subaccount, and may include a charge or credit with respect to any taxes paid or reserved for by us that we determine result from the operations of the VAA; and 3. The result is divided by the number of subaccount units outstanding at the beginning of the valuation period. The daily charges imposed on a subaccount for any valuation period are equal to the daily mortality and expense risk charge and the daily administrative charge multiplied by the number of calendar days in the valuation period. Contracts with different features have different daily charges, and therefore, will have different corresponding accumulation unit values on any given day. In certain circumstances (for example, when separate account assets are less than $1,000), and when permitted by law, it may be prudent for us to use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method. Transfers On or Before the Annuity Commencement Date After the first 30 days from the effective date of your contract, you may transfer all or a portion of your investment from one sub account to another. A transfer involves the surrender of accumulation units in one subaccount and the purchase of accumulation units in the other subaccount. A transfer will be done using the respective accumulation unit values determined at the end of the valuation date on which the transfer request is received. Transfers (among the variable subaccounts and as permitted between the variable and fixed accounts) are limited to twelve (12) per contract year unless otherwise authorized by us. Currently there is no charge for a transfer. However, we reserve the right to impose a charge in the future of up to $25 per transfer, for transfers after the first 12 within a contract year. This limit does not apply to transfers made under the automatic transfer programs of dollar cost averaging, cross-reinvestment or portfolio rebalancing programs elected on forms available from us. (See Additional Services and the SAI for more information on these programs.) The minimum amount which may be transferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total balance of the subaccount. A transfer request may be made to our Servicing Office using written, telephone, fax, or electronic instructions, if the appropriate authorization is on file with us. Our address, telephone number, and internet address are on the first page of this prospectus. In order to prevent unauthorized or fraudulent transfers, we may require certain identifying information before we will act upon instructions. We may also assign the contractowner a Personal Identification Number (PIN) to serve as identification. We will not be liable for following instructions we reasonably believe are genuine. Telephone requests will be recorded and written confirmation of all transfer requests will be mailed to the contractowner on the next valuation date. 31 Please note that the telephone and/or electronic devices may not always be available. Any telephone or electronic device, whether it is yours, your service provider's, or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to limit these problems, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request by writing to our Servicing Office. Requests for transfers will be processed on the valuation date that they are received when they are received in good order at our Servicing Office before the end of the valuation date (normally 4:00 p.m. New York time). If we receive a transfer request in good order at or after 4:00 p.m., New York time, we will process the request using the accumulation unit value computed on the next valuation date. After the first thirty days from the effective date of your contract, if your contract offers a fixed account, you may also transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. For a description of the interest adjustment, see the Fixed Side of the Contract - Interest Adjustment. Transfers may be delayed as permitted by the 1940 Act. See Delay of Payments. Market Timing Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our contractowners and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other contractowners or fund shareholders. In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. While we reserve the right to enforce these policies and procedures, contractowners and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual contractowners, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific contractowners who violate the excessive trading policies established by the fund. You should be aware that the purchase and redemption orders received by the funds generally are "omnibus" orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds' ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our contractowners) will not be harmed by transfer activity relating to the retirement plans and/or other insurance companies that may invest in the funds. In addition, if a fund believes that an omnibus order we submit may reflect one or more transfer requests from policy owners engaged in disruptive trading activity, the fund may reject the entire omnibus order. Our Market Timing Procedures detect potential "market timers" by examining the number of transfers made by contractowners within given periods of time. In addition, managers of the funds might contact us if they believe or suspect that there is market timing. If requested by a fund company, we may vary our Market Timing Procedures from subaccount to subaccount to comply with specific fund policies and procedures. We may increase our monitoring of contractowners who we have previously identified as market timers. When applying the parameters used to detect market timers, we will consider multiple contracts owned by the same contractowner if that contractowner has been identified as a market timer. For each contractowner, we will investigate the transfer patterns that meet the parameters being 32 used to detect potential market timers. We will also investigate any patterns of trading behavior identified by the funds that may not have been captured by our Market Timing Procedures. Once a contractowner has been identified as a "market timer" under our Market Timing Procedures, we will notify the contractowner in writing that future transfers (among the subaccounts and/or the fixed account) will be temporarily permitted to be made only by original signature sent to us by U.S. mail, first-class delivery for the remainder of the contract year (or calendar year if the contract is an individual contract that was sold in connection with an employer sponsored plan). Overnight delivery or electronic instructions (which may include telephone, facsimile, or Internet instructions) submitted during this period will not be accepted. If overnight delivery or electronic instructions are inadvertently accepted from a contractowner that has been identified as a market timer, upon discovery, we will reverse the transaction within 1 or 2 business days. We will impose this "original signature" restriction on that contractowner even if we cannot identify, in the particular circumstances, any harmful effect from that contractowner's particular transfers. Contractowners seeking to engage in frequent, large, or short-term transfer activity may deploy a variety of strategies to avoid detection. Our ability to detect such transfer activity may be limited by operational systems and technological limitations. The identification of contractowners determined to be engaged in such transfer activity that may adversely affect other contractowners or fund shareholders involves judgments that are inherently subjective. We cannot guarantee that our Market Timing Procedures will detect every potential market timer. If we are unable to detect market timers, you may experience dilution in the value of your fund shares and increased brokerage and administrative costs in the funds. This may result in lower long-term returns for your investments. Our Market Timing Procedures are applied consistently to all contractowners. An exception for any contractowner will be made only in the event we are required to do so by a court of law. In addition, certain funds available as investment options in your contract may also be available as investment options for owners of other, older life insurance policies issued by us. Some of these older life insurance policies do not provide a contractual basis for us to restrict or refuse transfers which are suspected to be market timing activity. In addition, because other insurance companies and/or retirement plans may invest in the funds, we cannot guarantee that the funds will not suffer harm from frequent, large, or short-term transfer activity among subaccounts and the fixed accounts of variable contracts issued by other insurance companies or among investment options available to retirement plan participants. In our sole discretion, we may revise our Market Timing Procedures at any time without prior notice as necessary to better detect and deter frequent, large, or short-term transfer activity to comply with state or federal regulatory requirements, and/or to impose additional or alternate restrictions on market timers (such as dollar or percentage limits on transfers). If we modify our Market Timing Procedures, they will be applied uniformly to all contractowners or as applicable to all contractowners investing in underlying funds. Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund's investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date You may transfer all or a portion of your investment in one subaccount to another subaccount or to the fixed side of the contract, as permitted under your contract. Those transfers will be limited to three times per contract year. You may also transfer from a variable annuity payment to a fixed annuity payment. You may not transfer from a fixed annuity payment to a variable annuity payment. If you select i4LIFE (Reg. TM) Advantage your transfer rights and restrictions for the variable subaccounts and the fixed account during the Access Period are the same as stated in the section of this prospectus called Transfers On or Before the Annuity Commencement Date. During the i4LIFE (Reg. TM) Advantage Lifetime Income Period, you are subject to the rights set forth in the prior paragraph. Ownership The owner on the date of issue will be the person or entity designated in the contract specifications. If no owner is designated, the annuitant(s) will be the owner. The owner may name a joint owner. As contractowner, you have all rights under the contract. According to New York law, the assets of the VAA are held for the exclusive benefit of all contractowners and their designated beneficiaries; and the assets of the VAA are not chargeable with liabilities arising from any other business that we may conduct. We reserve the right to approve all ownership and annuitant changes. Nonqualified contracts may not be sold, discounted, or pledged as collateral for a loan or for any other purpose. Qualified contracts are not transferable unless allowed under applicable law. Assignments may have an adverse impact on any death benefits or living benefits in this 33 product. We assume no responsibility for the validity or effect of any assignment. Consult your tax adviser about the tax consequences of an assignment. Joint Ownership If a contract has joint owners, the joint owners shall be treated as having equal undivided interests in the contract. Either owner, independently of the other, may exercise any ownership rights in this contract. Not more than two owners (an owner and joint owner) may be named and contingent owners are not permitted. Annuitant The following rules apply prior to the annuity commencement date. You may name only one annuitant [unless you are a tax-exempt entity, then you can name two joint annuitants]. You (if the contractowner is a natural person) have the right to change the annuitant at any time by notifying us of the change, however we reserve the right to approve all annuitant changes. The new annuitant must be under age 86 as of the effective date of the change. This change may cause a reduction in the death benefits or living benefits. See The Contracts - Death Benefit. A contingent annuitant may be named or changed by notifying us in writing. Contingent annuitants are not allowed on contracts owned by non-natural owners. On or after the annuity commencement date, the annuitant or joint annuitants may not be changed and contingent annuitant designations are no longer applicable. Surrenders and Withdrawals Before the annuity commencement date, we will allow the surrender of the contract or a withdrawal of the contract value upon your written request on an approved Lincoln distribution request form (available from the Servicing Office), subject to the rules discussed below. Surrender or withdrawal rights after the annuity commencement date depend on the annuity payout option selected. The amount available upon surrender/withdrawal is the contract value less any applicable charges, fees, and taxes at the end of the valuation period during which the written request for surrender/withdrawal is received in good order at the Servicing Office. If we receive a surrender or withdrawal request in good order at or after 4:00 p.m., New York time, we will process the request using the accumulation unit value computed on the next valuation date. The minimum amount which can be withdrawn is $300. Unless a request for withdrawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the fixed account in the same proportion that the amount of withdrawal bears to the total contract value. Surrenders and withdrawals from the fixed account may be subject to the interest adjustment. See Fixed Side of the Contract. Unless prohibited, surrender/withdrawal payments will be mailed within seven days after we receive a valid written request at the Servicing Office. The payment may be postponed as permitted by the 1940 Act. If you request a lump sum surrender and your surrender value is over $10,000, your money will be placed into a SecureLine (Reg. TM) account in your name. SecureLine (Reg. TM)is a service we offer to help you manage your surrender proceeds. With SecureLine (Reg. TM), an interest bearing draft account is established from the proceeds payable on a policy or contract administered by us. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. Instead of mailing you a check, we will send a checkbook so that you will have access to the account by writing a check. You may choose to leave the proceeds in this account, or you may begin writing checks right away. If you decide you want the entire proceeds immediately, you may write one check for the entire account balance. The SecureLine (Reg. TM) account is part of our general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of our general account, it is subject to the claims of our creditors. We receive a benefit from all amounts left in the SecureLine (Reg. TM) account. You may request that surrender proceeds be paid directly to you instead of applied to a SecureLine (Reg. TM) account. Interest credited in the SecureLine (Reg. TM) account is taxable as ordinary income in the year such interest is credited, and is not tax deferred. We recommend that you consult your tax advisor to determine the tax consequences associated with the payment of interest on amounts in the SecureLine (Reg. TM) account. The balance in your SecureLine (Reg. TM) account starts earning interest the day your account is opened and will continue to earn interest until all funds are withdrawn. Interest is compounded daily and credited to your account on the last day of each month. The interest rate will be updated monthly and we may increase or decrease the rate at our discretion. The interest rate credited to your SecureLine (Reg. TM) account may be more or less than the rate earned on funds held in our general account. There are no monthly fees. You may be charged a fee if you stop a payment or if you present a check for payment without sufficient funds. There are charges associated with surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. If the charges are deducted from the remaining contract value, the amount of the total withdrawal will increase according to the impact of the applicable surrender charge percentage; consequently, the dollar amount of the surrender charge associated with the withdrawal will also increase. In other words, the dollar amount deducted to cover the surrender charge is also subject to a surrender charge. Special restrictions on surrenders/withdrawals apply if your contract is purchased as part of a retirement plan of a public school system or 501(c)(3) organization under Section 403(b) of the tax code. Beginning January 1, 1989, in order for a contract to retain its tax-qualified status, Section 403(b) prohibits a withdrawal from a 403(b) contract of post 1988 contributions (and earnings on those 34 contributions) pursuant to a salary reduction agreement. However, this restriction does not apply if the annuitant (a) attains age 591/2, (b) separates from service, (c) dies, (d) becomes totally and permanently disabled and/or (e) experiences financial hardship (in which event the income attributable to those contributions may not be withdrawn). Pre-1989 contributions and earnings through December 31, 1988, are not subject to the previously stated restriction. Funds transferred to the contract from a 403(b)(7) custodial account will also be subject to restrictions. Participants in the Texas Optional Retirement Program should refer to the Restrictions under the Texas Optional Retirement Program, later in this prospectus. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvestment service and portfolio rebalancing. Currently, there is no charge for these services. However, we reserve the right to impose one after appropriate notice to contractowners. In order to take advantage of one of these services, you will need to complete the appropriate election form that is available from our Servicing Office. For further detailed information on these services, please see Additional Services in the SAI. Dollar-cost averaging allows you to transfer amounts from the DCA fixed account, if available, or certain variable subaccounts into the variable subaccounts on a monthly basis or in accordance with other terms we make available. We reserve the right to discontinue or modify this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. Withdrawals under AWS are subject to applicable surrender charges and interest adjustments. See Charges and Other Deductions - Surrender Charge and Fixed Side of the Contract - Interest Adjustment. The cross-reinvestment service automatically transfers the contract value in a designated variable subaccount that exceeds a baseline amount to another specific variable subaccount at specific intervals. You specify the applicable subaccounts, the baseline amount and the interval period. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of contract value allocated to each variable account subaccount. The rebalancing may take place monthly, quarterly, semi-annually or annually. Only one of the three additional services (DCA, cross-reinvestment and portfolio rebalancing) may be used at one time. For example, you cannot have DCA and cross-reinvestment running simultaneously. Death Benefit The chart below provides a brief overview of how the death benefit proceeds will be distributed if death occurs prior to i4LIFE (Reg. TM) Advantage elections or prior to the annuity commencement date. Refer to your contract for the specific provisions applicable upon death.
UPON DEATH OF: AND... contractowner There is a surviving joint owner contractowner There is no surviving joint owner contractowner There is no surviving joint owner and the beneficiary predeceases the contractowner annuitant The contractowner is living annuitant The contractowner is living annuitant** The contractowner is a trust or other non-natural person UPON DEATH OF: AND... DEATH BENEFIT PROCEEDS PASS TO: contractowner The annuitant is living or deceased joint owner contractowner The annuitant is living or deceased designated beneficiary contractowner The annuitant is living or deceased contractowner's estate annuitant There is no contingent annuitant The youngest contractowner becomes the contingent annuitant and the contract continues. The contractowner may waive* this continuation and receive the death benefit proceeds. annuitant The contingent annuitant is living contingent annuitant becomes the annuitant and the contract continues annuitant** No contingent annuitant allowed designated beneficiary with non-natural contractowner
* Notification from the contractowner to select the death benefit proceeds must be received within 75 days of the death of the annuitant. ** Death of annuitant is treated like death of the contractowner. 35 If the contractowner (or a joint owner) or annuitant dies prior to the annuity commencement date, a death benefit may be payable. You can choose the death benefit. Only one death benefit may be in effect at any one time and this death benefit terminates if you elect an annuitization option. i4LIFE (Reg. TM) Advantage purchasers will receive the same death benefit option they elected immediately prior to electing i4LIFE (Reg. TM) Advantage, if that death benefit option is available with i4LIFE (Reg. TM) Advantage. i4LIFE (Reg. TM) Advantage purchasers may also elect a less expensive death benefit option. Generally, the more expensive the death benefit the greater the protection. You should consider the following provisions carefully when designating the beneficiary, annuitant, any contingent annuitant and any joint owner, as well as before changing any of these parties. The identity of these parties under the contract may significantly affect the amount and timing of the death benefit or other amount paid upon a contractowner's or annuitant's death. You may designate a beneficiary during your lifetime and change the beneficiary by filing a written request with our Servicing Office. Each change of beneficiary revokes any previous designation. We reserve the right to request that you send us the contract for endorsement of a change of beneficiary. Upon the death of the contractowner, a death benefit will be paid to the beneficiary. Upon the death of a joint owner, the death benefit will be paid to the surviving joint owner. If the contractowner is a corporation or other non-individual (non-natural person), the death of the annuitant will be treated as death of the contractowner. If an annuitant who is not the contractowner or joint owner dies, then the contingent annuitant, if named, becomes the annuitant and no death benefit is payable on the death of the annuitant. If no contingent annuitant is named, the contractowner (or younger of joint owners) becomes the annuitant. Alternatively, a death benefit may be paid to the contractowner (and joint owner, if applicable, in equal shares). Notification of the election of this death benefit must be received by us within 75 days of the death of the annuitant. The contract terminates when any death benefit is paid due to the death of the annuitant. Only the contract value as of the valuation date we approve the payment of the death claim is available as a death benefit if a contractowner, joint owner or annuitant was added or changed subsequent to the effective date of this contract unless the change occurred because of the death of a prior contractowner, joint owner or annuitant. If your contract value equals zero, no death benefit will be paid. Account Value Death Benefit. If you elect the Account Value Death Benefit contract option, we will pay a death benefit equal to the contract value on the valuation date the death benefit is approved by us for payment. No additional death benefit is provided. Once you have selected this death benefit option, it cannot be changed. (Your contract may refer to this benefit as the Contract Value Death Benefit.) Guarantee of Principal Death Benefit. If you do not select a death benefit, the Guarantee of Principal Death Benefit will apply to your contract. If the Guarantee of Principal Death Benefit is in effect, the death benefit will be equal to the greater of: o The current contract value as of the valuation date we approve the payment of the claim; or o The sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Guaranteed Annual Income amount under the Lincoln Lifetime IncomeSM Advantage 2.0 rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0). In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The Guarantee of Principal Death Benefit may be discontinued by completing the Death Benefit Discontinuance form and sending it to our Servicing Office. The benefit will be discontinued as of the valuation date we receive the request and the Account Value Death Benefit will apply. We will deduct the charge for the Account Value Death Benefit as of that date. See Charges and Other Deductions. Enhanced Guaranteed Minimum Death Benefit (EGMDB) If the EGMDB is in effect, the death benefit paid will be the greatest of: o the current contract value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Guaranteed Annual Income amount under the Lincoln Lifetime IncomeSM Advantage 2.0 rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0); or o the highest contract value which the contract attains on any contract anniversary (including the inception date) (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the death of the contractowner, joint owner or annuitant for whom the death claim is approved for payment. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduced the contract value. 36 In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. You may discontinue the EGMDB at any time by completing the Death Benefit Discontinuance form and sending it to our Servicing Office. The benefit will be discontinued as of the valuation date we receive the request, and the Guarantee of Principal Death Benefit or the Account Value Death Benefit will apply. We will deduct the applicable charge for the new death benefit as of that date. See Charges and Other Deductions. The EGMDB is only available under nonqualified, IRA or Roth IRA contracts if the contractowner, joint owner and annuitant are under age 80 at the time of issuance. General Death Benefit Information Only one of these death benefits may be in effect at any one time and these benefits terminate if you elect i4LIFE (Reg. TM) Advantage (which provides a death benefit) or you elect an annuitization option. If there are joint owners, upon the death of the first contractowner, we will pay a death benefit to the surviving joint owner. The surviving joint owner will be treated as the primary, designated beneficiary. Any other beneficiary designation on record at the time of death will be treated as a contingent beneficiary. If the surviving joint owner is the spouse of the deceased joint owner, he/she may continue the contract as sole contractowner. Upon the death of the spouse who continues the contract, we will pay a death benefit to the designated beneficiary(s). If the beneficiary is the spouse of the contractowner, then the spouse may elect to continue the contract as the new contractowner. Pursuant to the Federal Defense of Marriage Act, same-sex marriages are not recognized for purposes of federal law. Therefore, the favorable tax treatment provided by federal tax law to an opposite-sex spouse is not available to a same-sex spouse. Same-sex spouses should consult a tax advisor prior to purchasing annuity products that provide benefits based upon status as a spouse, and prior to exercising any spousal rights under an annuity. Should the surviving spouse elect to continue the contract, a portion of the death benefit may be credited to the contract. Any portion of the death benefit that would have been payable (if the contract had not been continued) that exceeds the current contract value on the date the surviving spouse elects to continue will be added to the contract value. If the contract is continued in this way the death benefit in effect at the time the beneficiary elected to continue the contract will remain as the death benefit. The value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of a claim submitted in good order. To be in good order, we require all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: o If any beneficiary dies before the contractowner, that beneficiary's interest will go to any other beneficiaries named, according to their respective interests; and/or o If no beneficiary survives the contractowner, the proceeds will be paid to the contractowner's estate. If the beneficiary is a minor, court documents appointing the guardian/custodian may be required. Unless the contractowner has already selected a settlement option, the beneficiary may choose the method of payment of the death benefit. The death benefit payable to the beneficiary or joint owner must be distributed within five years of the contractowner's date of death unless the beneficiary begins receiving within one year of the contractowner's death the distribution in the form of a life annuity or an annuity for a designated period not extending beyond the beneficiary's life expectancy. Upon the death of the annuitant, Federal tax law requires that an annuity election be made no later than 60 days after we have approved the death claim for payment. If the death benefit becomes payable, the recipient may elect to receive payment either in the form of a lump sum settlement or an annuity payout. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. In the case of a death of one of the parties to the annuity contract, if the recipient of the death benefit has elected a lump sum settlement and the death benefit is over $10,000, the proceeds will be placed into a SecureLine (Reg. TM) account in the recipient's name as the 37 owner of the account. SecureLine (Reg. TM) is a service we offer to help the recipient manage the death benefit proceeds. With SecureLine (Reg. TM), an interest bearing account is established from the proceeds payable on a policy or contract administered by us. The recipient is the owner of the account, and is the only one authorized to transfer proceeds from the account. Instead of mailing the recipient a check, we will send a checkbook so that the recipient will have access to the account by writing a check. The recipient may choose to leave the proceeds in this account, or may begin writing checks right away. If the recipient decides he or she wants the entire proceeds immediately, the recipient may write one check for the entire account balance. The recipient can write as many checks as he or she wishes. We may at our discretion set minimum withdrawal amounts per check. The total of all checks written cannot exceed the account balance. The SecureLine (Reg. TM) account is part of our general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of our general account, it is subject to the claims of our creditors. We receive a benefit from all amounts left in the SecureLine (Reg. TM)account. The recipient may request that surrender proceeds be paid directly to him or her instead of applied to a SecureLine (Reg. TM) account. Interest credited in the SecureLine (Reg. TM) account is taxable as ordinary income in the year such interest is credited, and is not tax deferred. We recommend that the recipient consult a tax advisor to determine the tax consequences associated with the payment of interest on amounts in the SecureLine (Reg. TM) account. The balance in the recipient's SecureLine (Reg. TM) account starts earning interest the day the account is opened and will continue to earn interest until all funds are withdrawn. Interest is compounded daily and credited to the recipient's account on the last day of each month. The interest rate will be updated monthly and we may increase or decrease the rate at our discretion. The interest rate credited to the recipient's SecureLine (Reg. TM) account may be more or less than the rate earned on funds held in our general account. There are no monthly fees. The recipient may be charged a fee for a stop payment or if a check is returned for insufficient funds. Investment Requirements If you purchase a Living Benefit rider (Lincoln Lifetime IncomeSM Advantage 2.0, 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, or the Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage), you will be subject to Investment Requirements, which means you will be limited in how much you can invest in certain subaccounts of your contract. You must comply with the Investment Requirements during the period of time you own the rider (the minimum time period for ownership, if any, is specified in the termination section of each rider). After that period, if you no longer comply with the Investment Requirements, the rider will be terminated. Currently, if you purchase i4LIFE (Reg. TM) without the Guaranteed Income Benefit, you will not be subject to any Investment Requirements, although we reserve the right to impose Investment Requirements for this rider in the future. We have divided the subaccounts of your contract into three groups. We will specify the minimum or maximum percentages of your contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) that must be in each group at the time you purchase the rider. In addition, you may allocate your contract value and purchase payments in accordance with certain asset allocation models. If you terminate an asset allocation model, you must follow the Investment Requirements applicable to your rider. Some investment options are not available to you if you purchase certain riders. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. You can select the percentages of contract value to allocate to individual subaccounts within each group, but the total investment for all subaccounts in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 30% of contract value Investments cannot exceed 70% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. Delaware VIP Diversified Income Series All other funds except as described below. 2. Delaware VIP Limited-Term Diversified Income Series 3. LVIP BlackRock Inflation Protected Bond Fund 4. LVIP Delaware Bond Fund 5. LVIP Delaware Diversified Floating Rate Fund 6. LVIP Global Income Fund 7. LVIP SSgA Bond Index Fund
38 8. LVIP Total Bond Fund
Group 3 Investments cannot exceed 10% of contract value or Account Value ------------------------------------------------------- 1. AllianceBernstein VPS Global Thematic Growth Portfolio 2. Delaware VIP Emerging Markets Series 3. Delaware VIP REIT Series 4. DWS Alternative Asset Allocation Plus VIP Portfolio 5. LVIP Cohen & Steers Global Real Estate Fund 6. LVIP SSgA Emerging Markets 100 Fund 7. MFS VIT Utilities Series
To satisfy these Investment Requirements, you may allocate 100% of your contract value among the funds on the following list; however, if you allocate less than 100% of contract value to or among these funds, then these funds will be considered as part of Group 1 or 2 above, as applicable, and you will be subject to the Group 1 or 2 restrictions. The PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. BlackRock Global Allocation VI Fund Delaware VIP Diversified Income Series Delaware VIP Limited-Term Diversified Income Series LVIP BlackRock Inflation Protected Bond Fund LVIP Delaware Bond Fund LVIP Delaware Diversified Floating Rate Fund LVIP Global Income Fund LVIP SSgA Bond Index Fund LVIP SSgA Global Tactical Allocation Fund LVIP SSgA Conservative Index Allocation Fund LVIP SSgA Conservative Structured Allocation Fund LVIP SSgA Moderate Index Allocation Fund LVIP SSgA Moderate Structured Allocation Fund LVIP SSgA Moderately Aggressive Index Allocation Fund LVIP SSgA Moderately Aggressive Structured Allocation Fund LVIP Total Bond Fund LVIP Conservative Profile Fund LVIP Moderate Profile Fund LVIP Moderately Aggressive Profile Fund Living Benefit Riders The optional Living Benefit riders offered under this variable annuity contract Lincoln Lifetime IncomeSM Advantage 2.0 Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (version 4) and 4LATER (Reg. TM) Advantage - are described in the following sections. The riders offer either a minimum withdrawal benefit (Lincoln SmartSecurity (Reg. TM) Advantage), a minimum annuity payout (i4LIFE (Reg. TM) Advantage and 4LATER (Reg. TM) Advantage), or an income benefit (Lincoln Lifetime IncomeSM Advantage 2.0). You may not elect more than one Living Benefit rider at a time. Upon election of a Living Benefit rider, you will be subject to Investment Requirements (unless you elect i4LIFE (Reg. TM) Advantage without the Guaranteed Income Benefit (version 4)). The overview chart provided with this prospectus provides a brief description and comparison of each Living Benefit rider. Excess withdrawals under certain Living Benefit riders may result in a reduction or premature termination of those benefits or of those riders. If you are not certain how an excess withdrawal will reduce your future guaranteed amounts, you should contact either your registered representative or us prior to requesting a withdrawal to find out what, if any, impact the excess withdrawal will have on any guarantees under the Living Benefit rider. Terms and conditions may change after the contract is purchased. Lincoln Lifetime IncomeSM Advantage 2.0 The Lincoln Lifetime IncomeSM Advantage 2.0 is a Living Benefit rider available for purchase in your contract that provides: o Guaranteed periodic withdrawals up to the Guaranteed Annual Income amount (up to the last day of the contractowner's 85th birth year on qualified contracts and up to the last day of the contractowner's 99th birth year on nonqualified contracts) which is based upon a guaranteed Income Base (a value equal to either your initial purchase payment or contract value, if elected after the contract's effective date); o Lifetime income is available through i4LIFE (Reg. TM) Advantage or the Guaranteed Annual Income Amount Annuity Payout Option; o A 5% Enhancement to the Income Base if greater than an Automatic Annual Step-up so long as no withdrawals are made in that year and the rider is within a ten-year Enhancement period; o Automatic Annual Step-ups of the Income Base to the contract value if the contract value is equal to or greater than the Income Base after the 5% Enhancement; 39 o Age-based increases to the Guaranteed Annual Income amount (after reaching a higher age-band and after an Automatic Annual Step-up). Please note any withdrawals made prior to age 55 or that exceed the Guaranteed Annual Income amount or that are not payable to the contractowner or contractowner's bank account (or to the annuitant or the annuitant's bank account, if the owner is a non-natural person) (Excess Withdrawals) may significantly reduce your Income Base as well as your Guaranteed Annual Income amount by an amount greater than the dollar amount of the Excess Withdrawal and will terminate the rider if the Income Base is reduced to zero. In order to purchase Lincoln Lifetime IncomeSM Advantage 2.0 the purchase payment or contract value (if purchased after the contract is issued) must be at least $25,000. This rider provides guaranteed, periodic withdrawals regardless of the investment performance of the contract, provided that certain conditions are met. An Income Base is used to calculate the Guaranteed Annual Income payment from your contract, but is not available as a separate benefit upon death or surrender. The Income Base is equal to the initial purchase payment (or contract value if elected after contract issue), increased by subsequent purchase payments, Automatic Annual Step-ups and 5% Enhancements, and decreased by Excess Withdrawals in accordance with the provisions set forth below. After the first anniversary of the rider effective date, cumulative additional purchase payments into the contract will be limited to an amount equal to $100,000 without Home Office approval. No additional purchase payments are allowed if the contract value decreases to zero for any reason. This rider provides for guaranteed, periodic withdrawals up to the Guaranteed Annual Income amount commencing after you or the younger spouse (joint life option) reach age 55. The Guaranteed Annual Income payments are based upon specified percentages of the Income Base. The specified withdrawal percentages of the Income Base are age based and may increase over time. With the single life and joint life options, you may receive Guaranteed Annual Income payments for your lifetime through the election of i4LIFE (Reg. TM) Advantage or the Guaranteed Annual Income Amount Annuity Payout Option which must be elected by the last day of the contractowner's 85th birth year for qualified contracts and up to the last day of the contractowner's 99th birth year for nonqualified contracts. Withdrawals in excess of the Guaranteed Annual Income amount or that are made prior to age 55 or that are not payable to the contractowner or contractowner's bank account (or to the annuitant or the annuitant's bank account, if the owner is a non-natural person) (Excess Withdrawals) may significantly reduce your Income Base and your Guaranteed Annual Income payments by an amount greater than the dollar amount of the Excess Withdrawal and may terminate the rider and the contract if the Income Base is reduced to zero. Withdrawals will also negatively impact the availability of the 5% Enhancement. Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. These options are discussed below in detail. This rider will terminate for qualified contracts on the last day of the contractowner's 85th birth year (for nonqualified contracts on the last day of the contractowner's 99th birth year) unless i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) or the Guaranteed Annual Income Amount Annuity Payout Option has been elected prior to that date. Lincoln New York offers other optional riders available for purchase with its variable annuity contracts. These riders provide different methods to take income from your contract value and may provide certain guarantees. There are differences between the riders in the features provided as well as the charge structure. In addition, the purchase of one rider may impact the availability of another rider. Information about the relationship between Lincoln Lifetime IncomeSM Advantage 2.0 and these other riders is included later in this discussion. Not all riders will be available at all times. You may consider purchasing the Lincoln Lifetime IncomeSM Advantage 2.0 if you want a guaranteed lifetime income payment that may grow as you get older and may increase through the Automatic Annual Step-up or 5% Enhancement. The cost of the Lincoln Lifetime IncomeSM Advantage 2.0 may be higher than other Living Benefit riders that you may purchase in your contract. The age at which you may start receiving the Guaranteed Annual Income amount may be different than the ages that you may receive guaranteed payments under other riders. Availability. The Lincoln Lifetime IncomeSM Advantage 2.0 is available for purchase with new and existing nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. For nonqualified contracts, the contractowner/annuitant as well as the spouse under the joint life option must be under age 86 (age 76 for qualified contracts) at the time this rider is elected. You cannot elect the rider and any other living benefit rider offered in your contract at the same time (Lincoln SmartSecurity (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage). You may not elect the rider if you have also elected i4LIFE (Reg. TM) Advantage. You must wait at least 12 months after terminating 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage or any other living benefits we may offer in the future before electing Lincoln Lifetime IncomeSM Advantage 2.0. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage, 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage for more information. There is no guarantee that the Lincoln Lifetime IncomeSM Advantage 2.0 will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. The availability of this rider will depend upon your state's approval of this rider. Check with your registered representative regarding availability. If you purchase the Lincoln Lifetime IncomeSM Advantage 2.0 you will be limited in your ability to invest within the subaccounts offered within your contract. You will be required to adhere to Investment Requirements. In addition, the fixed account is not available except for use with dollar cost averaging. See Investment Requirements. 40 If the rider is elected at contract issue, then the rider will be effective on the contract's effective date. If the rider is elected after the contract is issued (by sending a written request to our Home Office), the rider will be effective on the next valuation date following approval by us. Benefit Year. The Benefit Year is the 12-month period starting with the effective date of the rider and starting with each anniversary of the rider effective date after that. Income Base. The Income Base is a value used to calculate your Guaranteed Annual Income amount. The Income Base is not available to you as a lump sum withdrawal or a death benefit. The initial Income Base varies based on when you elect the rider. If you elect the rider at the time you purchase the contract, the initial Income Base will equal your initial purchase payment. If you elect the rider after we issue the contract, the initial Income Base will equal the contract value on the effective date of the rider. The maximum Income Base is $10,000,000. This maximum takes into consideration the total Income Bases and Guaranteed Amounts from all Lincoln Life contracts (or contracts issued by our affiliates) in which you (and/or spouse if joint life option) are the covered lives under any other Living Benefit riders. See The Contracts - 4LATER (Reg. TM) Advantage and Lincoln SmartSecurity (Reg. TM) Advantage. Additional purchase payments automatically increase the Income Base by the amount of the purchase payment (not to exceed the maximum Income Base); for example, a $10,000 additional purchase payment will increase the Income Base by $10,000. After the first anniversary of the rider effective date, cumulative additional purchase payments into the contract will be limited to an amount equal to $100,000 without Home Office approval. If we grant approval to exceed the $100,000 additional purchase payment restriction, the charge will change to the then current charge in effect on the next Benefit Year anniversary. Additional purchase payments will not be allowed if the contract value decreases to zero for any reason including market loss. Excess Withdrawals reduce the Income Base as discussed below. Withdrawals less than or equal to the Guaranteed Annual Income amount will not reduce the Income Base. Since the charge for the rider is based on the Income Base, the cost of the rider increases when additional purchase payments, Automatic Annual Step-ups and 5% Enhancements are made, and the cost decreases as Excess Withdrawals are made because these transactions all adjust the Income Base. In addition, the percentage charge may change when Automatic Annual Step-ups or 5% Enhancements occur as discussed below or additional purchase payments occur. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. 5% Enhancement to the Income Base. On each Benefit Year anniversary, the Income Base, minus purchase payments received in that year, will be increased by 5% if the contract owner/annuitant (as well as the spouse if the joint life option is in effect) are under age 86, if there were no withdrawals in that year and the rider is within a 10-year Enhancement period described below. If during any 10-year Enhancement period there are no Automatic Annual Step-ups the 5% Enhancements will terminate at the end of the Enhancement period and will not restart until the next Benefit Year anniversary following the Benefit Year anniversary upon which an Automatic Annual Step-up occurs. Any purchase payment made after the initial purchase payment will be added immediately to the Income Base and will result in an increased Guaranteed Annual Income amount but must be invested in the contract at least one Benefit Year before it will be used in calculating the 5% Enhancement. Any purchase payments made within the first 90 days after the effective date of the rider will be included in the Income Base for purposes of calculating the 5% Enhancement on the first Benefit Year anniversary. If you decline an Automatic Annual Step-up during the first ten Benefit Years, you will continue to be eligible for the 5% Enhancements through the end of the current Enhancement Period, but the charge could increase to the then current charge on any 5% Enhancements after the 10th Benefit Year Anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. In order to be eligible to receive further 5% Enhancements the contractowner/annuitant (single life option), or the contractowner and spouse (joint life option) must still be living and be under age 86. Note: The 5% Enhancement is not available in any year there is a withdrawal from contract value including a Guaranteed Annual Income payment. A 5% Enhancement will occur in subsequent years only under certain conditions. If you are eligible (as defined below) for the 5% Enhancement in the next year, the Enhancement will not occur until the Benefit Year anniversary of that year. The following is an example of the impact of the 5% Enhancement on the Income Base (assuming no withdrawals): Initial purchase payment = $100,000; Income Base = $100,000 Additional purchase payment on day 30 = $15,000; Income Base = $115,000 Additional purchase payment on day 95 = $10,000; Income Base = $125,000 On the first Benefit Year Anniversary, the Income Base will not be less than $130,750 ($115,000 times 1.05%=$120,750 plus $10,000). The $10,000 purchase payment on day 95 is not eligible for the 5% Enhancement until the 2nd Benefit Year Anniversary. The 5% Enhancement will be in effect for 10 years (the Enhancement period) from the effective date of the rider. A new Enhancement period will begin each time an Automatic Annual Step-up to the contract value occurs as described below. As explained below, the 5% Enhancement and Automatic Annual Step-up will not occur in the same year. If the Automatic Annual Step-up provides a greater increase to the Income Base, you will not receive the 5% Enhancement. If the Automatic Annual Step-up and the 5% Enhancement 41 increase the Income Base to the same amount then you will receive the Automatic Annual Step-up. The 5% Enhancement or the Automatic Annual Step-up cannot increase the Income Base above the maximum Income Base of $10,000,000. You will not receive the 5% Enhancement on any Benefit Year anniversary in which there is a withdrawal, including a Guaranteed Annual Income payment from the contract during that Benefit Year. The 5% Enhancement will occur on the following Benefit Year anniversary if no further withdrawals are made from the contract and the rider is within the Enhancement period. An example of the impact of a withdrawal on the 5% Enhancement is included in the Withdrawal Amounts section below. If during the first ten Benefit years your Income Base is increased by the 5% Enhancement on the Benefit Year anniversary, your percentage charge for the rider will not change on the Benefit Year anniversary. However, the amount you pay for the rider will increase since the charge for the rider is based on the Income Base. After the tenth Benefit Year anniversary the annual rider percentage charge may increase to the current charge each year if the Income Base increases as a result of the 5% Enhancement, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. See Charges and Other Deductions - Rider Charges - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. If your percentage charge for this rider is increased due to a 5% Enhancement that occurs after the tenth rider year anniversary, you may opt-out of the 5% Enhancement by giving us notice in writing within 30 days after the Benefit Year anniversary if you do not want your percentage charge for the rider to change. This opt-out will only apply for this particular 5% Enhancement. You will need to notify us each time thereafter (if an Enhancement would cause your percentage charge to increase) if you do not want the 5% Enhancement. You may not opt-out of the 5% Enhancement if the current charge for the rider increases due to additional purchase payment made during that Benefit Year that exceeds the $100,000 purchase payment restriction after the first Benefit Year. See Income Base section for more details. Automatic Annual Step-ups of the Income Base. The Income Base will automatically step-up to the contract value on each Benefit Year anniversary if: a. the contractowner/annuitant (single life option), or the contractowner and spouse (joint life option) are still living and under age 86; and b. the contract value on that Benefit Year anniversary, after the deduction of any withdrawals (including surrender charges, the rider charge and account fee), plus any purchase payments made on that date and persistency credits, if any added on that date, is equal to or greater than the Income Base after the 5% Enhancement (if any). Each time the Income Base is stepped up to the current contract value as described above, your percentage charge for the rider will be the current charge for the rider, not to exceed the guaranteed maximum charge. Therefore, your percentage charge for this rider could increase every Benefit Year anniversary. See Charges and Other Deductions - Rider Charges - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. Each time the Automatic Annual Step-up occurs a new 10-year Enhancement period starts. The Automatic Annual Step-up is available even in those years when a withdrawal has occurred. If your percentage charge for this rider is increased upon an Automatic Annual Step-up, you may opt-out of the Automatic Annual Step-up by giving us notice in writing within 30 days after the Benefit Year anniversary if you do not want your percentage charge for the rider to change. This opt-out will only apply for this particular Automatic Annual Step-up. You will need to notify us each time the percentage charge increases if you do not want the Step-up. As stated above, if you decline an Automatic Annual Step-up during the first ten Benefit Years, you will continue to be eligible for the 5% Enhancements through the end of the current Enhancement Period, but the charge could increase to the then current charge on any 5% Enhancements after the 10th Benefit Year anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. See the earlier Income Base section. You may not opt-out of the Automatic Annual Step-up if an additional purchase payment made during that Benefit Year caused the charge for the rider to increase to the current charge. Following is an example of how the Automatic Annual Step-ups and the 5% Enhancement will work (assuming no withdrawals or additional purchase payments):
Income Base with Potential for Charge Contract Value 5% Enhancement Income Base to Change ---------------- ------------------ ------------- --------------------- Initial Purchase Payment $50,000...... $50,000 N/A $50,000 N/A 1st Benefit Year Anniversary.......... $54,000 $52,500 $54,000 Yes 2nd Benefit Year Anniversary.......... $53,900 $56,700 $56,700 No 3rd Benefit Year Anniversary.......... $57,000 $59,535 $59,535 No 4th Benefit Year Anniversary.......... $64,000 $62,512 $64,000 Yes
On the 1st Benefit Year anniversary, the Automatic Annual Step-up increased the Income Base to the contract value of $54,000 since the increase in the contract value is greater than the 5% Enhancement amount of $2,500 (5% of $50,000). On the 2nd Benefit Year 42 anniversary, the 5% Enhancement provided a larger increase (5% of $54,000 = $2,700). On the 3rd Benefit Year anniversary, the 5% Enhancement provided a larger increase (5% of $56,700=$2,835). On the 4th Benefit Year anniversary, the Automatic Annual Step-up to the contract value was greater than the 5% Enhancement amount of $2,977 (5% of $59,535). An Automatic Annual Step-up cannot increase the Income Base beyond the maximum Income Base of $10,000,000. Withdrawal Amount. You may make periodic withdrawals up to the Guaranteed Annual Income amount each Benefit Year as long as your Guaranteed Annual Income amount is greater than zero until the last day of the contractowner's (or youngest joint owner's) 99th birth year for nonqualified contracts or the last day of the contractowner's 85th birth year for qualified contracts. You may only receive lifetime periodic payments under either i4LIFE (Reg. TM) Advantage or the Guaranteed Annual Income Amount Annuity Payout Option if either payout option is elected prior to the contractowner's (or youngest joint owner's) 99th birth year for nonqualified contracts or the last day of the contractowner's 85th birth year for qualified contracts. You may start taking Guaranteed Annual Income withdrawals when you (single life option) or the younger of you and your spouse (joint life option) turn age 55. The initial Guaranteed Annual Income amount is calculated when you purchase the rider. If you (or younger of you and your spouse if the joint life option is elected) are under age 55 at the time the rider is elected the initial Guaranteed Annual Income amount will be zero. If you (or the younger of you and your spouse if the joint life option is elected) are age 55 or older at the time the rider is elected the initial Guaranteed Annual Income amount will be equal to a specified percentage of the Income Base. The specified percentage of the Income Base will be based on your age (or younger of you and your spouse if the joint life option is elected). Upon your first withdrawal the Guaranteed Annual Income percentage is based on your age (single life option) or the younger of you and your spouse's age (joint life option) at the time of the withdrawal. For example, if you purchase the rider at age 57, your Guaranteed Annual Income percentage is 4%. If you waited until you were age 60 (single life option) to make your first withdrawal your Guaranteed Annual Income percentage would be 5%. During the first Benefit Year the Guaranteed Annual Income amount is calculated using the Income Base as of the effective date of the rider (including any purchase payments made within the first 90 days after the effective date of the rider). After the first Benefit Year anniversary we will use the Income Base calculated on the most recent Benefit Year anniversary for calculating the Guaranteed Annual Income amount. After your first withdrawal the Guaranteed Annual Income amount percentage will only increase on a Benefit Year Anniversary on or after you have reached an applicable higher age band and after there has also been an Automatic Annual Step-up. If you have reached an applicable age band and there has not also been an Automatic Annual Step-up, then the Guaranteed Annual Income amount percentage will not increase until the next Automatic Annual Step-up occurs. If you do not withdraw the entire Guaranteed Annual Income amount during a Benefit Year, there is no carryover of the extra amount into the next Benefit Year. Guaranteed Annual Income Percentages by Ages
Guaranteed Age (joint life Guaranteed Annual Income Age (Single Annual Income amount option - younger of amount percentage Life Option) percentage (single life option) you and your spouse's age) (joint life option) ------------------------------ --------------------------------- ---------------------------- ------------------------- At least 55 and under 59 1/2 4% 55-64 4% 59 1/2+ 5% 65+ 5%
If your contract value is reduced to zero because of market performance or rider charges, withdrawals equal to the Guaranteed Annual Income amount will continue automatically for your life (and your spouse's life if applicable) under the Guaranteed Annual Income Amount Annuity Payout Option. You may not withdraw the remaining Income Base in a lump sum. You will not be entitled to the Guaranteed Annual Income amount if the Income Base is reduced to zero as a result of an Excess Withdrawal. If the Income Base is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. If the contract value is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. Withdrawals equal to or less than the Guaranteed Annual Income amount will not reduce the Income Base. All withdrawals you make will decrease the contract value. Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. The following example shows the calculation of the Guaranteed Annual Income amount and how withdrawals less than or equal to the Guaranteed Annual Income amount affect the Income Base and the contract value. The contractowner is age 58 (4% Guaranteed Annual Income percentage for single life option) on the rider's effective date, and makes an initial purchase payment of $200,000 into the contract: 43 Contract value on the rider's effective date $200,000 Income Base on the rider's effective date $200,000 Initial Guaranteed Annual Income amount on the rider's $ 8,000 effective date ($200,000 x 4%) Contract value six months after rider's effective date $210,000 Income Base six months after rider's effective date $200,000 Withdrawal six months after rider's effective date when $ 8,000 contractowner is still age 58 Contract value after withdrawal ($210,000 - $8,000) $202,000 Income Base after withdrawal ($200,000 - $0) $200,000 Contract value on first Benefit Year anniversary $205,000 Income Base on first Benefit Year anniversary $205,000 Guaranteed Annual Income amount on first Benefit Year $ 8,200 anniversary ($205,000 x 4%)
Since there was a withdrawal during the first year the 5% Enhancement is not available but the Automatic Annual Step-up was available and increased the Income Base to the contract value of $205,000. On the first anniversary of the rider's effective date the Guaranteed Annual Income amount is $8,200 (4% x $205,000). Purchase payments added to the contract subsequent to the initial purchase payment will increase the Guaranteed Annual Income amount by an amount equal to the applicable Guaranteed Annual Income amount percentage multiplied by the amount of the subsequent purchase payment. For example, assuming a contractowner is age 58 (single life option), if the Guaranteed Annual Income amount of $2,000 (4% of $50,000 Income Base) is in effect and an additional purchase payment of $10,000 is made, the new Guaranteed Annual Income amount that Benefit Year is $2,400 ($2,000 + 4% of $10,000). The Guaranteed Annual Income payment amount will be recalculated immediately after a purchase payment is added to the contract. Persistency credits added to the contract do not immediately increase the Guaranteed Annual Income amount but are added to the contract value and may increase the Income Base upon an Automatic Annual Step-up which in return may increase the Guaranteed Annual Income amount. Cumulative additional purchase payments into the contract that exceed $100,000 after the first anniversary of the rider effective date must receive Home Office approval. Additional purchase payments will not be allowed if the contract value is zero. 5% Enhancements and Automatic Annual Step-ups will increase the Income Base and thus the Guaranteed Annual Income amount. The Guaranteed Annual Income amount after the Income Base is adjusted either by a 5% Enhancement or an Automatic Annual Step-up will be equal to the adjusted Income Base multiplied by the applicable Guaranteed Annual Income percentage. Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) that exceed the Guaranteed Annual Income amount at the time of the withdrawal or are withdrawals made prior to age 55 (younger of you or your spouse for joint life) or that are not payable to the contractowner or contractowner's bank account (or to the annuitant or the annuitant's bank account, if the owner is a non-natural person). When an Excess Withdrawal occurs: 1. The Income Base is reduced by the same proportion that the Excess Withdrawal reduces the contract value. This means that the reduction in the Income Base could be more than the dollar amount of the withdrawal; and 2. The Guaranteed Annual Income amount will be recalculated to equal the applicable Guaranteed Annual Income amount percentage multiplied by the new (reduced) Income Base (after the pro rata reduction for the Excess Withdrawal). We will provide you with quarterly statements that will include the Guaranteed Annual Income amount (as adjusted for Guaranteed Annual Income amount payments, Excess Withdrawals and additional purchase payments) available to you for the Benefit Year, if applicable, in order for you to determine whether a withdrawal may be an Excess Withdrawal. We encourage you to either consult with your registered representative or call us at number provided on the front page of this prospectus if you have questions about Excess Withdrawals. The following example demonstrates the impact of an Excess Withdrawal on the Income Base, the Guaranteed Annual Income amount and the contract value. The contractowner who is age 58 (single life option) makes a $12,000 withdrawal which causes a $12,915.19 reduction in the Income Base. Prior to Excess Withdrawal: Contract value = $60,000 Income Base = $85,000 Guaranteed Annual Income amount = $3,400 (4% of the Income Base of $85,000) After a $12,000 Withdrawal ($3,400 is within the Guaranteed Annual Income amount, $8,600 is the Excess Withdrawal): The contract value is reduced by the amount of the Guaranteed Annual Income amount of $3,400 and the Income Base is not reduced: 44 Contract value = $56,600 ($60,000 - $3,400) Income Base = $85,000 The contract value is also reduced by the $8,600 Excess Withdrawal and the Income Base is reduced by 15.19435%, the same proportion that the Excess Withdrawal reduced the $56,600 contract value ($8,600 - $56,600) Contract value = $48,000 ($56,600 - $8,600) Income Base = $72,084.81 ($85,000 x 15.19435% = $12,915.19; $85,000 - $12,915.19 = $72,084.81). Guaranteed Annual Income amount = $2,883.39 (4% of $72,084.81 Income Base) On the following Benefit Year anniversary: Contract value = $43,000 Income Base = $72,084.81 Guaranteed Income amount = $2,883.39 (4% x $72,084.81) In a declining market, Excess Withdrawals may significantly reduce your Income Base as well as your Guaranteed Annual Income amount. If the Income Base is reduced to zero due to an Excess Withdrawal the rider will terminate. If the contract value is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. Excess Withdrawals will be subject to surrender charges unless one of the waivers of surrender charge provisions set forth in your prospectus is applicable. Continuing with the prior example of the $12,000 withdrawal: the $3,400 Guaranteed Annual Income amount is not subject to surrender charges; the $8,600 Excess Withdrawal may be subject to surrender charges according to the surrender charge schedule in this prospectus. See Charges and Other Deductions - Surrender Charge. Withdrawals from IRA contracts will be treated as within the Guaranteed Annual Income amount (even if they exceed the Guaranteed Annual Income amount) only if the withdrawals are taken as systematic monthly or quarterly installments of the amount needed to satisfy the required minimum distribution (RMD) rules under Internal Revenue Code Section 401(a)(9). In addition, in order for this exception for RMDs to apply, the following must occur: 1. Lincoln's monthly or quarterly automatic withdrawal service is used to calculate and pay the RMD; 2. The RMD calculation must be based only on the value in this contract; and 3. No withdrawals other than RMDs are made within the Benefit Year (except as described in the next paragraph). If your RMD withdrawals during a Benefit Year are less than the Guaranteed Annual Income amount, an additional amount up to the Guaranteed Annual Income amount may be withdrawn and will not be subject to surrender charges. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the Guaranteed Annual Income amount, including amounts attributable to RMDs, will be treated as Excess Withdrawals. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters for a discussion of the tax consequences of withdrawals. Guaranteed Annual Income Amount Annuity Payout Option. If you are required to take annuity payments because you have reached the maturity date of the contract or have reached the last day of your 85th birth year (qualified contracts) or the last day of your 99th birth year (nonqualified contracts) and have not elected i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4), you have the option of electing the Guaranteed Annual Income Amount Annuity Payout Option. If the contract value is reduced to zero and you have a remaining Income Base, you will receive the Guaranteed Annual Income Amount Annuity Payout Option. If you are receiving the Guaranteed Annual Income Amount Annuity Payout Option, the beneficiary may be eligible to receive final payment upon death of the single life or surviving joint life. To be eligible the death benefit option in effect immediately prior to the effective date of the Guaranteed Annual Income Amount Annuity Payout Option must be one of the following death benefits: the Guarantee of Principal Death Benefit or the EGMDB. Contractowners may decide to choose the Guaranteed Annual Income Amount Annuity Payout Option over i4LIFE (Reg. TM) Advantage if they feel this may provide a higher final payment option over time and they may place more importance on this over access to the Account Value. If the death benefit option in effect is the Account Value Death Benefit the beneficiary will not be eligible to receive the final payment(s). The Guaranteed Annual Income Amount Annuity Payout Option is an annuity payout option which the contractowner (and spouse if applicable) will receive annual annuity payments equal to the Guaranteed Annual Income amount for life (this option is different from other annuity payout options, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Contractowners may decide to choose the Guaranteed Annual Income Amount Annuity Payout Option over i4LIFE (Reg. TM) Advantage if they feel this may provide a higher final payment option over time and they may place more importance on this over access to the Account Value. Payment frequencies 45 other than annual may be available. You will have no other contract features other than the right to receive annuity payments equal to the Guaranteed Annual Income amount for your life or the life of you and your spouse for the joint life option. The final payment is a one-time lump-sum payment. If the effective date of the rider is the same as the effective date of the contract the final payment will be equal to the sum of all purchase payments, decreased by withdrawals. If the effective date of the rider is after the effective date of the contract the final payment will be equal to the contract value on the effective date of the rider, increased for purchase payments received after the rider effective date and decreased by withdrawals. Excess Withdrawals reduce the final payment in the same proportion as the withdrawals reduce the contract value; withdrawals less than or equal to the Guaranteed Annual Income amount and payments under the Guaranteed Annual Income Amount Annuity Payout Option will reduce the final payment dollar for dollar. Death Prior to the Annuity Commencement Date. The Lincoln Lifetime IncomeSM Advantage 2.0 has no provision for a payout of the Income Base or any other death benefit upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit options (as described earlier in this prospectus) will be in effect. Election of the Lincoln Lifetime IncomeSM Advantage 2.0 does not impact the death benefit options available for purchase with your annuity contract except as described below in Impact to Withdrawal Calculations of Death Benefits before the Annuity Commencement Date. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the single life, the Lincoln Lifetime IncomeSM Advantage 2.0 will end and no further Guaranteed Annual Income amounts are available (even if there was an Income Base in effect at the time of the death). If the beneficiary elects to continue the contract after the death of the single life (through a separate provision of the contract), the beneficiary may purchase a new Lincoln Lifetime IncomeSM Advantage 2.0 if available under the terms and charge in effect at the time of the new purchase. There is no carryover of the Income Base. Upon the first death under the joint life option, the lifetime payout of the Guaranteed Annual Income amount will continue for the life of the surviving spouse. The 5% Enhancement and Automatic Annual Step-up will continue if applicable as discussed above. Upon the death of the surviving spouse, the Lincoln Lifetime IncomeSM Advantage 2.0 will end and no further Guaranteed Annual Income amounts are available (even if there was an Income Base in effect at the time of the death). As an alternative, after the first death, the surviving spouse if under age 86 may choose to terminate the joint life option and purchase a new single life option, if available, under the terms and charge in effect at the time for a new purchase. In deciding whether to make this change, the surviving spouse should consider whether the change will cause the Income Base and the Guaranteed Annual Income amount to decrease. Termination. After the fifth anniversary of the effective date of the rider, the contractowner may terminate the rider by notifying us in writing. Lincoln Lifetime IncomeSM Advantage 2.0 will automatically terminate: o on the annuity commencement date (except payments under the Guaranteed Annual Income Amount Annuity Payout Option will continue if applicable); or o upon the death under the single life option or the death of the surviving spouse under the joint life option; or o when the Guaranteed Annual Income amount or contract value is reduced to zero due to an Excess Withdrawal; or o upon surrender of the contract; or o upon termination of the underlying annuity contract; or o for qualified contracts, on the final day of the contractowner's 85th birth year if i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) has not been elected; or o for nonqualified contracts, on the final day of the contractowner's 99th birth year (or the younger of the contractowner or spouse for joint life option) if i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) has not been elected. The termination will not result in any increase in contract value equal to the Income Base. Upon effective termination of this rider, the benefits and charges within this rider will terminate. If you terminate the rider, you must wait one year before you can re-elect any Living Benefit rider, Lincoln SmartSecurity (Reg. TM) Advantage, 4LATER (Reg. TM) Advantage, or any other living benefits we may offer in the future. Compare to Lincoln SmartSecurity (Reg. TM) Advantage. If a contractowner is interested in purchasing a rider that provides guaranteed minimum withdrawals, the following factors should be considered when comparing Lincoln Lifetime IncomeSM Advantage 2.0 and the Lincoln SmartSecurity (Reg. TM) Advantage (only one of these riders can be added to a contract at any one time): the Lincoln Lifetime IncomeSM Advantage 2.0 has the opportunity to provide a higher Income Base than the Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage because of the 5% Enhancement or Automatic Annual Step-up. The Income Base for Lincoln Lifetime IncomeSM Advantage 2.0 may also be higher than the Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage because withdrawals equal to or less than the Guaranteed Annual Income amount do not reduce the Income Base whereas withdrawals under Lincoln SmartSecurity (Reg. TM) Advantage reduce the Guaranteed Amount. Lincoln Lifetime IncomeSM Advantage 2.0 also provides the potential for lifetime withdrawals from an earlier age (rather than age 65 with the Lincoln SmartSecurity (Reg. TM) Advantage). However, the percentage charge for the Lincoln Lifetime IncomeSM Advantage 2.0 is higher and has the potential to increase on every Benefit Year Anniversary if the increase in contract value exceeds the 5% Enhancement and after the 10th Benefit Year anniversary upon a 5% Enhancement. In 46 addition, the guaranteed maximum charge is higher for Lincoln Lifetime IncomeSM Advantage 2.0. Since the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base is not reduced by withdrawals that are less than or equal to the Guaranteed Annual Income amount, the charge, which is applied against the Income Base will not be reduced. Whereas with Lincoln SmartSecurity (Reg. TM) Advantage, withdrawals reduce the Guaranteed Amount against which the Lincoln SmartSecurity (Reg. TM) Advantage charge is applied. In addition, the Lincoln SmartSecurity (Reg. TM) Advantage provides that guaranteed Maximum Annual Withdrawal amounts can continue to a beneficiary to the extent of any remaining Guaranteed Amount while the Lincoln Lifetime IncomeSM Advantage 2.0 does not offer this feature. i4LIFE (Reg. TM) Advantage Option. i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable income payments for life, the ability to make withdrawals during a defined period of time (the Access Period) and a death benefit during the Access Period. A minimum payout floor, called the Guaranteed Income Benefit, is also available for purchase at the time you elect i4LIFE (Reg. TM) Advantage. You cannot have both i4LIFE (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage 2.0 in effect on your contract at the same time. Contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0 may decide to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). If this decision is made, the contractowner can use the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or the rider's effective date (if there has not been an Automatic Annual Step-up) to establish the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) at the terms in effect for purchasers of this rider. If the contractowner drops Lincoln Lifetime IncomeSM Advantage 2.0 and purchases i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) by the last day of the contractowner's 85th birth year for qualified contracts (based on contractowner's age for joint life option) or by the last day of the contractowner's 99th birth year for nonqualified contracts (based on youngest life for joint life option), the initial Guaranteed Income Benefit will equal the greater of (a) the current Guaranteed Annual Income Amount or (b) the Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or the rider's effective date (if there has not been an Automatic Annual Step-up) multiplied by the applicable age-banded Guaranteed Income Benefit percentage or (c) the i4LIFE (Reg. TM) Advantage Account Value multiplied by the applicable age-banded Guaranteed income Benefit percentage. If you choose to drop the Lincoln Lifetime IncomeSM Advantage 2.0 and have the single life option, you must purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) single life option. If you drop the Lincoln Lifetime IncomeSM Advantage 2.0 and have the joint life option, you must purchase i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (version 4) joint life option. Contractowners who purchase Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed the ability in the future to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) even if it is no longer available for sale. They are also guaranteed that the Guaranteed Income Benefit percentage and Access Period requirements will be at least as favorable as those at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. If you choose to drop your rider and elect i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) prior to the 5th Benefit Year anniversary, the election must be made before the Annuity Commencement Date and by age 95 for nonqualified contracts or age 80 for qualified contracts. Elections made prior to the 5th Benefit Year anniversary will result in a minimum Access Period of the greater of 20 years or age 90. If you choose to drop the rider and elect i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) after the 5th Benefit Year anniversary the election must be made before the Annuity Commencement Date and by the last day of the contractowner's 85th birth year for qualified contracts or by the last day of the contractowner's 99th birth year for nonqualified contracts. Elections made after the 5th Benefit Year anniversary will result in a minimum Access Period of the greater of 15 years or age 85. See i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). For nonqualified contracts, the contractowner must elect the levelized option for regular income payments. While i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is in effect, the contractowner cannot change the payment mode elected or decrease the length of the Access Period. When deciding whether to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) you should consider that depending on a person's age and the selected length of the Access Period, i4LIFE (Reg. TM) Advantage may provide a higher payout than the Guaranteed Annual Income amounts under Lincoln Lifetime IncomeSM Advantage 2.0. You should consider electing i4LIFE (Reg. TM) Advantage when you are ready to immediately start receiving i4LIFE (Reg. TM) Advantage payments whereas with Lincoln Lifetime IncomeSM Advantage 2.0 you may defer taking withdrawals until a later date. Payments from a nonqualified contract that a person receives under the i4LIFE (Reg. TM) Advantage rider are treated as "amounts received as an annuity" under section 72 of the Internal Revenue Code because the payments occur after the annuity starting date. These payments are subject to an "exclusion ratio" as provided in section 72(b) of the Code, which means a portion of each annuity payout is treated as income (taxable at ordinary income tax rates), and the remainder is treated as a nontaxable return of purchase payments. In contrast, withdrawals under Lincoln Lifetime IncomeSM Advantage 2.0 are not treated as amounts received as an annuity because they occur prior to the annuity starting date. As a result, such withdrawals are treated first as a return of any existing gain in the contract (which is the measure of the extent to which the contract value exceeds purchase payments), and then as a nontaxable return of purchase payments. The initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) will be equal to the current annual rate in effect for your Lincoln Lifetime IncomeSM Advantage 2.0 rider. This charge is in addition to the mortality and expense risk and administrative charge for your base contract death benefit option. The charge is calculated based upon the greater of the value of the Income Base or contract value as of the last valuation date under Lincoln Lifetime IncomeSM Advantage 2.0 prior to election of i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). During the Access Period, this charge is deducted from the i4LIFE (Reg. TM) Advantage Account Value 47 on a quarterly basis with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). During the Lifetime Income Period, this charge is deducted annually. The initial charge may increase annually upon a step-up of the Guaranteed Income Benefit by an amount equal to the prior charge rate (or initial charge rate if the first anniversary of the rider's effective date) multiplied by the percentage increase, if any, to the Guaranteed Income Benefit and the percentage increase if any to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge. If an Excess Withdrawal occurs, the charge will decrease by the same percentage as the percentage change to the Account Value. Impact to Withdrawal Calculations of Death Benefits before the Annuity Commencement Date. The death benefit calculation for certain death benefit options in effect prior to the annuity commencement date may change for contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0. Certain death benefit options provide that all withdrawals reduce the death benefit in the same proportion that the withdrawals reduce the contract value. If you elect the Lincoln Lifetime IncomeSM Advantage 2.0, withdrawals less than or equal to the Guaranteed Annual Income will reduce the sum of all purchase payments option of the death benefit on a dollar for dollar basis. This applies to the Guarantee of Principal Death Benefit, and only the sum of all purchase payments alternative of the EGMDB. See The Contracts - Death Benefits. Any Excess Withdrawals will reduce the sum of all purchase payments in the same proportion that the withdrawals reduced the contract value under any death benefit option in which proportionate withdrawals are in effect. This change has no impact on death benefit options in which all withdrawals reduce the death benefit calculation on a dollar for dollar basis. The terms of your contract will describe which method is in effect for your contract while this rider is in effect. The following example demonstrates how a withdrawal will reduce the death benefit if both the EGMDB and the Lincoln Lifetime IncomeSM Advantage 2.0 are in effect when the contractowner dies. Note that this calculation applies only to the sum of all purchase payments calculation and not for purposes of reducing the highest anniversary contract value under the EGMDB: Contract value before withdrawal $80,000 Guaranteed Annual Income amount $5,000 Enhanced Guaranteed Minimum Death Benefit (EGMDB) values before withdrawal is the greatest of a), b), or c) described in detail in the EGMDB section of this prospectus: a) Contract value $80,000 b) Sum of purchase payments $100,000 c) Highest anniversary contract value $150,000 Withdrawal of $9,000 will impact the death benefit calculation as follows: a) $80,000 - $9,000 = $71,000 (Reduction $9,000) b) $100,000 - $5,000 = $95,000 (reduction by the amount of the Guaranteed Annual Income amount) ($95,000 - $5,067 = $89,932 [$95,000 times ($4,000/$75,000) = $5,067] Proportional reduction of Excess Withdrawal. Total reduction = $10,067. c) $150,000 - $16,875 = $133,125 [$150,000 times $9,000/$80,000 = $16,875]. The entire $9,000 withdrawal reduced the death benefit option proportionally. Total reduction = $16,875. Item c) provides the largest death benefit of $133,125. Lincoln SmartSecurity (Reg. TM) Advantage The Lincoln SmartSecurity (Reg. TM) Advantage is a Rider that is available for purchase with your variable annuity contract. This benefit provides a minimum guaranteed amount (Guaranteed Amount) that you will be able to withdraw, in installments, from your contract. The Guaranteed Amount is equal to the initial purchase payment (or contract value if elected after contract issue) adjusted for subsequent purchase payments, step-ups and withdrawals in accordance with the provisions set forth below. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the Guaranteed Amount will automatically step-up to the contract value, if higher, on each Benefit Year anniversary through the 10th anniversary. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the contractowner can also initiate additional ten-year periods of automatic step-ups. You may access this Guaranteed Amount through periodic withdrawals which are based on a percentage of the Guaranteed Amount. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life or Joint Life options, you also have the option to receive periodic withdrawals for your lifetime or for the lifetimes of you and your spouse (when available in your state). These options are discussed below in detail. By purchasing this Rider, you will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. We offer other optional riders available for purchase with variable annuity contracts. These riders, which are fully discussed in this prospectus, provide different methods to take income from your contract value and may provide certain guarantees. 48 There are differences between the riders in the features provided as well as the charge structure. In addition, the purchase of one rider may impact the availability of another rider. In particular, before you elect the Lincoln SmartSecurity (Reg. TM) Advantage, you may want to compare it to Lincoln Lifetime IncomeSM Advantage 2.0, which provides minimum guaranteed, periodic withdrawals for life. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0 - Compare to Lincoln SmartSecurity (Reg. TM) Advantage. If the benefit is elected at contract issue, then the Rider will be effective on the contract's effective date. If the benefit is elected after the contract is issued (by sending a written request to our Servicing Office), the Rider will be effective on the next valuation date following approval by us. Benefit Year. The Benefit Year is the 12-month period starting with the effective date of the Rider and starting with each anniversary of the Rider effective date after that. If the contractowner elects to step-up the Guaranteed Amount (this does not include automatic annual step-ups within a ten-year period), the Benefit Year will begin on the effective date of the step-up and each anniversary of the effective date of the step-up after that. The step-up will be effective on the next valuation date after notice of the step-up is approved by us. Guaranteed Amount. The Guaranteed Amount is a value used to calculate your withdrawal benefit under this Rider. The Guaranteed Amount is not available to you as a lump sum withdrawal or a death benefit. The initial Guaranteed Amount varies based on when and how you elect the benefit. If you elect the benefit at the time you purchase the contract, the Guaranteed Amount will equal your initial purchase payment. If you elect the benefit after we issue the contract, the Guaranteed Amount will equal the contract value on the effective date of the Rider. The maximum Guaranteed Amount is $10,000,000 for Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up. This maximum takes into consideration the combined Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage or the Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 of all Lincoln New York contracts (or contracts issued by our affiliates) owned by you (or on which you are the annuitant). Additional purchase payments automatically increase the Guaranteed Amount by the amount of the purchase payment (not to exceed the maximum); for example, a $10,000 additional purchase payment will increase the Guaranteed Amount by $10,000. We will allow purchase payments into your annuity contract after the first anniversary of the Rider effective date if the cumulative additional purchase payments exceed $100,000 only with prior Servicing Office approval. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Guaranteed Amount as discussed below. Since the charge for the Rider is based on the Guaranteed Amount, the cost of the Rider increases when additional purchase payments and step-ups are made, and the cost decreases as withdrawals are made because these transactions all adjust the Guaranteed Amount. Step-ups of the Guaranteed Amount. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the Guaranteed Amount will automatically step-up to the contract value on each Benefit Year anniversary up to and including the tenth Benefit Year if: a. the contractowner or joint owner is still living; and b. the contract value as of the valuation date, after the deduction of any withdrawals (including surrender charges), the Rider charge and account fee plus any purchase payments made on that date is greater than the Guaranteed Amount immediately preceding the valuation date. After the tenth Benefit Year anniversary, you may initiate another ten-year period of automatic step-ups by electing (in writing) to step-up the Guaranteed Amount to the greater of the Contract Value or the current Guaranteed Amount if: a. each contractowner and annuitant is under age 81; and b. the contractowner or joint owner is still living. If you choose, we will administer this election for you automatically, so that a new ten-year period of step-ups will begin at the end of each prior ten-year step-up period. Following is an example of how the step-ups work in the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, (assuming no withdrawals or additional purchase payments):
Guaranteed Contract Value Amount o Initial purchase payment $50,000 $47,750 $50,000 o 1st Benefit Year Anniversary $54,000 $54,000 o 2nd Benefit Year Anniversary $53,900 $54,000 o 3rd Benefit Year Anniversary $57,000 $57,000
49 Annual step-ups, if the conditions are met, will continue until (and including) the 10th Benefit Year Anniversary. If you had elected to have the next ten-year period of step-ups begin automatically after the prior ten-year period, annual step-ups, if conditions are met, will continue beginning on the 11th Benefit Year Anniversary. Contractowner elected step-ups (other than automatic step-ups) will be effective on the next valuation date after we receive your request and a new Benefit Year will begin. Purchase payments and withdrawals made after a step-up adjust the Guaranteed Amount. In the future, we may limit your right to step-up the Guaranteed Amount to your Benefit Year anniversary dates. All step-ups are subject to the maximum Guaranteed Amount. A contractowner elected step-up (including contractowner step-ups that we administer for you to begin a new ten-year step-up period) may cause a change in the percentage charge for this benefit. There is no change in the percentage charge when automatic, annual step-ups occur during a ten-year period. See Charges and Other Deductions - Rider Charges - Lincoln SmartSecurity (Reg. TM) Advantage Charge. Withdrawals. You will have access to your Guaranteed Amount through periodic withdrawals up to the Maximum Annual Withdrawal amount each Benefit Year until the Guaranteed Amount equals zero. On the effective date of the Rider, the Maximum Annual Withdrawal amount is 5% of the Guaranteed Amount. If you do not withdraw the entire Maximum Annual Withdrawal amount during a Benefit Year, there is no carryover of the extra amount into the next Benefit Year. The Maximum Annual Withdrawal amount is increased by 5% of any additional purchase payments. For example, if the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option with a Maximum Annual Withdrawal amount of $2,500 (5% of $50,000 Guaranteed Amount) is in effect and an additional purchase payment of $10,000 is made, the new Maximum Annual Withdrawal amount is $3,000 ($2,500 + 5% of $10,000). Step-ups of the Guaranteed Amount (both automatic step-ups and step-ups elected by you) will step-up the Maximum Annual Withdrawal amount to the greater of: a. the Maximum Annual Withdrawal amount immediately prior to the step-up; or b. 5% of the new (stepped-up) Guaranteed Amount. If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) are within the Maximum Annual Withdrawal amount, then: 1. the withdrawal will reduce the Guaranteed Amount by the amount of the withdrawal on a dollar-for-dollar basis, and 2. the Maximum Annual Withdrawal amount will remain the same. Withdrawals within the Maximum Annual Withdrawal Amount are not subject to surrender charges or the interest adjustment on the amount withdrawn from the fixed account if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up is in effect, withdrawals from IRA contracts will be treated as within the Maximum Annual Withdrawal amount (even if they exceed the 5% Maximum Annual Withdrawal amount) only if the withdrawals are taken in the form of systematic monthly or quarterly installments, as calculated by Lincoln, of the amount needed to satisfy the required minimum distribution rules under Internal Revenue Code Section 401(a)(9) for this contract value. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters. When cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) exceed the Maximum Annual Withdrawal amount: 1. The Guaranteed Amount is reduced to the lesser of: o the contract value immediately following the withdrawal, or o the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal. 2. The Maximum Annual Withdrawal amount will be the least of: o the Maximum Annual Withdrawal amount immediately prior to the withdrawal; or o the greater of: o 5% of the reduced Guaranteed Amount immediately following the withdrawal (as specified above when withdrawals exceed the Maximum Annual Withdrawal amount); or o 5% of the contract value immediately following the withdrawal; or o the new Guaranteed Amount. The following example of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up demonstrates the impact of a withdrawal in excess of the Maximum Annual Withdrawal amount on the Guaranteed Amount and the Maximum Annual Withdrawal amount. A $7,000 withdrawal caused a $32,000 reduction in the Guaranteed Amount. Prior to Excess Withdrawal: Contract Value = $60,000 50 Guaranteed Amount = $85,000 Maximum Annual Withdrawal = $5,000 (5% of the initial Guaranteed Amount of $100,000) After a $7,000 Withdrawal: Contract Value = $53,000 Guaranteed Amount = $53,000 Maximum Annual Withdrawal = $2,650 The Guaranteed Amount was reduced to the lesser of the contract value immediately following the withdrawal ($53,000) or the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal ($85,000 $7,000 = $78,000). The Maximum Annual Withdrawal amount was reduced to the least of: 1) Maximum Annual Withdrawal amount prior to the withdrawal ($5,000); or 2) The greater of 5% of the new Guaranteed Amount ($2,650) or 5% of the contract value following the withdrawal ($2,650); or 3) The new Guaranteed Amount ($53,000). The least of these three items is $2,650. In a declining market, withdrawals that exceed the Maximum Annual Withdrawal amount may substantially deplete or eliminate your Guaranteed Amount and reduce your Maximum Annual Withdrawal amount. Withdrawals in excess of the Maximum Annual Withdrawal amount will be subject to surrender charges (to the extent that total withdrawals exceed the free amount of withdrawals allowed during a contract year) and an interest adjustment on the amount withdrawn from the fixed account. Refer to the Statement of Additional Information for an example of the interest adjustment calculation. Lifetime Withdrawals. Payment of the Maximum Annual Withdrawal amount will be guaranteed for your (contractowner) lifetime (if you purchase the Single Life option) or for the lifetimes of you (contractowner) and your spouse (if the Joint Life option is purchased), as long as: 1) No withdrawals are made before you (and your spouse if a Joint Life) are age 65; and 2) An excess withdrawal (described above) has not reduced the Maximum Annual Withdrawal amount to zero. If the lifetime withdrawal is not in effect, the Maximum Annual Withdrawal amount will last only until the Guaranteed Amount equals zero. If any withdrawal is made prior to the time you (or both spouses) are age 65, the Maximum Annual Withdrawal amount will not last for the lifetime(s), except in the two situations described below: 1) If a step-up of the Guaranteed Amount after age 65 causes the Maximum Annual Withdrawal amount to equal or increase from the immediately prior Maximum Annual Withdrawal amount. This typically occurs if the contract value equals or exceeds the highest, prior Guaranteed Amount. If this happens, the new Maximum Annual Withdrawal amount will automatically be available for the specified lifetime(s); or 2) The contractowner makes a one-time election to reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount. This reset will occur on the first valuation date following the Benefit Year anniversary and will be based on the Guaranteed Amount as of that valuation date. This will reduce your Maximum Annual Withdrawal amount. A contractowner would only choose this if the above situation did not occur. To reset the Maximum Annual Withdrawal amount, the following must occur: a. the contractowner (and spouse if applicable) is age 65; b. the contract is currently within a ten-year automatic step-up period described above (or else a contractowner submits a step-up request to start a new ten-year automatic step-up period) (the contractowner must be eligible to elect a step-up; i.e., all contractowners and the annuitant must be alive and under age 81); and c. you have submitted this request to us in writing at least 30 days prior to the end of the Benefit Year. As an example of these two situations, if you purchased the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life with $100,000, your initial Guaranteed Amount is $100,000 and your initial Maximum Annual Withdrawal amount is $5,000. If you make a $5,000 withdrawal at age 62, your Guaranteed Amount will decrease to $95,000. Since you did not satisfy the age 65 requirement, you do not have a lifetime Maximum Annual Withdrawal amount. If a step-up of the Guaranteed Amount after age 65 (either automatic or owner-elected) causes the Guaranteed Amount to equal or exceed $100,000, then the Maximum Annual Withdrawal amount of $5,000 (or greater) will become a lifetime payout. This is the first situation described above. However, if the Guaranteed Amount has not been reset to equal or exceed the highest prior Guaranteed Amount, then you can choose the second situation described above if you are age 65 and the contract is within a ten-year automatic step-up period. This will reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount; 5% of $95,000 is $4,750. This is your new Maximum Annual Withdrawal amount which can be paid for your lifetime unless excess withdrawals are made. The tax consequences of withdrawals and annuity payments are discussed in Federal Tax Matters. 51 All withdrawals you make, whether or not within the Maximum Annual Withdrawal amount, will decrease your contract value. If the contract is surrendered, the contractowner will receive the contract value (less any applicable charges, fees, and taxes) and not the Guaranteed Amount. If your contract value is reduced to zero because of market performance, withdrawals equal to the Maximum Annual Withdrawal amount will continue for the life of you (and your spouse if applicable) if the lifetime withdrawals are in effect. If not, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount equals zero. You may not withdraw the remaining Guaranteed Amount in a lump sum. Guaranteed Amount Annuity Payout Option. If you desire to annuitize your Guaranteed Amount, the Guaranteed Amount Annuity Payout Option is available. The Guaranteed Amount Annuity Payment Option is a fixed annuitization in which the contractowner (and spouse if applicable) will receive the Guaranteed Amount in annual annuity payments equal to the current 5% Maximum Annual Withdrawal amount, including the lifetime Maximum Annual Withdrawals if in effect (this option is different from other annuity payment options discussed in this prospectus, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. Payments will continue until the Guaranteed Amount equals zero and may continue until death if the lifetime Maximum Annual Withdrawal is in effect. This may result in a partial, final payment. You would consider this option only if your contract value is less than the Guaranteed Amount (and you don't believe the contract value will ever exceed the Guaranteed Amount) and you do not wish to keep your annuity contract in force other than to pay out the Guaranteed Amount. You will have no other contract features other than the right to receive annuity payments equal to the Maximum Annual Withdrawal amount until the Guaranteed Amount equals zero. If the contract value is zero and you have a remaining Guaranteed Amount, you may not withdraw the remaining Guaranteed Amount in a lump sum, but must elect the Guaranteed Amount Annuity Payment Option. Death Prior to the Annuity Commencement Date. There is no provision for a lump sum payout of the Guaranteed Amount upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit will be paid other than any applicable Maximum Annual Withdrawal amounts. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the Single Life under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Single Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will end. If the contract is continued as discussed below, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero. In the alternative, the surviving spouse can choose to become the new Single Life, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. The surviving spouse will need to be 65 before taking withdrawals to qualify for a lifetime payout. In deciding whether to make this change, the surviving spouse should consider: 1) the change a reset would cause to the Guaranteed Amount and the Maximum Annual Withdrawal amount; 2) whether it is important to have Maximum Annual Withdrawal amounts for life versus the remainder of the prior Guaranteed Amount; and 3) the cost of the Single Life option. Upon the first death under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will continue for the life of the surviving spouse. Upon the death of the surviving spouse, the lifetime payout of the Maximum Annual Withdrawal amount will end. However, if the spouse's beneficiary elects to take the annuity death benefit in installments over life expectancy, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero (see below for a non-spouse beneficiary). As an alternative, after the first death, the surviving spouse may choose to change from the Joint Life option to the Single Life option, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. In deciding whether to make this change, the surviving spouse should consider: 1) if the reset will cause the Guaranteed Amount and the Maximum Annual Withdrawal amount to decrease and 2) if the cost of the Single Life option is less than the cost of the Joint Life option. If the surviving spouse of the deceased contractowner continues the contract, the remaining automatic step-ups under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up will apply to the spouse as the new contractowner. If a non-spouse beneficiary elects to receive the death benefit in installments over life expectancy (thereby keeping the contract in force), the beneficiary may continue the Lincoln SmartSecurity (Reg. TM) Advantage if desired. Automatic step-ups under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up will not continue and elective step-ups of the Guaranteed Amount under both options will not be permitted. In the event the contract value declines below the Guaranteed Amount (as adjusted for withdrawals 52 of death benefit payments), the beneficiary is assured of receiving payments equal to the Guaranteed Amount (as adjusted). Deductions for the Rider charge will continue on a quarterly basis and will be charged against the remaining Guaranteed Amount. Note: there are instances where the required installments of the death benefit, in order to be in compliance with the Internal Revenue Code as noted above, may exceed the Maximum Annual Withdrawal amount, thereby reducing the benefit of this Rider. If there are multiple beneficiaries, each beneficiary will be entitled to continue a share of the Lincoln SmartSecurity (Reg. TM) Advantage equal to his or her share of the death benefit. Impact of Divorce on Joint Life Option. In the event of a divorce, the contractowner may change from a Joint Life Option to a Single Life Option (if the contractowner is under age 81) at the current Rider charge for new sales of the Single Life Option. At the time of the change, the Guaranteed Amount will be reset to the current contract value and the Maximum Annual Withdrawal amount will equal 5% of this new Guaranteed Amount. After a divorce, the contractowner may keep the Joint Life Option to have the opportunity to receive lifetime payouts for the lives of the contractowner and a new spouse. This is only available if no withdrawals were made from the contract after the effective date of the Rider up to and including the date the new spouse is added to the Rider. Termination. After the later of the fifth anniversary of the effective date of the Rider or the fifth anniversary of the most recent contractowner-elected step-up, including any step-up we administered for you, of the Guaranteed Amount, the contractowner may terminate the Rider by notifying us in writing. Lincoln SmartSecurity (Reg. TM) Advantage will automatically terminate: o on the annuity commencement date (except payments under the Guaranteed Amount Annuity Payment Option will continue if applicable); o upon the election of i4LIFE (Reg. TM) Advantage; o if the contractowner or annuitant is changed (except if the surviving spouse assumes ownership of the contract upon death of the contractowner) including any sale or assignment of the contract or any pledge of the contract as collateral; o upon the last payment of the Guaranteed Amount unless the lifetime Maximum Annual Withdrawal is in effect; o when a withdrawal in excess of the Maximum Annual Withdrawal amount reduces the Guaranteed Amount to zero; or o upon termination of the underlying annuity contract. The termination will not result in any increase in contract value equal to the Guaranteed Amount. Upon effective termination of this Rider, the benefits and charges within this Rider will terminate. If you terminate the Rider, you must wait one year before you can elect Lincoln SmartSecurity (Reg. TM) Advantage, or purchase Lincoln Lifetime IncomeSM Advantage 2.0 or 4LATER (Reg. TM) Advantage or any other living benefit we are offering in the future. i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to terminate the Lincoln SmartSecurity (Reg. TM) Advantage rider and purchase i4LIFE (Reg. TM) Advantage can use any remaining Guaranteed Amount to establish the Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage terms and charge in effect at the time of the i4LIFE (Reg. TM) Advantage election. Contractowners may consider this if i4LIFE (Reg. TM) Advantage will provide a higher payout amount, among other reasons. There are many factors to consider when making this decision, including the cost of the riders, the payout amounts and applicable guarantees. You should discuss this decision with your registered representative. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. All contractowners and the annuitant of the contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up must be under age 81 at the time this Rider is elected. You cannot elect the Rider on or after the purchase of i4LIFE (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage or on or after the Annuity Commencement Date. There is no guarantee that the Lincoln SmartSecurity (Reg. TM) Advantage will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. Check with your investment representative regarding availability. i4LIFE (Reg. TM) Advantage i4LIFE (Reg. TM) Advantage (the Variable Annuity Payout Option Rider in your contract) is an optional annuity payout rider you may purchase at an additional cost and is separate and distinct from other annuity payout options offered under your contract and described later in this prospectus. You may also purchase either the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit or the 4LATER (Reg. TM) Guaranteed Income Benefit (described below) for an additional charge. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is a payout option that provides you with variable, periodic regular income payments for life. These payouts are made during an Access Period, where you have access to the Account Value. After the Access Period ends, payouts continue for the rest of your life, during the Lifetime Income Period. i4LIFE (Reg. TM) Advantage is different from other annuity payout options provided by Lincoln because with i4LIFE (Reg. TM) Advantage, you have the ability to make additional withdrawals or surrender the contract during the Access Period. You may also purchase the Guaranteed Income Benefit which provides a minimum payout floor for your regular income payments. The initial regular income payment is calculated from the Account Value on the periodic income commencement date, a date no more than 14 days prior to the date you select to begin receiving the regular income payments. This option is available on non-qualified annuities, IRAs and Roth IRAs (check with your registered representative regarding availability with SEP markets). This 53 option is subject to a charge (imposed only during the i4LIFE (Reg. TM) Advantage payout phase) computed daily on the average account value. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is available for contracts with a contract value of at least $50,000 and may be elected after the effective date of the contract and before an annuity payout option is elected by sending a written request to our Servicing Office. If you purchased Lincoln Lifetime IncomeSM Advantage 2.0 or 4LATER (Reg. TM) Advantage, you must wait at least one year before you can purchase i4LIFE (Reg. TM) Advantage. When you elect i4LIFE (Reg. TM) Advantage, you must choose the annuitant, secondary life, if applicable, and make several choices about your regular income payments. The annuitant and secondary life may not be changed after i4LIFE (Reg. TM) Advantage is elected. For qualified contracts, the secondary life must be the spouse. See i4LIFE (Reg. TM) Advantage Death Benefits regarding the impact of a change to the annuitant prior to the i4LIFE (Reg. TM) Advantage election. i4LIFE (Reg. TM) Advantage for IRA annuity contracts is only available if the annuitant and secondary life are age 591/2 or older at the time the option is elected. i4LIFE (Reg. TM) Advantage must be elected by age 85 on qualified contracts. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. Additional purchase payments may be made during the Access Period for an IRA annuity contract, unless a Guaranteed Income Benefit has been elected. Additional purchase payments will not be accepted once i4LIFE (Reg. TM) Advantage becomes effective for a non-qualified annuity contract. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The Contracts - Transfers on or Before the Annuity Commencement Date. When you elect i4LIFE (Reg. TM) Advantage, the death benefit that you previously elected will become the death benefit election under i4LIFE (Reg. TM) Advantage, unless you elect a less expensive death benefit option. Existing contractowners with the Account Value death benefit, who elect i4LIFE (Reg. TM) Advantage must choose the i4LIFE (Reg. TM) Advantage Account Value death benefit. The amount paid under the new death benefit may be less than the amount that would have been paid under the death benefit provided before i4LIFE (Reg. TM) Advantage began. See The Contracts - i4LIFE (Reg. TM) Advantage Death Benefits. Access Period. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period, which begins on the periodic income commencement date. The Access Period is a defined period of time during which we pay variable, periodic regular income payments and provide a death benefit, and during which you may surrender the contract and make withdrawals from your Account Value (defined below). At the end of the Access Period, the remaining Account Value is used to make regular income payments for the rest of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently to age 115 for non-qualified contracts; to age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. Additional restrictions may apply if you're under age 591/2 when you request a change to the Access Period. Currently, if you extend the Access Period, it must be extended at least 5 years. If you change the Access Period, subsequent regular income payments will be adjusted accordingly, and the Account Value remaining at the end of the new Access Period will be applied to continue regular income payments for your life. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. We may reduce or terminate the Access Period for IRA i4LIFE (Reg. TM) Advantage contracts in order to keep the regular income payments in compliance with IRC provisions for required minimum distributions. The minimum Access Period requirements for Guaranteed Income Benefits are longer than the requirements for i4LIFE (Reg. TM) Advantage without a Guaranteed Income Benefit. Shortening the Access Period will terminate the Guaranteed Income Benefit. See Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value on a valuation date will equal the total value of all accumulation units plus interest credited on the fixed account, and will be reduced by regular income payments and Guaranteed Income Benefit payments made as well as any withdrawals taken. After the Access Period ends, the remaining Account Value will be applied to continue regular income payments for your life and the Account Value will be reduced to zero. Regular income payments during the Access Period. i4LIFE (Reg. TM) Advantage provides for variable, periodic regular income payments for as long as an annuitant (or secondary life, if applicable) is living and access to your Account Value during the Access Period. When you elect i4LIFE (Reg. TM) Advantage, you will have to choose the date you will receive the initial regular income payment, the frequency of the payments (monthly, quarterly, semi-annually or annually), how often the payment is recalculated, the length of the Access Period and the assumed investment return. These choices will influence the amount of your regular income payments. Regular income payments must begin within one year of the date you elect i4LIFE (Reg. TM) Advantage. If you do not choose a payment frequency, the default is a monthly frequency. In most states, you may also elect to have regular income payments from non-qualified contracts recalculated only once each year rather than recalculated at the time of each payment. This results in level regular income payments between recalculation dates. Qualified contracts are only recalculated once per year, at 54 the beginning of each calendar year. You also choose the assumed investment return. Return rates of 3%, 4% or 5% may be available. The higher the assumed investment return you choose, the higher your initial regular income payment will be and the higher the return must be to increase subsequent regular income payments. You also choose the length of the Access Period. At this time, changes can only be made on periodic income commencement date anniversaries. Regular income payments are not subject to any surrender charges or applicable interest adjustments. See Charges and Other Deductions. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value, less applicable premium taxes by 1000 and multiplying the result by an annuity factor. The annuity factor is based upon: o the age and sex of the annuitant and secondary life, if applicable; o the length of the Access Period selected; o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The annuity factor used to determine the regular income payments reflects the fact that, during the Access Period, you have the ability to withdraw the entire Account Value and that a death benefit of the entire Account Value will be paid to your beneficiary upon your death. These benefits during the Access Period result in a slightly lower regular income payment, during both the Access Period and the Lifetime Income Period, than would be payable if this access was not permitted and no lump-sum death benefit of the full Account Value was payable. (The contractowner must elect an Access Period of no less than the minimum Access Period which is currently set at 5 years.) The annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the Guaranteed Income Benefit (if any) will terminate and the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and any Guaranteed Income Benefit if applicable) will terminate. Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed investment return and the frequency of the recalculation do not change. The initial regular income payment during the Lifetime Income Period is determined by dividing the Account Value on the last valuation date of the Access Period by 1000 and multiplying the result by an annuity factor revised to reflect that the Access Period has ended. The annuity factor is based upon: o the age and sex of the annuitant and secondary life (if living); o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The impact of the length of the Access Period and any withdrawals made during the Access Period will continue to be reflected in the regular income payments during the Lifetime Income Period. To determine subsequent regular income payments, the contract is credited with a fixed number of annuity units equal to the initial regular income payment (during the Lifetime Income Period) divided by the annuity unit value (by subaccount). Subsequent regular income payments are determined by multiplying the number of annuity 55 units per subaccount by the annuity unit value. Your regular income payments will vary based on the value of your annuity units. If your regular income payments are adjusted on an annual basis, the total of the annual payment is transferred to Lincoln New York's general account to be paid out based on the payment mode you selected. Your payment(s) will not be affected by market performance during that year. Your regular income payment(s) for the following year will be recalculated at the beginning of the following year based on the current value of the annuity units. Regular income payments will continue for as long as the annuitant or secondary life, if applicable, is living, and will continue to be adjusted for investment performance of the subaccounts your annuity units are invested in (and the fixed account if applicable). Regular income payments vary with investment performance. During the lifetime income period, there is no longer an Account Value; therefore, no withdrawals are available and no death benefit is payable. In addition, transfers are not allowed from a fixed annuity payment to a variable annuity payment. i4LIFE (Reg. TM) Advantage Death Benefits i4LIFE (Reg. TM) Advantage Account Value Death Benefit. The i4LIFE (Reg. TM) Advantage Account Value death benefit is available during the Access Period. This death benefit is equal to the Account Value as of the valuation date on which we approve the payment of the death claim. You may not change this death benefit once it is elected. i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit. The i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit is available during the Access Period and will be equal to the greater of: o the Account Value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefit, reduce the death benefit by the dollar amount of the payment; and o all other withdrawals, if any, reduce the death benefit in the same proportion that withdrawals reduce the contract value or Account Value. References to purchase payments and withdrawals include purchase payments and withdrawals made prior to the election of i4LIFE (Reg. TM) Advantage if your contract was in force with the Guarantee of Principal or greater death benefit option prior to that election. In a declining market, withdrawals which are deducted in the same proportion that withdrawals reduce the contract value or Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with that withdrawal (surrender charges for example) and premium taxes, if any. The following example demonstrates the impact of a proportionate withdrawal on your death benefit: o i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit $200,000 o Total i4LIFE (Reg. TM) Regular Income payments $ 25,000 o Additional Withdrawal $15,000 ($15,000/$150,000=10% withdrawal) o Account Value at the time of Additional Withdrawal $150,000
Death Benefit Value after i4LIFE (Reg. TM) regular income payment = $200,000 - $25,000 = $175,000 Death Benefit Value after additional withdrawal = $175,000 - $17,500 = $157,500 Reduction in Death Benefit Value for Withdrawal = $175,000 X 10% = $17,500 The regular income payments reduce the death benefit by $25,000 and the additional withdrawal causes a 10% reduction in the death benefit, the same percentage that the withdrawal reduced the Account Value. During the Access Period, contracts with the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit may elect to change to the i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our Servicing Office, and we will begin deducting the lower i4LIFE (Reg. TM) Advantage charge at that time. Once the change is effective, you may not elect to return to the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit. i4LIFE (Reg. TM) Advantage EGMDB. The i4LIFE (Reg. TM) Advantage EGMDB is only available during the Access Period. This benefit is the greatest of: o the Account Value as of the valuation date on which we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefit, reduce the death benefit by the dollar amount of the payment; and o all other withdrawals, if any, reduce the death benefit in the same proportion that withdrawals reduce the contract value or Account Value. References to purchase payments and withdrawals include purchase payments and withdrawals made prior to the election of i4LIFE (Reg. TM) Advantage if your contract was in force with the Guarantee of Principal or greater death benefit option prior to that election; or 56 o the highest Account Value or contract value on any contract anniversary date (including the inception date of the contract) after the EGMDB is effective (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the date of death. The highest Account Value or contract value is increased by purchase payments and is decreased by regular income payments, including withdrawals to provide the Guaranteed Income Benefits and all other withdrawals subsequent to the anniversary date on which the highest Account Value or contract value is obtained. Regular income payments and withdrawals are deducted in the same proportion that regular income payments and withdrawals reduce the contract value or Account Value. When determining the highest anniversary value, if you elected the EGMDB (or more expensive death benefit option) prior to electing i4LIFE (Reg. TM) Advantage and this death benefit was in effect when you purchased i4LIFE (Reg. TM) Advantage, we will look at the contract value before i4LIFE (Reg. TM) Advantage and the Account Value after the i4LIFE (Reg. TM) Advantage election to determine the highest anniversary value. In a declining market, withdrawals which are deducted in the same proportion that withdrawals reduce the Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with that withdrawal (surrender charges for example) and premium taxes, if any. Contracts with the i4LIFE (Reg. TM) Advantage EGMDB may elect to change to the i4LIFE (Reg. TM) Advantage Guarantee of Principal or i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our Servicing Office, and we will begin deducting the lower i4LIFE (Reg. TM) Advantage charge at that time. Once the change is effective, you may not elect to return to the i4LIFE (Reg. TM) Advantage EGMDB. General Death Benefit Provisions. For all death benefit options, following the Access Period, there is no death benefit. The death benefits also terminate when the Account Value equals zero, because the Access Period terminates. If there is a change in the contractowner, joint owner or annuitant during the life of the contract, for any reason other than death, the only death benefit payable for the new person will be the i4LIFE (Reg. TM) Advantage Account Value death benefit. For non-qualified contracts, upon the death of the contractowner, joint owner or annuitant, the contractowner (or beneficiary) may elect to terminate the contract and receive full payment of the death benefit or may elect to continue the contract and receive regular income payments. Upon the death of the secondary life, who is not also an owner, only the surrender value is paid. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. If a death occurs during the Access Period, the value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Upon notification to us of the death, regular income payments may be suspended until the death claim is approved. Upon approval, a lump sum payment for the value of any suspended payments will be made as of the date the death claim is approved, and regular income payments will continue, if applicable. The excess, if any, of the death benefit over the Account Value will be credited into the contract at that time. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage A Guaranteed Income Benefit is available for purchase when you elect i4LIFE (Reg. TM) Advantage which ensures that your regular income payments will never be less than a minimum payout floor, regardless of the actual investment performance of your contract. See Charges and Other Deductions for a discussion of the Guaranteed Income Benefit charges. As discussed below, certain features of the Guaranteed Income Benefit may be impacted if you purchased Lincoln SmartSecurity (Reg. TM) Advantage (withdrawal benefit rider) or Lincoln Lifetime IncomeSM Advantage 2.0 (income benefit rider) prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (annuity payout rider). Refer to the 4LATER (Reg. TM) Advantage section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. 57 Additional purchase payments cannot be made to a contract with the Guaranteed Income Benefit. You are also limited in how much you can invest in certain subaccounts. See the Contracts - Investment Requirements. There is no guarantee that the i4LIFE (Reg. TM) Guaranteed Income Benefit option will be available to elect in the future, as we reserve the right to discontinue this option at any time. In addition, we may make different versions of the Guaranteed Income Benefit available to new purchasers or may create different versions for use with various Living Benefit riders. However, a contractowner with the Lincoln Lifetime IncomeSM Advantage 2.0 who decides to drop Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage will be guaranteed the right to purchase the Guaranteed Income Benefit under the terms set forth in the Lincoln Lifetime IncomeSM Advantage 2.0 rider. i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, is elected when you elect i4LIFE (Reg. TM) Advantage or during the Access Period, if still available for election, subject to terms and conditions at that time. You may choose not to purchase the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit at the time you purchase i4LIFE (Reg. TM) Advantage by indicating that you do not want the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit on the election form at the time that you purchase i4LIFE (Reg. TM) Advantage. If you intend to use the Guaranteed Amount from the Lincoln SmartSecurity (Reg. TM) Advantage rider or the greater of the Account Value or Income Base from the Lincoln Lifetime IncomeSM Advantage 2.0 rider to establish the Guaranteed Income Benefit, you must elect the Guaranteed Income Benefit at the time you elect i4LIFE (Reg. TM) Advantage. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. See i4LIFE (Reg. TM) Advantage - General i4LIFE (Reg. TM) Provisions for an example. Guaranteed Income Benefit (version 4). For Guaranteed Income Benefit (version 4) the initial Guaranteed Income Benefit will be an amount equal to a specified percentage of your Account Value, based on your age (or the age of the youngest life under a joint life option) at the time the Guaranteed Income Benefit is elected. The specified percentages of the Account Value and the corresponding age-bands for calculating the initial Guaranteed Income Benefit are outlined in the table below. Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit
Age Percentage of Account Value, Income Base or Guaranteed Amount* ------------------- --------------------------------------------------------------- Under 40 2.5% 40 - 54 3.0% 55 - under 59.5 3.5% 59.5 - 64 4.0% 65 - 69 4.5% 70 - 79 5.0% 80 and above 5.50%
*Purchasers of Lincoln SmartSecurity (Reg. TM) Advantage may use any remaining Guaranteed Amount (if greater than the contract value) to calculate the initial Guaranteed Income Benefit. Purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 may use any remaining Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or the rider's effective date (if there has not been any Automatic Annual Step-up) if greater than the contract value to establish the initial Guaranteed Income Benefit. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment has fallen below the Guaranteed Income Benefit, because of poor investment results, a payment equal to the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit is the minimum payment you will receive. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the Guaranteed Income Benefit, the Guaranteed Income Benefit will never come into effect. If the Guaranteed Income Benefit is paid, it will be paid with the same frequency as your regular income payment. If your regular income payment is less than the Guaranteed Income Benefit, we will reduce the Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the Guaranteed Income Benefit (in other words, Guaranteed Income Benefit payments reduce the Account Value by the entire amount of the Guaranteed Income Benefit payment). (Regular income payments also reduce the Account Value). This payment will be made from the variable subaccounts and the fixed account on a pro-rata basis according to your investment allocations. If your Account Value reaches zero as a result of payments to provide the Guaranteed Income Benefit, we will continue to pay you an amount equal to the Guaranteed Income Benefit. If your Account Value reaches zero, your Access Period will end and your Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled, and will reduce your death benefit. If your Account Value equals zero, no death benefit will be paid. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: 58 o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
The contractowner receives an amount equal to the Guaranteed Income Benefit. The entire amount of the Guaranteed Income Benefit is deducted from the Account Value. The Guaranteed Income Benefit (version 4) will automatically step up every year to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. For non-qualified contracts, the step-up will occur annually on the first valuation date on or after each periodic income commencement date anniversary starting on the first periodic income commencement date anniversary. For qualified contracts, the step-up will occur annually on the valuation date of the first periodic income payment of each calendar year. The first step-up is the valuation date of the first periodic income payment in the next calendar year following the periodic income commencement date. The following example illustrates how the initial Guaranteed Income Benefit (version 4) is calculated for a 60-year old contractowner with a nonqualified contract, and how a step-up would increase the Guaranteed Income Benefit in a subsequent year. The percentage of the Account Value used to calculate the initial Guaranteed Income Benefit is 4% for a 60-year old per the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. The example also assumes that the Account Value has increased due to positive investment returns resulting in a higher recalculated regular income payment. See The Contracts- i4LIFE (Reg. TM) Advantage-Regular income payments during the Access Period for a discussion of recalculation of the regular income payment. 8/1/2010 Amount of initial regular income payment: $ 5,051 8/1/2010 Account Value at election of Guaranteed Income Benefit (version 4): $100,000 8/1/2010 Initial Guaranteed Income Benefit (4% times $100,000 Account Value): $ 4,000 8/1/2011 Recalculated regular income payment: $ 6,000 8/1/2011 Guaranteed Income Benefit after step-up (75% of $6,000): $ 4,500
The contractowner's Guaranteed Income Benefit was increased to 75% of the recalculated regular income payment. At the time of a step-up of the Guaranteed Income Benefit the i4LIFE (Reg. TM) Guaranteed Income Benefit percentage charge may increase subject to the maximum guaranteed charge of 2.00%. This means that your charge may change every year. If we automatically administer a new step-up for you and if your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date of the step-up. If we receive notice of your request to reverse the step-up, on a going forward basis, we will decrease the percentage charge to the percentage charge in effect before the step-up occurred. Any increased charges paid between the time of the step-up and the date we receive your notice to reverse the step-up will not be reimbursed. Step-ups will continue after a request to reverse a step-up. i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charges. We will provide you with written notice when a step-up will result in an increase to the current charge so that you may give us timely notice if you wish to reverse a step-up. The next section describes certain guarantees in living benefit riders relating to the election of the Guaranteed Income Benefit. Lincoln Lifetime IncomeSM Advantage 2.0. Contractowners who purchase Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed the ability in the future to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) even if it is no longer available for sale. They are also guaranteed that the Guaranteed Income Benefit percentage and Access Period requirements will be at least as favorable as those available at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. See The Contracts- Lincoln Lifetime IncomeSM Advantage 2.0. Contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0 may decide to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). If this decision is made, the contractowner can use the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or since the rider's effective date (if there has not been an Automatic Annual Step-up) if greater than the contract value to establish the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) at the terms in effect for purchasers of this rider. If the contractowner drops Lincoln Lifetime IncomeSM Advantage 2.0 and purchases i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) by the last day of the contractowner's 85th birth year for qualified contracts (based on contractowner's age for joint life option) or by the last day of the contractowner's 99th birth year for nonqualified contracts (based on youngest life for joint life option), the initial Guaranteed Income Benefit will equal the greater of (a) the current Guaranteed Annual Income amount or (b) the Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or the rider's effective date (if there has not been an Automatic Annual Step-up) multiplied by the applicable age-banded Guaranteed Income Benefit percentage or (c) the i4LIFE (Reg. TM) Advantage Account Value multiplied by the applicable age-banded Guaranteed Income Benefit percentage. 59 Lincoln SmartSecurity (Reg. TM) Advantage. Contractowners who purchased the Lincoln SmartSecurity (Reg. TM) Advantage are guaranteed that they may use the remaining Guaranteed Amount (if greater than the contract value) at the time the initial Guaranteed Income Benefit is determined, to calculate the Guaranteed Income Benefit. The initial Guaranteed Income Benefit will be equal to the applicable percentage based on either the contractowner's age (single life) or the youngest age of either the contractowner or secondary life (if applicable) , at the time the Guaranteed Income Benefit is elected, multiplied by the remaining Guaranteed Amount. The applicable percentage is found in the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. In other words, the initial Guaranteed Income Benefit will equal the applicable percentage based on the contractowner's age multiplied by the remaining Guaranteed Amount (if greater than the contract value). The following is an example of how the Guaranteed Amount from Lincoln SmartSecurity (Reg. TM) Advantage or the Income Base from Lincoln Lifetime IncomeSM Advantage 2.0 may be used to calculate the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). The example assumes that on the date that i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is elected the contractowner is 70 years of age and has made no withdrawals from the contract. The percentage of the Account Value used to calculate the initial Guaranteed Income Benefit is 5% for a 70-year old per the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. The example assumes an annual payment mode has been elected. Account Value (equals contract value on date i4LIFE (Reg. TM) $100,000 Advantage with Guaranteed Income Benefit (version 4) is elected): Guaranteed Amount/Income Base on date i4LIFE (Reg. TM) $120,000 Advantage with Guaranteed Income Benefit (version 4) is elected: Amount of initial regular income payment: $ 5,992 per year Initial Guaranteed Income Benefit (5% x $120,000 $ 6,000 Guaranteed Amount/Income Base which is greater than $100,000 Account Value):
Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. When you select the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, certain restrictions will apply to your contract: o A 4% assumed investment return (AIR) will be used to calculate the regular income payments. o The minimum Access Period required for Guaranteed Income Benefit (version 4) is the longer of 20 years or the difference between your age (nearest birthday) and age 90. We may change this Access Period requirement prior to election of the Guaranteed Income Benefit. If you use the greater of the Account Value or Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 to calculate the Guaranteed Income Benefit after the fifth anniversary of the rider's effective date, the minimum Access Period will be the longer of 15 years or the difference between your age (nearest birthday) and age 85. o The maximum Access Period available for this benefit is to age 115 for non-qualified contracts; to age 100 for qualified contracts. If you choose to lengthen your Access Period (which must be increased by a minimum of 5 years), your regular income payment will be reduced, but the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will not be affected. If you choose to shorten your Access Period, the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit will terminate. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency; or o upon written notice to us; or o assignment of the contract. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. However if you used the greater of the Account Value or Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit any termination of the Guaranteed Income Benefit will also result in a termination of the i4LIFE (Reg. TM) Advantage election. If you terminate the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit you may be able to re-elect it, if available, after one year. The election will be treated as a new purchase, subject to the terms and charges in effect at the time of election and the i4LIFE (Reg. TM) Advantage regular income payments will be recalculated. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. Availability. The Guaranteed Income Benefit (version 4) will be available with qualified and nonqualified (IRAs and Roth IRAs) annuity contracts upon approval in your state. The contractowner must be under age 96 for nonqualified contracts and under age 81 for qualified contracts at the time this rider is elected. 60 Withdrawals. You may request a withdrawal at any time prior to or during the Access Period. We reduce the Account Value by the amount of the withdrawal, and all subsequent regular income payments and Guaranteed Income Benefit payments, if applicable, will be reduced proportionately. Withdrawals may have tax consequences. See Federal Tax Matters. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. The following example demonstrates the impact of a withdrawal on the regular income payments and the Guaranteed Income Benefit payments: o i4LIFE (Reg. TM) Regular Income Payment before Withdrawal $ 1,200 o Guaranteed Income Benefit before Withdrawal $ 900 o Account Value at time of Additional Withdrawal $150,000 o Additional Withdrawal $ 15,000 (a 10% withdrawal)
Reduction in i4LIFE (Reg. TM) Regular Income payment for Withdrawal = $1,200 X 10 % = $120 i4LIFE (Reg. TM) Regular Income payment after Withdrawal = $1,200 - $120 = $1,080 Reduction in Guaranteed Income Benefit for Withdrawal = $900 X 10% = $90 Guaranteed Income Benefit after Withdrawal = $900 - $90 = $810 Surrender. At any time prior to or during the Access Period, you may surrender the contract by withdrawing the surrender value. If the contract is surrendered, the contract terminates and no further regular income payments will be made. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. Termination. For IRA annuity contracts, you may terminate i4LIFE (Reg. TM) Advantage prior to the end of the Access Period by notifying us in writing. The termination will be effective on the next valuation date after we receive the notice and your contract will return to the accumulation phase. Your i4LIFE (Reg. TM) Advantage death benefit will terminate and you may choose the Guarantee of Principal (if you had the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit) or Account Value death benefit options. Upon termination, we will stop assessing the charge for i4LIFE (Reg. TM) Advantage and begin assessing the mortality and expense risk charge and administrative charge associated with the new death benefit option. Your contract value upon termination will be equal to the Account Value on the valuation date we terminate i4LIFE (Reg. TM) Advantage. For non-qualified contracts, you may not terminate i4LIFE (Reg. TM) Advantage once you have elected it. 4LATER (Reg. TM) Advantage 4LATER (Reg. TM) Advantage is a rider that is available to protect against market loss by providing you with a method to receive a minimum payout from your annuity. The rider provides an Income Base (described below) prior to the time you begin taking payouts from your annuity. If you elect 4LATER (Reg. TM) Advantage, you must elect i4LIFE (Reg. TM) Advantage with the 4LATER (Reg. TM) Guaranteed Income Benefit to receive a benefit from 4LATER (Reg. TM) Advantage. Election of these riders may limit how much you can invest in certain subaccounts. See The Contracts-Investment Requirements. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Advantage charge. 4LATER (Reg. TM) Advantage Before Payouts Begin The following discussion applies to 4LATER (Reg. TM) Advantage during the accumulation phase of your annuity, referred to as 4LATER (Reg. TM). This is prior to the time any payouts begin under i4LIFE (Reg. TM) Advantage with the 4LATER (Reg. TM) Guaranteed Income Benefit. Income Base. The Income Base is a value established when you purchase 4LATER (Reg. TM) and will only be used to calculate the minimum payouts available under your contract at a later date. The Income Base is not available for withdrawals or as a death benefit. If you elect 4LATER (Reg. TM) at the time you purchase the contract, the Income Base initially equals the purchase payments. If you elect 4LATER (Reg. TM) after we issue the contract, the Income Base will initially equal the contract value on the 4LATER (Reg. TM) Effective Date. Additional purchase payments automatically increase the Income Base by the amount of the purchase payments. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. As described below, during the accumulation phase, the Income Base will be automatically enhanced by 15% (adjusted for additional purchase payments and withdrawals as described in the Future Income Base section below) at the end of each Waiting Period. In addition, after the Initial Waiting Period, you may elect to reset your Income Base to the current contract value if your contract value has grown beyond the 15% enhancement. You may elect this reset on your own or you may choose to have Lincoln New York automatically reset the Income Base for you at the end of each Waiting Period. These reset options are discussed below. Then, when you are ready to elect i4LIFE (Reg. TM) Advantage and establish the 4LATER (Reg. TM) Guaranteed Income Benefit, the Income Base (if higher than the contract value) is used in the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit calculation. 61 Waiting Period. The Waiting Period is each consecutive 3-year period which begins on the 4LATER (Reg. TM) Effective Date, or on the date of any reset of the Income Base to the contract value. At the end of each completed Waiting Period, the Income Base is increased by 15% (as adjusted for purchase payments and withdrawals) to equal the Future Income Base as discussed below. The Waiting Period is also the amount of time that must pass before the Income Base can be reset to the current contract value. A new Waiting Period begins after each reset and must be completed before the next 15% enhancement or another reset occurs. Future Income Base. 4LATER (Reg. TM) provides a 15% automatic enhancement to the Income Base after a 3-year Waiting Period. This enhancement will continue every 3 years until i4LIFE (Reg. TM) Advantage is elected, you terminate 4LATER (Reg. TM) or you reach the Maximum Income Base. See Maximum Income Base. During the Waiting Period, the Future Income Base is established to provide the value of this 15% enhancement on the Income Base. After each 3-year Waiting Period is satisfied, the Income Base is increased to equal the value of the Future Income Base. The 4LATER (Reg. TM) charge will then be assessed on this newly adjusted Income Base, but the percentage charge will not change. Any purchase payment made after the 4LATER (Reg. TM) Effective Date, but within 90 days of the contract effective date, will increase the Future Income Base by the amount of the purchase payment, plus 15% of that purchase payment. Example: Initial Purchase Payment $100,000 Purchase Payment 60 days later $ 10,000 -------- Income Base $110,000 Future Income Base (during the 1st Waiting Period) $126,500 ($110,000 x 115%) Income Base (after 1st Waiting Period) $126,500 New Future Income Base (during 2nd Waiting Period) $145,475 ($126,500 x 115%)
Any purchase payments made after the 4LATER (Reg. TM) Effective Date and more than 90 days after the contract effective date will increase the Future Income Base by the amount of the purchase payment plus 15% of that purchase payment on a pro-rata basis for the number of full years remaining in the current Waiting Period. Example: Income Base $100,000 Purchase Payment in Year 2 $ 10,000 -------- New Income Base $110,000 Future Income Base (during 1st Waiting Period-Year 2) $125,500 ($100,000 x 115%) + ($10,000 x 100%) + (10,000 x 15% x 1/3) Income Base (after 1st Waiting Period) $125,500 New Future Income Base (during 2nd Waiting Period) $144,325 (125,500 x 115%)
Withdrawals reduce the Future Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. During any subsequent Waiting Periods, if you elect to reset the Income Base to the contract value, the Future Income Base will equal 115% of the contract value on the date of the reset and a new Waiting Period will begin. See Resets of the Income Base to the current contract value below. In all situations, the Future Income Base is subject to the Maximum Income Base described below. The Future Income Base is never available to the contractowner to establish a 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, but is the value the Income Base will become at the end of the Waiting Period. Maximum Income Base. The Maximum Income Base is equal to 200% of the Income Base on the 4LATER (Reg. TM) Effective Date. The Maximum Income Base will be increased by 200% of any additional purchase payments. In all circumstances, the Maximum Income Base can never exceed $10,000,000. This maximum takes into consideration the combined Income Bases for all Lincoln Life contracts (or contracts issued by our affiliates) owned by you or on which you are the annuitant. After a reset to the current contract value, the Maximum Income Base will equal 200% of the contract value on the valuation date of the reset not to exceed $10,000,000. Each withdrawal will reduce the Maximum Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. Example: 62 Income Base $100,000 Maximum Income Base $200,000 Purchase Payment in Year 2 $ 10,000 Increase to Maximum Income Base $ 20,000 New Income Base $110,000 New Maximum Income Base $220,000 Future Income Base after Purchase $125,500 Maximum Income Base $220,000 Payment Income Base (after 1st Waiting $125,500 Period) Future Income Base (during 2nd $144,325 Maximum Income Base $220,000 Waiting Period) Contract Value in Year 4 $112,000 Withdrawal of 10% $ 11,200 After Withdrawal (10% adjustment) ----------------------------------------- Contract Value $100,800 Income Base $112,950 Future Income Base $129,892 Maximum Income Base $198,000
Resets of the Income Base to the current contract value ("Resets"). You may elect to reset the Income Base to the current contract value at any time after the initial Waiting Period following: (a) the 4LATER (Reg. TM) Effective Date or (b) any prior reset of the Income Base. Resets are subject to a maximum of $10,000,000 and the annuitant must be under age 81. You might consider resetting the Income Base if your contract value has increased above the Income Base (including the 15% automatic Enhancements) and you want to lock-in this increased amount to use when setting the Guaranteed Income Benefit. If the Income Base is reset to the contract value, the 15% automatic Enhancement will not apply until the end of the next Waiting Period. This reset may be elected by sending a written request to our Servicing Office or by specifying at the time of purchase that you would like us to administer this reset election for you. If you want us to administer this reset for you, at the end of each 3-year Waiting Period, if the contract value is higher than the Income Base (after the Income Base has been reset to the Future Income Base), we will implement this election and the Income Base will be equal to the contract value on that date. We will notify you that a reset has occurred. This will continue until you elect i4LIFE (Reg. TM) Advantage, the annuitant reaches age 81, or you reach the Maximum Income Base. If we administer this reset election for you, you have 30 days after the election to notify us if you wish to reverse this election and have your Income Base increased to the Future Income Base instead. You may wish to reverse this election if you are not interested in the increased charge. If the contract value is less than the Income Base on any reset date, we will not administer this reset. We will not attempt to administer another reset until the end of the next 3-year Waiting Period; however, you have the option to request a reset during this period by sending a written request to our Servicing Office. At the time of each reset (whether you elect the reset or we administer the reset for you), the annual charge will change to the current charge in effect at the time of the reset, not to exceed the guaranteed maximum charge. At the time of reset, a new Waiting Period will begin. Subsequent resets may be elected at the end of each new Waiting Period. The reset will be effective on the next valuation date after notice of the reset is approved by us. We reserve the right to restrict resets to Benefit Year anniversaries. The Benefit Year is the 12-month period starting with the 4LATER (Reg. TM) Effective Date and starting with each anniversary of the 4LATER (Reg. TM) Effective Date after that. If the contractowner elects to reset the Income Base, the Benefit Year will begin on the effective date of the reset and each anniversary of the effective date of the reset after that. Eligibility. To purchase 4LATER (Reg. TM) Advantage, the annuitant must be age 80 or younger. If you plan to elect i4LIFE (Reg. TM) Advantage within three years of the issue date of 4LATER (Reg. TM) Advantage, you will not receive the benefit of the Future Income Base. 4LATER (Reg. TM) Rider Effective Date. If 4LATER (Reg. TM) is elected at contract issue, then it will be effective on the contract's effective date. If 4LATER (Reg. TM) is elected after the contract is issued (by sending a written request to our Servicing Office), then it will be effective on the next valuation date following approval by us. 4LATER (Reg. TM) Guaranteed Income Benefit When you are ready to elect i4LIFE (Reg. TM) Advantage regular income payments, the greater of the Income Base accumulated under 4LATER (Reg. TM) or the contract value will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. The 4LATER (Reg. TM) Guaranteed Income Benefit is a minimum payout floor for your i4LIFE (Reg. TM) Advantage regular income payments. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit charge. The Guaranteed Income Benefit will be determined by dividing the greater of the Income Base or contract value (or Guaranteed Amount if applicable) on the periodic income commencement date, by 1000 and multiplying the result by the rate per $1000 from the 63 Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the Servicing Office. If you prefer, when you start the Guaranteed Income Benefit, you can request that Lincoln New York administer this election for you. At the time of a reset of the 15 year period, the charge for the 4LATER (Reg. TM) Guaranteed Income Benefit will become the current charge up to the guaranteed maximum charge of 1.50% (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charge). After we administer this election, you have 30 days to notify us if you wish to reverse the election (because you do not wish to incur the additional cost). If we receive this notice, we will decrease the percentage charge, on a going forward basis, to the percentage charge in effect before the step-up occurred. Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit currently is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. We reserve the right to increase this minimum prior to election of 4LATER (Reg. TM) Advantage, subject to the terms in your rider. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. 64 When you make your 4LATER (Reg. TM) Guaranteed Income Benefit and i4LIFE (Reg. TM) Advantage elections, you must also choose an assumed investment return of 4% to calculate your i4LIFE (Reg. TM) Advantage regular income payments. Once you have elected 4LATER (Reg. TM), the assumed investment return rate will not change; however, we may change the required assumed investment return rate in the future for new purchasers only. The following is an example of what happens when you extend the Access Period: Assume: i4LIFE (Reg. TM) Advantage remaining Access Period = 10 years Current i4LIFE (Reg. TM) Advantage regular income payment = $6,375 Current 4LATER (Reg. TM) Guaranteed Income Benefit = $5,692 Extend Access Period 5 years: i4LIFE (Reg. TM) Advantage regular income payment after extension = $5,355 Percentage change in i4LIFE (Reg. TM) Advantage regular income payment = $5,355 - $6,375 = 84% New 4LATER (Reg. TM) Guaranteed Income Benefit = $5,692 x 84% = $4,781 General Provisions of 4LATER (Reg. TM) Advantage Termination. After the later of the third anniversary of the 4LATER (Reg. TM) Rider Effective Date or the most recent Reset, the 4LATER (Reg. TM) Rider may be terminated upon written notice to us. Prior to the periodic income commencement date, 4LATER (Reg. TM) will automatically terminate upon any of the following events: o termination of the contract to which the 4LATER (Reg. TM) Rider is attached; o the change of or the death of the annuitant (except if the surviving spouse assumes ownership of the contract and the role of the annuitant upon death of the contractowner); or o the change of contractowner (except if the surviving spouse assumes ownership of the contract and the role of annuitant upon the death of the contractowner), including the assignment of the contract. After the periodic income commencement date, the 4LATER (Reg. TM) Rider will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the 4LATER (Reg. TM) Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. If you terminate 4LATER (Reg. TM) prior to the periodic income commencement date, you must wait one year before you can re-elect 4LATER (Reg. TM) or purchase the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0. If you terminate the 4LATER (Reg. TM) Rider on or after the periodic income commencement date, you cannot re-elect it. You may be able to elect the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, after one year. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. The election of one of these benefits, if available, will be treated as a new purchase, subject to the terms and charges in effect at the time of election. Availability. You cannot elect 4LATER (Reg. TM) after an annuity payout option or i4LIFE (Reg. TM) Advantage has been elected, and it cannot be elected on contracts that currently have Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0. Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 and elect 4LATER (Reg. TM) will not carry their Guaranteed Amount or Income Base over into the new 4LATER (Reg. TM). The 4LATER (Reg. TM) Income Base will be established based on the contractowner's contract value on the Effective Date of 4LATER (Reg. TM). Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 will have to wait one year before they can elect 4LATER (Reg. TM). See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0. Annuity Payouts When you apply for a contract, you may select any annuity commencement date permitted by law, which is usually on or before the annuitant's 90th birthday. Your broker-dealer may recommend that you annuitize at an earlier age. As an alternative, contractowners with Lincoln SmartSecurity (Reg. TM) Advantage may elect to annuitize their Guaranteed Amount under the Guaranteed Amount Annuity Payout Option. Contractowners with Lincoln Lifetime IncomeSM Advantage 2.0 may elect the Guaranteed Annual Income Amount Annuity Payout option. The contract provides optional forms of payouts of annuities (annuity options), each of which is payable on a variable basis, a fixed basis or a combination of both as you specify. The contract provides that all or part of the contract value may be used to purchase an annuity payout option. 65 You may elect annuity payouts in monthly, quarterly, semiannual or annual installments. If the payouts from any subaccount would be or become less than $50, we have the right to reduce their frequency until the payouts are at least $50 each. Following are explanations of the annuity options available. Annuity Options The annuity options outlined below do not apply to contractowners who have elected i4LIFE (Reg. TM) Advantage, the Maximum Annual Withdrawal Amount Annuity Payout option or the Guaranteed Annual Income Amount Annuity Payout option. Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if the annuitant dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Payouts Guaranteed for Designated Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option provides a periodic payout during the joint lifetime of the annuitant and a joint annuitant. When one of the joint annuitants dies, the survivor receives two-thirds of the periodic payout made when both were alive. This option further provides that should one or both of the annuitants die during the elected guaranteed period, usually 10 or 20 years, full benefit payment will continue for the rest of the guaranteed period. Unit Refund Life Annuity. This option offers a periodic payout during the lifetime of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable Annuity Payouts) equal to the excess, if any, of: o the total amount applied under this option divided by the annuity unit value for the date payouts begin, minus o the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for payment by the Servicing Office. Life Annuity with Cash Refund. Fixed annuity benefit payments that will be made for the lifetime of the annuitant with the guarantee that upon death, should (a) the total dollar amount applied to purchase this option be greater than (b) the fixed annuity benefit payment multiplied by the number of annuity benefit payments paid prior to death, then a refund payment equal to the dollar amount of (a) minus (b) will be made. Under the annuity options listed above, you may not make withdrawals. Other options, with or without withdrawal features, may be made available by us. You may pre-select an annuity payout option as a method of paying the death benefit to a beneficiary. If you do, the beneficiary cannot change this payout option. You may change or revoke in writing to our Servicing Office, any such selection, unless such selection was made irrevocable. If you have not already chosen an annuity payout option, the beneficiary may choose any annuity payout option. At death, options are only available to the extent they are consistent with the requirements of the contract as well as Sections 72(s) and 401(a)(9) of the tax code, if applicable. General Information Any previously selected death benefit in effect before the annuity commencement date will no longer be available on and after the annuity commencement date. You may change the annuity commencement date, change the annuity option or change the allocation of the investment among subaccounts up to 30 days before the scheduled annuity commencement date, upon written notice to the Servicing Office. You must give us at least 30 days notice before the date on which you want payouts to begin. Annuity payouts may not commence within twelve months after the effective date of the contract. Unless you select another option, the contract automatically provides for a life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable or combination fixed and variable basis, in proportion to the account allocations at the time of annuitization) except when a joint life payout is required by law. Under any option providing for guaranteed period payouts, the number of payouts 66 which remain unpaid at the date of the annuitant's death (or surviving annuitant's death in case of joint life annuity) will be paid to you or your beneficiary as payouts become due after we are in receipt of: o proof, satisfactory to us, of the death; o written authorization for payment; and o all claim forms, fully completed. Variable Annuity Payouts Variable annuity payouts will be determined using: o The contract value on the annuity commencement date, less any surrender charges and any applicable premium taxes; o The annuity tables contained in the contract; o The annuity option selected; and o The investment performance of the fund(s) selected. To determine the amount of payouts, we make this calculation: 1. Determine the dollar amount of the first periodic payout; then 2. Credit the contract with a fixed number of annuity units equal to the first periodic payout divided by the annuity unit value; and 3. Calculate the value of the annuity units each period thereafter. Annuity payouts assume an investment return of 3%, 4%, or 5% per year, as applied to the applicable mortality table. Some of these assumed interest rates may not be available in your state; therefore, please check with your investment representative. You may choose your assumed interest rate at the time you elect a variable annuity payout on the administrative form provided by us. The higher the assumed interest rate you choose, the higher your initial annuity payment will be. The amount of each payout after the initial payout will depend upon how the underlying fund(s) perform, relative to the assumed rate. If the actual net investment rate (annualized) exceeds the assumed rate, the payment will increase at a rate proportional to the amount of such excess. Conversely, if the actual rate is less than the assumed rate, annuity payments will decrease. The higher the assumed interest rate, the less likely future annuity payments are to increase, or the payments will increase more slowly than if a lower assumed rate was used. There is a more complete explanation of this calculation in the SAI. Fixed Side of the Contract Purchase payments and contract value allocated to the fixed side of the contract become part of our general account, and do not participate in the investment experience of the VAA. The general account is subject to regulation and supervision by the New York Insurance Department as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed. In reliance on certain exemptions, exclusions and rules, we have not registered interests in the general account as a security under the Securities Act of 1933 and have not registered the general account as an investment company under the 1940 Act. Accordingly, neither the general account nor any interests in it are regulated under the 1933 Act or the 1940 Act. We have been advised that the staff of the SEC has not made a review of the disclosures which are included in this prospectus which relate to our general account and to the fixed account under the contract. These disclosures, however, may be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. We guarantee an effective interest rate of not less than 1.50% per year on amounts held in a fixed account. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. ANY INTEREST IN EXCESS OF 1.50% (OR THE GUARANTEED MINIMUM INTEREST RATE STATED IN YOUR CONTRACT) WILL BE DECLARED IN ADVANCE AT OUR SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF THE MINIMUM INTEREST RATE WILL BE DECLARED. Any amount surrendered, withdrawn from or transferred out of a fixed account prior to the expiration of the guaranteed period is subject to the interest adjustment. This may reduce your value upon surrender, withdrawal or transfer, but will not reduce the amount below the value it would have had if 1.50% (or the guaranteed minimum interest rate for your contract) interest had been credited to the fixed subaccount. Guaranteed Periods The portion of the fixed account which accepts allocations for a guaranteed period at a guaranteed interest rate is called a fixed subaccount. There is a fixed subaccount for each particular guaranteed period. 67 The owner may allocate purchase payments to one or more fixed subaccounts with guaranteed periods of 1 to 10 years. We may add guaranteed periods or discontinue accepting purchase payments into one or more guaranteed periods at any time. The minimum amount of any purchase payment that can be allocated to a fixed subaccount is $2,000. Each purchase payment allocated to a fixed subaccount will start its own guaranteed period and will earn a guaranteed interest rate. The duration of the guaranteed period affects the guaranteed interest rate of the fixed subaccount. A fixed subaccount guarantee period ends on the date after the number of calendar years in the fixed subaccount's guaranteed period. Interest will be credited daily at a guaranteed rate that is equal to the effective annual rate determined on the first day of the fixed subaccount guaranteed period. Amounts surrendered, transferred or withdrawn from a fixed subaccount prior to the end of the guaranteed period will be subject to the interest adjustment. Each guaranteed period purchase payment will be treated separately for purposes of determining any applicable interest adjustment. Any amount withdrawn from a fixed subaccount may be subject to any applicable surrender charges, account fees and premium taxes. We will notify the contractowner in writing at least 45 but not more than 75 days prior to the expiration date for any guaranteed period amount. A new fixed subaccount guaranteed period of the same duration as the previous fixed subaccount guaranteed period will begin automatically at the end of the previous guaranteed period, unless we receive, prior to the end of a guaranteed period, a written election by the contractowner. The written election may request the transfer of the guaranteed period amount to a different fixed subaccount or to a variable subaccount from among those being offered by us. Transfers of any guaranteed period amount which become effective upon the date of expiration of the applicable guaranteed period are not subject to the limitation of twelve transfers per contract year or the additional fixed account transfer restrictions. Interest Adjustment Any surrender, withdrawal or transfer of a fixed subaccount guaranteed period amount before the end of the guaranteed period (other than dollar cost averaging, cross-reinvestment, regular income payments under i4LIFE (Reg. TM) Advantage or withdrawals within the Maximum Annual Withdrawal amount in Lincoln SmartSecurity (Reg. TM) Advantage or regular income payments under i4LIFE (Reg. TM) Advantage) will be subject to the interest adjustment. A surrender, withdrawal or transfer effective upon the expiration date of the guaranteed period will not be subject to the interest adjustment. The interest adjustment will be applied to the amount being surrendered, withdrawn or transferred. The interest adjustment will be applied after the deduction of any applicable account fees and before any applicable transfer charges. Any transfer, withdrawal, or surrender of contract value from a fixed subaccount will be increased or decreased by an interest adjustment, unless the transfer, withdrawal or surrender is effective: o during the free look period (See Return Privilege) o on the expiration date of a guaranteed period o as a result of the death of the contractowner or annuitant o subsequent to the diagnosis of a terminal illness of the contractowner. Diagnosis of the terminal illness must be after the effective date of the contract and result in a life expectancy of less than one year, as determined by a qualified professional medical practitioner. o subsequent to the admittance of the contractowner into an accredited nursing home or equivalent health care facility. Admittance into such facility must be after the effective date of the contract and continue for 90 consecutive days prior to the surrender or withdrawal. o subsequent to the permanent and total disability of the contractowner if such disability begins after the contract date and prior to the 65th birthday of the contractowner and has existed continuously for twelve months. o upon annuitization of the contract. These provisions may not be applicable to your contract or available in your state. Please check with your investment representative regarding the availability of these provisions. In general, the interest adjustment reflects the relationship between the yield rate in effect at the time a purchase payment is allocated to a fixed subaccount's guaranteed period under the contract and the yield rate in effect at the time of the purchase payment's surrender, withdrawal or transfer. It also reflects the time remaining in the fixed subaccount's guaranteed period. If the yield rate at the time of the surrender, withdrawal or transfer is lower than the yield rate at the time the purchase payment was allocated, then the application of the interest adjustment will generally result in a higher payment at the time of the surrender, withdrawal or transfer. Similarly, if the yield rate at the time of surrender, withdrawal or transfer is higher than the yield rate at the time of the allocation of the purchase payment, then the application of the interest adjustment will generally result in a lower payment at the time of the surrender, withdrawal or transfer. The yield rate is published by the Federal Reserve Board. The interest adjustment is calculated by multiplying the transaction amount by: (1+A)n -1 ---------- (1+B )n
where: A = yield rate for a U.S. Treasury security with time to maturity equal to the subaccount's guaranteed period, determined at the beginning of the guaranteed period. 68 B = yield rate for a U.S. Treasury security with time to maturity equal to the time remaining in the subaccount's guaranteed period if greater than one year, determined at the time of surrender, withdrawal or transfer. For remaining periods of one year or less, the yield rate for a one year U.S. Treasury security is used. n= The number of years remaining in the guaranteed period (e.g., 1 year and 73 days = 1 + (73 divided by 365) = 1.2 years) Straight-Line interpolation is used for periods to maturity not quoted. See the SAI for examples of the application of the interest adjustment. Small Contract Surrenders We may surrender your contract, in accordance with New York law if: o your contract value drops below certain state specified minimum amounts ($2,000 or less) for any reason, including if your contract value decreases due to the performance of the subaccounts you selected; o no purchase payments have been received for three (3) full, consecutive contract years; and o the paid up annuity benefit at maturity would be less than $20.00 per month (these requirements may differ in some states). At least 60 days before we surrender your contract, we will send you a letter at your last address we have on file, to inform you that your contract will be surrendered. You will have the opportunity to make additional purchase payments to bring your contract value above the minimum level to avoid surrender. If we surrender your contract, we will not assess any surrender charge. We will not surrender your contract if you are receiving guaranteed payments from us under one of the Living Benefit riders. Delay of Payments Contract proceeds from the VAA will be paid within seven days, except: o when the NYSE is closed (other than weekends and holidays); o times when market trading is restricted or the SEC declares an emergency, and we cannot value units or the funds cannot redeem shares; or o when the SEC so orders to protect contractowners. If, pursuant to SEC rules, an underlying money market fund suspends payment of redemption proceeds in connection with a liquidation of the fund, we will delay payment of any transfer, partial withdrawal, surrender, loan, or death benefit from the money market sub-account until the fund is liquidated. Payment of contract proceeds from the fixed account may be delayed for up to six months. Due to federal laws designed to counter terrorism and prevent money laundering by criminals, we may be required to reject a purchase payment and/or deny payment of a request for transfers, withdrawals, surrenders, or death benefits, until instructions are received from the appropriate regulator. We also may be required to provide additional information about a contractowner's account to government regulators. Reinvestment Privilege You may elect to make a reinvestment purchase with any part of the proceeds of a surrender/withdrawal, and we will recredit that portion of the surrender/withdrawal charges attributable to the amount returned. This election must be made by your written authorization to us on an approved Lincoln reinvestment form and received in our Servicing Office within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this prospectus. In the case of a qualified retirement plan, a representation must be made that the proceeds being used to make the purchase have retained their tax-favored status under an arrangement for which the contracts offered by this prospectus are designed. The number of accumulation units which will be credited when the proceeds are reinvested will be based on the value of the accumulation unit(s) on the next valuation date. This computation will occur following receipt of the proceeds and request for reinvestment at the Servicing Office. You may utilize the reinvestment privilege only once. For tax reporting purposes, we will treat a surrender/withdrawal and a subsequent reinvestment purchase as separate transactions (and a Form 1099 may be issued, if applicable). You should consult a tax adviser before you request a surrender/withdrawal or subsequent reinvestment purchase. Amendment of Contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Any changes are subject to prior approval of your state's insurance department (if required). 69 Distribution of the Contracts Lincoln Financial Distributors, Inc. ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln New York and is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a member of FINRA. The Principal Underwriter has entered into selling agreements with broker-dealers that are unaffiliated with us. While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. You may ask your registered representative how he/she will personally be compensated, in whole or in part, for the sale of the contract to you or for any alternative proposal that may have been presented to you. You may wish to take such compensation payments into account when considering and evaluating any recommendation made to you in connection with the purchase of a contract. The following paragraphs describe how payments are made by us and the Principal Underwriter to various parties. Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays commissions to all Selling Firms. The maximum commission the Principal Underwriter pays to Selling Firms is 6.00% of purchase payments, plus 0.20% annual trail compensation beginning in years two and beyond. Some Selling Firms may elect to receive a lower commission when a purchase payment is made along with an earlier quarterly payment based on contract value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to Selling Firms is 6.00% of annuitized value and/or ongoing annual compensation of up to 1.05% of annuity value or statutory reserves. LFD also acts as wholesaler of the contracts and performs certain marketing and other functions in support of the distribution and servicing of the contracts. LFD may pay certain Selling Firms or their affiliates additional amounts for, among other things: (1) "preferred product" treatment of the contracts in their marketing programs, which may include marketing services and increased access to sales representatives; (2) sales promotions relating to the contracts; (3) costs associated with sales conferences and educational seminars for their sales representatives; (4) other sales expenses incurred by them; and (5) inclusion in the financial products the Selling Firm offers. Lincoln Life may provide loans to broker-dealers or their affiliates to help finance marketing and distribution of the contracts, and those loans may be forgiven if aggregate sales goals are met. In addition, we may provide staffing or other administrative support and services to broker-dealers who distribute the contracts. LFD, as wholesaler, may make bonus payments to certain Selling Firms based on aggregate sales of our variable insurance contracts (including the contracts) or persistency standards. These additional payments are not offered to all Selling Firms, and the terms of any particular agreement governing the payments may vary among Selling Firms. These additional types of compensation are not offered to all Selling Firms. The terms of any particular agreement governing compensation may vary among Selling Firms and the amounts may be significant. The prospect of receiving, or the receipt of, additional compensation may provide Selling Firms and/or their registered representatives with an incentive to favor sales of the contracts over other variable annuity contracts (or other investments) with respect to which a Selling Firm does not receive additional compensation, or lower levels of additional compensation. You may wish to take such payment arrangements into account when considering and evaluating any recommendation relating to the contracts. Additional information relating to compensation paid in 2010 is contained in the SAI. Compensation Paid to Other Parties. Depending on the particular selling arrangements, there may be others whom LFD compensates for the distribution activities. For example, LFD may compensate certain "wholesalers", who control access to certain selling offices, for access to those offices or for referrals, and that compensation may be separate from the compensation paid for sales of the contracts. LFD may compensate marketing organizations, associations, brokers or consultants which provide marketing assistance and other services to broker-dealers who distribute the contracts, and which may be affiliated with those broker-dealers. A marketing expense allowance is paid to American Funds Distributors (AFD) in consideration of the marketing assistance AFD provides to LFD. This allowance, which ranges from 0.10% to 0.16% is based on the amount of purchase payments initially allocated to the American Funds Insurance Series underlying the variable annuity. Commissions and other incentives or payments described above are not charged directly to contract owners or the Separate Account. All compensation is paid from our resources, which include fees and charges imposed on your contract. Contractowner Questions The obligations to purchasers under the contracts are those of Lincoln New York. This prospectus provides a general description of the material features of the contract. Questions about your contract should be directed to us at 1-888-868-2583. Federal Tax Matters Introduction The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. 70 This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules to your individual situation. Nonqualified Annuities This part of the discussion describes some of the Federal income tax rules applicable to nonqualified annuities. A nonqualified annuity is a contract not issued in connection with a qualified retirement plan, such as an IRA or a section 403(b) plan, receiving special tax treatment under the tax code. We may not offer nonqualified annuities for all of our annuity products. Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decedent; o Certain qualified contracts; o Contracts purchased by employers upon the termination of certain qualified plans; and o Certain contracts used in connection with structured settlement agreements. Investments In The VAA Must Be Diversified For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be "adequately diversified." IRS regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the contract purchase payments. Although we do not control the investments of the underlying investment options, we expect that the underlying investment options will comply with the IRS regulations so that the VAA will be considered "adequately diversified." Restrictions Federal income tax law limits your right to choose particular investments for the contract. Because the IRS has issued little guidance specifying those limits, the limits are uncertain and your right to allocate contract values among the subaccounts may exceed those limits. If so, you would be treated as the owner of the assets of the VAA and thus subject to current taxation on the income, bonus credits, persistency credits and gains, if applicable, from those assets. We do not know what limits may be set by the IRS in any guidance that it may issue and whether any such limits will apply to existing contracts. We reserve the right to modify the contract without your consent to try to prevent the tax law from considering you as the owner of the assets of the VAA. Loss Of Interest Deduction After June 8, 1997, if a contract is issued to a taxpayer that is not an individual, or if a contract is held for the benefit of an entity, the entity will lose a portion of its deduction for otherwise deductible interest expenses. Age At Which Annuity Payouts Begin Federal income tax rules do not expressly identify a particular age by which annuity payouts must begin. However, those rules do require that an annuity contract provide for amortization, through annuity payouts, of the contract's purchase payments, bonus credits, persistency credits and earnings. If annuity payouts under the contract begin or are scheduled to begin on a date past the annuitant's 85th birthday, it is possible that the tax law will not treat the contract as an annuity for Federal income tax purposes. In that event, you would be currently taxed on the excess of the contract value over the purchase payments of the contract. 71 Tax Treatment Of Payments We make no guarantees regarding the tax treatment of any contract or of any transaction involving a contract. However, the rest of this discussion assumes that your contract will be treated as an annuity for Federal income tax purposes and that the tax law will not tax any increase in your contract value until there is a distribution from your contract. Taxation Of Withdrawals And Surrenders You will pay tax on withdrawals to the extent your contract value exceeds your purchase payments in the contract. This income (and all other income from your contract) is considered ordinary income (and does not receive capital gains treatment and is not qualified dividend income). A higher rate of tax is paid on ordinary income than on capital gains. You will pay tax on a surrender to the extent the amount you receive exceeds your purchase payments. In certain circumstances, your purchase payments are reduced by amounts received from your contract that were not included in income. Surrender and reinstatement of your contract will generally be taxed as a withdrawal. If your contract has Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0, and if your Guaranteed Amount or Income Base immediately before a withdrawal exceeds your contract value, the tax law could require that an additional amount be included in income. Please consult your tax adviser. Taxation Of Annuity Payouts, Including Regular Income Payments The tax code imposes tax on a portion of each annuity payout (at ordinary income tax rates) and treats a portion as a nontaxable return of your purchase payments in the contract. We will notify you annually of the taxable amount of your annuity payout. Once you have recovered the total amount of the purchase payment in the contract, you will pay tax on the full amount of your annuity payouts. If annuity payouts end because of the annuitant's death and before the total amount in the contract has been distributed, the amount not received will generally be deductible. If withdrawals, other than regular income payments, are taken from i4LIFE (Reg. TM) Advantage during the Access Period, they are taxed subject to an exclusion ratio that is determined based on the amount of the payment. Taxation Of Death Benefits We may distribute amounts from your contract because of the death of a contractowner or an annuitant. The tax treatment of these amounts depends on whether you or the annuitant dies before or after the annuity commencement date. Death prior to the annuity commencement date: o If the beneficiary receives death benefits under an annuity payout option, they are taxed in the same manner as annuity payouts. o If the beneficiary does not receive death benefits under an annuity payout option, they are taxed in the same manner as a withdrawal. Death after the annuity commencement date: o If death benefits are received in accordance with the existing annuity payout option, they are excludible from income if they do not exceed the purchase payments not yet distributed from the contract. All annuity payouts in excess of the purchase payments not previously received are includible in income. o If death benefits are received in a lump sum, the tax law imposes tax on the amount of death benefits which exceeds the amount of purchase payments not previously received. Penalty Taxes Payable On Withdrawals, Surrenders, Or Annuity Payouts The tax code may impose a 10% penalty tax on any distribution from your contract which you must include in your gross income. The 10% penalty tax does not apply if one of several exceptions exists. These exceptions include withdrawals, surrenders, or annuity payouts that: o you receive on or after you reach 591/2, o you receive because you became disabled (as defined in the tax law), o you receive from an immediate annuity, o a beneficiary receives on or after your death, or o you receive as a series of substantially equal periodic payments based on your life or life expectancy (non-natural owners holding as agent for an individual do not qualify). Unearned Income Medicare Contribution Congress enacted the "Unearned Income Medicare Contribution" as a part of the Health Care and Education Reconciliation Act of 2010. This new tax, which affects individuals whose modified adjusted gross income exceeds certain thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned income," or (ii) the dollar amount by which the individual's modified adjusted gross income exceeds the applicable threshold. Unearned income includes the taxable portion of distributions that you take from your annuity contract. The tax is effected for tax years after December 31, 2012. Please consult your tax advisor to determine whether your annuity distributions are subject to this tax. 72 Special Rules If You Own More Than One Annuity Contract In certain circumstances, you must combine some or all of the nonqualified annuity contracts you own in order to determine the amount of an annuity payout, a surrender, or a withdrawal that you must include in income. For example, if you purchase two or more deferred annuity contracts from the same life insurance company (or its affiliates) during any calendar year, the tax code treats all such contracts as one contract. Treating two or more contracts as one contract could affect the amount of a surrender, a withdrawal or an annuity payout that you must include in income and the amount that might be subject to the penalty tax described previously. Loans and Assignments Except for certain qualified contracts, the tax code treats any amount received as a loan under your contract, and any assignment or pledge (or agreement to assign or pledge) of any portion of your contract value, as a withdrawal of such amount or portion. Gifting A Contract If you transfer ownership of your contract to a person other than to your spouse (or to your former spouse incident to divorce), and receive a payment less than your contract's value, you will pay tax on your contract value to the extent it exceeds your purchase payments not previously received. The new owner's purchase payments in the contract would then be increased to reflect the amount included in income. Charges for Additional Benefits Your contract automatically includes a basic death benefit and may include other optional riders. Certain enhancements to the basic death benefit may also be available to you. The cost of the basic death benefit and any additional benefit are deducted from your contract. It is possible that the tax law may treat all or a portion of the death benefit and other optional rider charges, if any, as a contract withdrawal. Qualified Retirement Plans We also designed the contracts for use in connection with certain types of retirement plans that receive favorable treatment under the tax code. Contracts issued to or in connection with a qualified retirement plan are called "qualified contracts." We issue contracts for use with various types of qualified plans. The Federal income tax rules applicable to those plans are complex and varied. As a result, this prospectus does not attempt to provide more than general information about the use of the contract with the various types of qualified plans. Persons planning to use the contract in connection with a qualified plan should obtain advice from a competent tax adviser. Types of Qualified Contracts and Terms of Contracts Qualified plans include the following: o Individual Retirement Accounts and Annuities ("Traditional IRAs") o Roth IRAs o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP") o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees) o 401(a) plans (qualified corporate employee pension and profit-sharing plans) o 403(a) plans (qualified annuity plans) o 403(b) plans (public school system and tax-exempt organization annuity plans) o H.R. 10 or Keogh Plans (self-employed individual plans) o 457(b) plans (deferred compensation plans for state and local governments and tax-exempt organizations) o Roth 403(b) plans We do not offer certain types of qualified plans for all of our annuity products. Check with your representative concerning qualified plan availability for this product. We will amend contracts to be used with a qualified plan as generally necessary to conform to the tax law requirements for the type of plan. However, the rights of a person to any qualified plan benefits may be subject to the plan's terms and conditions, regardless of the contract's terms and conditions. In addition, we are not bound by the terms and conditions of qualified plans to the extent such terms and conditions contradict the contract, unless we consent. Pursuant to new tax regulations, starting September 24, 2007, the contract is not available for purchase under a 403(b) plan and since July 31, 2008, we do not accept additional premiums or transfers to existing 403(b) contracts. Also, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that surrenders, loans or transfers you request comply with applicable tax requirements and to decline requests that are not in compliance. We will defer processing payments you request until all information required under the tax law has been received. By requesting a surrender, loan or transfer, you consent to the sharing of confidential 73 information about you, your contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, as described below. o Loans are allowed under certain types of qualified plans, but Federal income tax rules prohibit loans under other types of qualified plans. For example, Federal income tax rules permit loans under some section 403(b) plans, but prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject to a variety of limitations, including restrictions as to the loan amount, the loan's duration, the rate of interest, and the manner of repayment. Your contract or plan may not permit loans. Tax Treatment of Payments The Federal income tax rules generally include distributions from a qualified contract in the participant's income as ordinary income. These taxable distributions will include purchase payments that were deductible or excludible from income. Thus, under many qualified contracts, the total amount received is included in income since a deduction or exclusion from income was taken for purchase payments. There are exceptions. For example, you do not include amounts received from a Roth IRA in income if certain conditions are satisfied. Required Minimum Distributions Under most qualified plans, you must begin receiving payments from the contract in certain minimum amounts by the later of age 701/2 or retirement. You are required to take distributions from your traditional IRAs beginning in the year you reach age 701/2. If you own a Roth IRA, you are not required to receive minimum distributions from your Roth IRA during your life. Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan. The IRS regulations applicable to required minimum distributions include a rule that may impact the distribution method you have chosen and the amount of your distributions. Under new regulations, the presence of an enhanced death benefit, or other benefit which could provide additional value to your contract, may require you to take additional distributions. An enhanced death benefit is any death benefit that has the potential to pay more than the contract value or a return of purchase payments. Annuity contracts inside Custodial or Trusteed IRAs will also be subject to these regulations. Please contact your tax adviser regarding any tax ramifications. Federal Penalty Taxes Payable on Distributions The tax code may impose a 10% penalty tax on a distribution from a qualified contract that must be included in income. The tax code does not impose the penalty tax if one of several exceptions applies. The exceptions vary depending on the type of qualified contract you purchase. For example, in the case of an IRA, exceptions provide that the penalty tax does not apply to a withdrawal, surrender, or annuity payout: o received on or after the annuitant reaches 591/2, o received on or after the annuitant's death or because of the annuitant's disability (as defined in the tax law), o received as a series of substantially equal periodic payments based on the annuitant's life (or life expectancy), or o received as reimbursement for certain amounts paid for medical care. These exceptions, as well as certain others not described here, generally apply to taxable distributions from other qualified plans. However, the specific requirements of the exception may vary. Unearned Income Medicare Contribution Congress enacted the "Unearned Income Medicare Contribution" as a part of the Health Care and Education Reconciliation Act of 2010. This new tax, which affects individuals whose modified adjusted gross income exceeds certain thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned income," or (ii) the dollar amount by which the individual's modified adjusted gross income exceeds the applicable threshold. Distributions that you take from your contract are not included in the calculation of unearned income because your contract is qualified plan contract. However, the amount of any such distribution is included in determining whether you exceed the modified adjusted gross income threshold. The tax is effective for tax years after December 31, 2012. Please consult your tax advisor to determine whether your annuity distributions are subject to this tax. 74 Transfers and Direct Rollovers As a result of Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), you may be able to move funds between different types of qualified plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or transfer. You may be able to rollover or transfer amounts between qualified plans and traditional IRAs. These rules do not apply to Roth IRAs and 457(b) non-governmental tax-exempt plans. The Pension Protection Act of 2006 (PPA) permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distributions after 2007). There are special rules that apply to rollovers, direct rollovers and transfers (including rollovers or transfers of after-tax amounts). If the applicable rules are not followed, you may incur adverse Federal income tax consequences, including paying taxes which you might not otherwise have had to pay. Before we send a rollover distribution, we will provide a notice explaining tax withholding requirements (see Federal Income Tax Withholding). We are not required to send you such notice for your IRA. You should always consult your tax adviser before you move or attempt to move any funds. Death Benefit and IRAs Pursuant to IRS regulations, IRAs may not invest in life insurance contracts. We do not believe that these regulations prohibit the death benefit from being provided under the contract when we issue the contract as a Traditional or Roth IRA. However, the law is unclear and it is possible that the presence of the death benefit under a contract issued as a Traditional or Roth IRA could result in increased taxes to you. Certain death benefit options may not be available for all of our products. Federal Income Tax Withholding We will withhold and remit to the IRS a part of the taxable portion of each distribution made under a contract unless you notify us prior to the distribution that tax is not to be withheld. In certain circumstances, Federal income tax rules may require us to withhold tax. At the time a withdrawal, surrender, or annuity payout is requested, we will give you an explanation of the withholding requirements. Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans. Our Tax Status Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes. Changes in the Law The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by applying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a "quorum"), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the same proportion as the voting instruction which we receive, it is important that each contractowner provide their voting instructions to us. Even though contractowners may choose not to provide voting instruction, the shares of a fund to which such contractowners 75 would have been entitled to provide voting instruction will, subject to fair representation requirements, be voted by us in the same proportion as the voting instruction which we actually receive. As a result, the instruction of a small number of contractowners could determine the outcome of matters subject to shareholder vote. All shares voted by us will be counted when the underlying fund determines whether any requirement for a minimum number of shares be present at such a meeting to satisfy a quorum requirement has been met. Voting instructions to abstain on any item to be voted on will be applied on a pro-rata basis to reduce the number of votes eligible to be cast. Whenever a shareholders meeting is called, we will provide or make available to each person having a voting interest in a subaccount proxy voting material, reports and other materials relating to the funds. Since the funds engage in shared funding, other persons or entities besides Lincoln New York may vote fund shares. See Investments of the Variable Annuity Account - Fund Shares. Return Privilege Within the free-look period after you receive the contract, you may cancel it for any reason by delivering or mailing it postage prepaid, to Lincoln Life & Annuity Company of New York at PO Box 2348, Fort Wayne, IN 46801-2348. A contract canceled under this provision will be void. Except as explained in the following paragraph, we will return the contract value as of the valuation date on which we receive the cancellation request, plus any premium taxes which had been deducted. No applicable surrender charges or interest adjustment will apply. A purchaser who participates in the VAA is subject to the risk of a market loss on the contract value during the free-look period. IRA purchasers will receive the greater of purchase payments or contract value as of the valuation date on which we receive the cancellation request. State Regulation As a life insurance company organized and operated under New York law, we are subject to provisions governing life insurers and to regulation by the New York Superintendent of Insurance. Our books and accounts are subject to review and examination by the New York Insurance Department at all times. A full examination of our operations is conducted by that Department at least every five years. Records and Reports As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Servicing Office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Administrative services necessary for the operations of the VAA and the contracts are currently provided by Lincoln Life. However, neither the assets of Lincoln Life nor the assets of LNC support the obligation of Lincoln New York under the contracts. Other Information You may elect to receive your prospectus, prospectus supplements, quarterly statements, and annual and semiannual reports electronically over the Internet, if you have an e-mail account and access to an Internet browser. Once you select eDelivery, via the Internet Service Center, all documents available in electronic format will no longer be sent to you in hard copy. You will receive an e-mail notification when the documents become available online. It is your responsibility to provide us with your current e-mail address. You can resume paper mailings at any time without cost, by updating your profile at the Internet Service Center, or contacting us. To learn more about this service, please log on to www.LincolnFinancial.com, select service centers and continue on through the Internet Service Center. Legal Proceedings In the ordinary course of its business, Lincoln New York, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the financial position of Lincoln New York, the VAA, or the principal underwriter. 76 (This page intentionally left blank) 77 Contents of the Statement of Additional Information (SAI) for Lincoln New York Account N for Variable Annuities
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Interest Adjustment Example Annuity Payouts Examples of Regular Income Payment Calculations Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below: Statement of Additional Information Request Card Lincoln ChoicePlusSM Signature Lincoln New York Account N for Variable Annuities . Please send me a free copy of the current Statement of Additional Information for Lincoln New York Account N for Variable Annuities Lincoln ChoicePlusSM Signature. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to Lincoln Life & Annuity Company of New York, PO Box 2348, Fort Wayne, IN 46801-2348. 78 (This page intentionally left blank) 79 (This page intentionally left blank) 80 OVERVIEW OF LIVING BENEFIT RIDERS --------------------------------- We offer a number of optional living benefit riders that, for an additional fee, offer certain guarantees, if certain conditions are met. These living benefit riders are described briefly below. Please see the more detailed description in the prospectus discussion for each rider, as well as the Charges and Other Deductions section of the prospectus, for important information on the costs, restrictions, and availability of each rider. Please consult your registered representative as to whether any living benefit rider is appropriate for you based on factors such as your investment objectives, risk tolerance, liquidity needs, and time horizon. Not all riders or features are available in all states or with your contract. Prior versions of these riders may have different features. Please consult your registered representative for the availability of any particular rider.
----------------------------------------------------------------------------------------------------------------------------------- LINCOLN LINCOLN LIFETIME I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) I4LIFE(R) ADVANTAGE SMARTSECURITY(R) INCOME(SM) ADVANTAGE GUARANTEED INCOME ADVANTAGE 1-YR. 2.0 BENEFIT (VERSION 4) AUTOMATIC STEP-UP 2) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE 2.0 ----------------------------------------------------------------------------------------------------------------------------------- 1. Overview Designed to Designed to Designed to provide Designed to Designed to use the guarantee that if guarantee that if an income program guarantee today a Income Base you make your first you make your first that combines future minimum established under withdrawal on or withdrawal on or variable lifetime payout floor for 4LATER(R) Advantage (if after the date you after the date you income payments and i4LIFE(R) Advantage 4LATER(R) Advantage reach age 65, you reach age 55 you are a death benefit with regular income Guaranteed Income are guaranteed guaranteed income the ability to make payments, regardless Benefit is elected) or income for your life for your life (and withdrawals during a of investment the Account Value* (and your spouse's, your spouse's, under defined period. performance, by established under under Joint Life Joint Life version). providing an Income i4LIFE(R) Advantage (if version), even after Also includes age- Base during the i4LIFE(R) Advantage the entire amount of based increases to accumulation period Guaranteed Income purchase payments the withdrawal that can be used to Benefit is elected) or has been returned to amount. establish in the the greater of the you through periodic future a Guaranteed Income Base or Account withdrawals. If Income Benefit with Value under Lincoln lifetime withdrawals i4LIFE(R) Advantage. Lifetime Income(SM) are not in effect, Advantage 2.0 (for you may make prior purchasers of periodic withdrawals Lincoln Lifetime of the Guaranteed Income(SM) Advantage Amount. 2.0) to provide a minimum payout floor for i4LIFE(R) Advantage regular income payments, regardless of investment performance. * Can instead use the remaining Guaranteed Amount under Lincoln SmartSecurity(R) Advantage ----------------------------------------------------------------------------------------------------------------------------------- 2. Current Fee 0.65% (Single Life) Single life option Varies based on 0.65% of Income Base 1) 0.65% added to the or 0.80% (Joint 1.05% of Income Base product and death i4LIFE(R) Advantage Life) of Guaranteed Joint life option benefit option charge (0.85% if joint Amount 1.25% of Income Base (assessed as a % of life option is chosen) account value, and i4LIFE(R) Advantage only during annuity Guaranteed Income payout phase) Benefit Version 4 (0.65% for 4LATER(R) Advantage Guaranteed Income Benefit) 2) 0.50% added to the i4LIFE(R) Advantage charge (i4LIFE(R) Advantage Guaranteed Income Benefit Version 3) (assessed as a % of account value, and only during annuity payout phase) 3) Guaranteed Income Benefit for Purchasers of LINCOLN LIFETIME INCOME(SM) Advantage 2.0, 1.05% (single life option) or 1.25 (joint life option) which is the total charge for i4LIFE(R) Advantage Guaranteed Income Benefit initially (assessed as a % of the LINCOLN LIFETIME INCOME(SM) Advantage 2.0 Income Base or Account Value, if greater). ----------------------------------------------------------------------------------------------------------------------------------- 3. Guaranteed 1.50% of Guaranteed 2.00% of Income Base Same as current fee 1.50% of Income Base 1) 2.00% added to the Maximum Fee Amount i4LIFE(R) Advantage charge (assessed as a % of account value, and only during annuity payout phase) 2) 2.00% total charge for i4LIFE(R) Advantage Guaranteed Income Benefit for Purchasers of LINCOLN LIFETIME INCOME(SM) Advantage 2.0. (assessed as a % of the LINCOLN LIFETIME INCOME(SM) Advantage 2.0 Income Base). ----------------------------------------------------------------------------------------------------------------------------------- 4. Withdrawals Yes - 5% annually Yes - Age-based (4- Yes, during Access Yes, only after you No Permitted 5%) annually Period elect i4LIFE(R) Advantage ----------------------------------------------------------------------------------------------------------------------------------- 5. Payments for Yes (if conditions Yes (if conditions Yes (if conditions If elect Yes (if conditions are Life are met) are met) are met) i4LIFE(R)Advantage met) ----------------------------------------------------------------------------------------------------------------------------------- 6. Potential Purchase Payments Purchase Payments N/A Purchase Payments Automatic Annual Step- Increases to Automatic Annual 5% Enhancements 15% Enhancements Ups Prior versions Guaranteed Step-Ups Automatic Annual (every 3 years) will have different Amount, Income (if conditions are Step-Ups Resets to contract Step-Up provisions Base, or met) (if conditions are value (if conditions are Guaranteed met) (if conditions are met) Income Benefit met) (as applicable) ----------------------------------------------------------------------------------------------------------------------------------- 7. Investment Option 3 (different Option 3 (different None Option 3 (different Option 3 (different Requirements Investment Investment Investment Investment Requirements may Requirements may Requirements may Requirements may apply apply depending upon apply depending upon apply depending upon depending upon date of date of purchase. date of purchase. date of purchase. purchase. See See Investment See Investment See Investment Investment Requirements section Requirements section Requirements section Requirements section of prospectus for of prospectus for of prospectus for of prospectus for more more details) more details) more details) details) ----------------------------------------------------------------------------------------------------------------------------------- 8. Ability to Yes, after the first Yes-may impact the No (non-qualified Yes No Make rider anniversary, charge contracts) Additional if cumulative (Cumulative purchase Yes, during Access Purchase payments are over payments in excess Period, unless Payments if $100,000 and prior of $100,000 require 4LATER(R) Advantage Contract Home Office approval Home Office Guaranteed Income Value is provided approval.) Benefit or i4LIFE(R) is greater Advantage Guaranteed than zero Income Benefit has been elected (qualified contracts) No, for purchasers of Lincoln Lifetime Income(SM) Advantage 2.0 if i4LIFE(R) Advantage Guaranteed Income Benefit (Version 4) has been elected ----------------------------------------------------------------------------------------------------------------------------------- 9. Spousal Yes No No Yes (prior to No Continuation Periodic Income Commencement Date) ----------------------------------------------------------------------------------------------------------------------------------- 10. Ability Yes, after 5 years Yes, after 5 Years No (non-qualified Yes, after 3 years Yes, after 3 years to Cancel following the later contracts) following the later following the later Rider of rider effective of rider effective of rider effective date or Yes, at any time date or most recent date or most recent contractowner- (qualified Reset Reset (if 4LATER(R) elected step-up contracts) Advantage Guaranteed Income Benefit is elected or purchasers of LINCOLN LIFETIME INCOME(SM) Advantage or LINCOLN LIFETIME INCOME(SM) Advantage 2.0 elect the Guaranteed Income Benefit) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) Yes, after 5 years following the rider effective date for LINCOLN LIFETIME INCOME(SM) Advantage 2.0 ----------------------------------------------------------------------------------------------------------------------------------- 11. Nursing Home No Yes No No No Benefit (subject to state availability) ----------------------------------------------------------------------------------------------------------------------------------- 12. May Elect Other No No Limited to No (prior to Limited to i4LIFE(R) Living Benefit Guaranteed Income Periodic Income Advantage Riders Benefit Commencement Date) -----------------------------------------------------------------------------------------------------------------------------------
Lincoln ChoicePlusSM Signature Lincoln New York Account N for Variable Annuities (Registrant) Lincoln Life & Annuity Company of New York (Depositor) Statement of Additional Information (SAI) This SAI should be read in conjunction with the Lincoln ChoicePlusSM Signature prospectus of Lincoln New York Account N for Variable Annuities dated April 29, 2011. You may obtain a copy of the Lincoln ChoicePlusSM Signature prospectus on request and without charge. Please write Lincoln Life & Annuity Company of New York, PO Box 2348, Fort Wayne, IN 46801-2348, or call 1-888-868-2583. Table of Contents
Item Page Special Terms B-2 Services B-2 Principal Underwriter B-2 Purchase of Securities Being Offered B-2 Interest Adjustment Example B-2 Annuity Payouts B-4 Examples of Regular Income Payment Calculations B-5
Item Page Determination of Accumulation and Annuity Unit Value B-5 Capital Markets B-5 Advertising & Ratings B-6 More About the S&P 500 Index B-6 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is April 29, 2011. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm Ernst & Young LLP, independent registered public accounting firm, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania, 19103, has audited a) our financial statements of the VAA as of December 31, 2010; and b) our financial statements of Lincoln Life & Annuity Company of New York as of December 31, 2010, which are included in this SAI and Registration Statement. The aforementioned financial statements are included herein in reliance on Ernst & Young LLP's reports, given on their authority as experts in accounting and auditing. Keeper of Records All accounts, books, records and other documents which are required to be maintained for the VAA are maintained by us or by third parties responsible to Lincoln New York. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service. Administrative services necessary for the operations of the VAA and the contracts are currently provided by Lincoln Life. However, neither the assets of Lincoln Life nor the assets of LNC support the obligation of Lincoln New York under the contracts. Principal Underwriter Lincoln Financial Distributors, Inc., ("LFD"), an affiliate of Lincoln New York, serves as principal underwriter (the "Principal Underwriter") for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives who are also associated with Lincoln Financial Advisors Corporation and/or Lincoln Financial Securities Corp. (collectively "LFN"), our affiliates. The Principal Underwriter also may enter into selling agreements with other broker-dealers ("Selling Firms") for the sale of the contracts. Sales representatives of Selling Firms are appointed as our insurance agents. LFD, acting as the Principal Underwriter, paid $9,599,993, $5,410,039 and $11,044,907 to LFN and Selling Firms in 2008, 2009, and 2010 respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts. Purchase of Securities Being Offered The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived. Both before and after the annuity commencement date, there are exchange privileges between subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts. The offering of the contracts is continuous. Interest Adjustment Example Note: This example is intended to show how the interest adjustment calculation impacts the surrender value of a representative contract. The surrender charges, annual account fee, adjustment factor, and guaranteed minimum interest rate values shown here are generally different from those that apply to specific contracts, particularly those contracts that deduct an initial sales load or pay a bonus on deposits. Calculations of the interest adjustment in your contract, if applicable, will be based on the factors applicable to your contract. The interest adjustment may be referred to as a market value adjustment in your contract. B-2 SAMPLE CALCULATIONS FOR MALE 35 ISSUE CASH SURRENDER VALUES Single Premium.................. $50,000 Premium taxes................... None Withdrawals..................... None Guaranteed Period............... 5 years Guaranteed Interest Rate........ 3.50% Annuity Date.................... Age 70 Index Rate A.................... 3.50% Index Rate B.................... 4.00% End of contract year 1 3.50% End of contract year 2 3.00% End of contract year 3 2.00% End of contract year 4 Percentage adjustment to B...... 0.50%
Interest Adjustment Formula (1 + Index A)n ------------------------------ -1 n = Remaining Guaranteed Period (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity 1 + Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment Formula Value Value (3) & (4) Charge Value --------------- --------- -------------------- ---------- --------- ------------ ----------- ---------- 1............ $51,710 0.962268 $49,759 $50,710 $50,710 $4,250 $46,460 2............ $53,480 0.985646 $52,712 $51,431 $52,712 $4,250 $48,462 3............ $55,312 1.000000 $55,312 $52,162 $55,312 $4,000 $51,312 4............ $57,208 1.009756 $57,766 $52,905 $57,766 $3,500 $54,266 5............ $59,170 N/A $59,170 $53,658 $59,170 $3,000 $56,170
ANNUITY VALUE CALCULATION
BOY* Annual EOY** Annuity Guaranteed Account Annuity Contract Year Value Interest Rate Fee Value ------------------ --------- --------------- --------- ---------- 1...............$50,000 x 1.035 - $40 = $51,710 2...............$51,710 x 1.035 - $40 = $53,480 3...............$53,480 x 1.035 - $40 = $55,312 4...............$55,312 x 1.035 - $40 = $57,208 5...............$57,208 x 1.035 - $40 = $59,170
SURRENDER CHARGE CALCULATION
Surrender Charge Surrender Contract Year Factor Deposit Charge ------------------ ---------- --------- ---------- 1............... 8.5% x $50,000 = $4,250 2............... 8.5% x $50,000 = $4,250 3............... 8.0% x $50,000 = $4,000 4............... 7.0% x $50,000 = $3,500 5............... 6.0% x $50,000 = $3,000
B-3 1 + INTEREST ADJUSTMENT FORMULA CALCULATION
Contract Year Index A Index B Adj Index B N Result ---------------- --------- --------- ------------- ----- --------- 1............. 3.50% 4.00% 4.50% 4 0.962268 2............. 3.50% 3.50% 4.00% 3 0.985646 3............. 3.50% 3.00% 3.50% 2 1.000000 4............. 3.50% 2.00% 2.50% 1 1.009756 5............. 3.50% N/A N/A N/A N/A
MINIMUM VALUE CALCULATION
Minimum Annual Guaranteed Account Minimum Contract Year Interest Rate Fee Value ------------------ --------------- --------- ---------- 1...............$50,000 x 1.015 - $40 = $50,710 2...............$50,710 x 1.015 - $40 = $51,431 3...............$51,431 x 1.015 - $40 = $52,162 4...............$52,162 x 1.015 - $40 = $52,905 5...............$52,905 x 1.015 - $40 = $53,658
* BOY = beginning of year ** EOY = end of year Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax (and less any surrender charges on purchase payments in the contract for less than 12 months if bonus credits applied to the purchase payments); o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity Mortality Tables, modified, with an assumed investment return at the rate of 3%, 4%, or 5% per annum, depending on the terms of your contract. The first annuity payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The assumed interest rate is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than the assumed interest rate, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. We may use sex-distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law. At an annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying B-4 the contractowner's fixed number of annuity units in each subaccount by the appropriate annuity unit value for the valuation date ending 14 days prior to the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immediately preceding valuation date by the product of: o The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and o A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days prior to the payment date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of Age, Sex and Survival We may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. Examples of Regular Income Payment Calculations These examples will illustrate the impact of the length of the access period and the impact of a withdrawal on the regular income payments. These examples assume that the investment return is the same as the assumed investment return (AIR) to make the regular income payment calculations simpler to understand. The regular income payments will vary based on the investment performance of the underlying funds. Annuitant............................ Male, Age 65 Secondary Life....................... Female, Age 63 Purchase Payment..................... $200,000.00 Regular Income Payment Frequency..... Annual AIR.................................. 4.0% Hypothetical Investment Return....... 4.0% 20-year Access Period 30-Year Access Period Regular Income Payment............... $ 10,600.94 $9,974.48
A 10% withdrawal from the account value will reduce the regular income payments by 10% to $9,540.85 with the 20-year access period and $8,977.03 with the 30-year access period. At the end of the 20-year access period, the remaining account value of $109,921.94 (assuming no withdrawals) will be used to continue the $10,600.94 regular income payment during the lifetime income period for the lives of the annuitant and secondary life. At the end of the 30-year access period, the remaining account value of $66,884.77 (assuming no withdrawals) will be used to continue the $9,974.48 regular income payment during the lifetime income period for the lives of the annuitant and secondary life. (Note: the regular income payments during the lifetime income period will vary with the investment performance of the underlying funds). Determination of Accumulation and Annuity Unit Value A description of the days on which accumulation and annuity units will be valued is given in the prospectus. The New York Stock Exchange's (NYSE) most recent announcement (which is subject to change) states that it will be closed on weekends and on these holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of these holidays occurs on a weekend day, the Exchange may also be closed on the business day occurring just before or just after the holiday. It may also be closed on other days. Since the portfolios of some of the fund and series will consist of securities primarily listed on foreign exchanges or otherwise traded outside the United States, those securities may be traded (and the net asset value of those fund and series and of the variable account could therefore be significantly affected) on days when the investor has no access to those funds and series. Capital Markets In any particular year, our capital may increase or decrease depending on a variety of factors - the amount of our statutory income or losses (which is sensitive to equity market and credit market conditions), the amount of additional capital we must hold to support business growth, changes in reserving requirements, our inability to secure capital market solutions to provide reserve relief, such as B-5 issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio and changes in interest rates. Advertising & Ratings We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln New York or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. All ratings are on outlook stable. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis or in accordance with other terms we make available, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts or in accordance with other terms we make available. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. The minimum amount to be dollar cost averaged is $1,500 ($2,000 for contracts purchased prior to November 15, 2010) over any period between six and 60 months. Once elected, the program will remain in effect until the earlier of: o the annuity commencement date; o the value of the amount being DCA'd is depleted; or o you cancel the program by written request or by telephone if we have your telephone authorization on file. We reserve the right to restrict access to this program at any time. A transfer made as part of this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges or interest adjustment which may apply to transfers. Upon receipt of an additional purchase payment allocated to the DCA fixed account, the existing program duration will be extended to reflect the end date of the new DCA program. B-6 However, the existing interest crediting rate will not be extended. The existing interest crediting rate will expire at its originally scheduled expiration date and the value remaining in the DCA account from the original amount as well as any additional purchase payments will be credited with interest at the standard DCA rate at the time. We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. Automatic Withdrawal Service (AWS) - AWS provides an automatic, periodic withdrawal of contract value to you. AWS may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. You may elect to participate in AWS at the time of application or at any time before the annuity commencement date by sending a written request to us. The minimum contract value required to establish AWS is $10,000. You may cancel or make changes to your AWS program at any time by sending a written request to us. If telephone authorization has been elected, certain changes may be made by telephone. Notwithstanding the requirements of the program, any withdrawal must be permitted under Section 401(a)(9) of the IRC for qualified plans or permitted under Section 72 of the IRC for non-qualified contracts. To the extent that withdrawals under AWS do not qualify for an exemption from the contingent deferred sales charge, we will assess any applicable surrender charges on those withdrawals. See Contingent deferred sales charges. Portfolio Rebalancing - Portfolio rebalancing is an option, which, if elected by the contractowner, restores to a pre-determined level the percentage of the contract value, allocated to each variable subaccount. This pre-determined level will be the allocation initially selected when the contract was purchased, unless subsequently changed. The portfolio rebalancing allocation may be changed at any time by submitting a written request to us. If portfolio rebalancing is elected, all purchase payments allocated to the variable subaccounts must be subject to portfolio rebalancing. Portfolio rebalancing may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. The contractowner may terminate the portfolio rebalancing program or re-enroll at any time by sending a written request to us. If telephone authorization has been elected, the contractowner may make these elections by phone. The portfolio rebalancing program is not available following the annuity commencement date. Other Information Due to differences in redemption rates, tax treatment or other considerations, the interests of contractowners under the variable life accounts could conflict with those of contractowners under the VAA. In those cases, where assets from variable life and variable annuity separate accounts are invested in the same fund(s) (i.e., where mixed funding occurs), the Boards of Directors of the fund involved will monitor for any material conflicts and determine what action, if any, should be taken. If it becomes necessary for any separate account to replace shares of any fund with another investment, that fund may have to liquidate securities on a disadvantageous basis. Refer to the prospectus for each fund for more information about mixed funding. Financial Statements The December 31, 2010 financial statements of the VAA and the December 31, 2010 financial statements of Lincoln New York appear on the following pages. B-7 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK S-1 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 S-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of Lincoln Life & Annuity Company of New York We have audited the accompanying balance sheets of Lincoln Life & Annuity Company of New York (the Company) as of December 31, 2010 and 2009, and the related statements of income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also 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 our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lincoln Life & Annuity Company of New York at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 2009 the Company changed its method of accounting for the recognition and presentation of other-than-temporary impairments. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 1, 2011 S-3 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, --------------------- 2010 2009 ------- ------------- ASSETS Investments: Available-for-sale securities, at fair value: Fixed maturity securities (amortized cost: 2010 -- $6,429; 2009 -- $6,229) $ 6,659 $ 6,180 Equity securities (cost: 2010 and 2009 -- $2) 3 2 Mortgage loans on real estate 225 228 Policy loans 431 442 Other investments 1 2 ------- ------------- Total investments 7,319 6,854 Cash and invested cash 48 65 Deferred acquisition costs and value of business acquired 731 856 Premiums and fees receivable 5 5 Accrued investment income 93 92 Reinsurance recoverables 503 502 Goodwill 162 162 Other assets 115 105 Separate account assets 2,660 2,263 ------- ------------- Total assets $11,636 $10,904 ======= ============= LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Future contract benefits $ 1,523 $ 1,537 Other contract holder funds 5,268 5,084 Other liabilities 306 264 Separate account liabilities 2,660 2,263 ------- ------------- Total liabilities 9,757 9,148 ------- ------------- CONTINGENCIES AND COMMITMENTS (SEE NOTE 11) STOCKHOLDER'S EQUITY Common stock -- 132,000 shares authorized, issued and outstanding 940 940 Retained earnings 879 846 Accumulated other comprehensive income (loss) 60 (30) ------- ------------- Total stockholder's equity 1,879 1,756 ------- ------------- Total liabilities and stockholder's equity $11,636 $10,904 ======= =============
See accompanying Notes to Financial Statements S-4 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF INCOME (LOSS) (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- REVENUES Insurance premiums $127 $104 $ 98 Insurance fees 259 255 248 Net investment income 418 408 395 Realized gain (loss): Total other-than-temporary impairment losses on securities (20) (90) (106) Portion of loss recognized in other comprehensive income 5 31 -- ------- ------- ------- Net other-than-temporary impairment losses on securities recognized in earnings (15) (59) (106) Realized gain (loss), excluding other-than-temporary impairment losses on securities (2) (6) 8 ------- ------- ------- Total realized gain (loss) (17) (65) (98) Other revenues and fees -- (1) -- ------- ------- ------- Total revenues 787 701 643 ------- ------- ------- BENEFITS AND EXPENSES Interest credited 207 209 209 Benefits 254 225 228 Underwriting, acquisition, insurance and other expenses 158 159 156 ------- ------- ------- Total benefits and expenses 619 593 593 ------- ------- ------- Income (loss) before taxes 168 108 50 Federal income tax expense (benefit) 55 35 14 ------- ------- ------- Net income (loss) $113 $73 $ 36 ======= ======= =======
See accompanying Notes to Financial Statements S-5 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 --------- --------- --------- COMMON STOCK Balance as of beginning-of-year $ 940 $ 940 $ 940 --------- --------- --------- Balance as of end-of-year 940 940 940 --------- --------- --------- RETAINED EARNINGS Balance as of beginning-of-year 846 757 724 Cumulative effect from adoption of new accounting standards -- 16 -- Comprehensive income (loss) 203 269 (167) Less other comprehensive income (loss), net of tax (90) (196) 203 --------- --------- --------- Net income (loss) 113 73 36 Dividends declared (80) -- (3) --------- --------- --------- Balance as of end-of-year 879 846 757 --------- --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance as of beginning-of-year (30) (210) (7) Cumulative effect from adoption of new accounting standards -- (16) -- Other comprehensive income (loss), net of tax 90 196 (203) --------- --------- --------- Balance as of end-of-year 60 (30) (210) --------- --------- --------- Total stockholder's equity as of end-of-year $1,879 $1,756 $1,487 ========= ========= =========
See accompanying Notes to Financial Statements S-6 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------------ ------- 2010 2009 2008 -------- --------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 113 $ 73 $ 36 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred acquisition costs, value of business acquired, deferred sales inducements and deferred front-end loads deferrals and interest, net of amortization 28 27 7 Change in premiums and fees receivable -- (2) 1 Change in accrued investment income (1) (6) (3) Change in future contract benefits and other contract holder funds (84) (140) 50 Change in reinsurance related assets and liabilities 25 92 (116) Change in federal income tax accruals 40 44 (26) Realized (gain) loss 17 65 98 Other (18) (5) (15) -------- --------- ------- Net cash provided by (used in) operating activities 120 148 32 -------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (920) (1,150) (833) Sales of available-for-sale securities 210 271 162 Maturities of available-for-sale securities 451 384 548 Purchases of other investments (119) (18) (76) Sales or maturities of other investments 135 70 37 -------- --------- ------- Net cash provided by (used in) investing activities (243) (443) (162) -------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits of fixed account values, including the fixed portion of variable 583 663 538 Withdrawals of fixed account values, including the fixed portion of variable (346) (308) (406) Transfers to and from separate accounts, net (51) (50) (72) Common stock issued for benefit plans and excess tax benefits -- -- (4) Dividends paid to stockholders (80) -- -- -------- --------- ------- Net cash provided by (used in) financing activities 106 305 56 -------- --------- ------- Net increase (decrease) in cash and invested cash, including discontinued operations (17) 10 (74) Cash and invested cash, including discontinued operations, as of beginning-of-year 65 55 129 -------- --------- ------- Cash and invested cash, including discontinued operations, as of end-of-year $ 48 $ 65 $ 55 ======== ========= =======
See accompanying Notes to Financial Statements S-7 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Lincoln Life & Annuity Company of New York ("LLANY" or the "Company," which also may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of The Lincoln National Life Insurance Company ("LNL"), a wholly-owned subsidiary of Lincoln National Corporation ("LNC" or the "Ultimate Parent"), and formerly referred to as Jefferson-Pilot LifeAmerica Insurance Company ("JPLA"), is domiciled in the state of New York. LLANY is principally engaged in the sale of individual life insurance products, individual annuity products and work-site and group non-medical products (primarily term life and disability). These products are marketed primarily through personal producing general agents and brokers throughout the U.S. LLANY is licensed and sells its products throughout the United States of America and several U.S. territories. See Note 20 for additional information. BASIS OF PRESENTATION The accompanying financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. LLANY also submits financial statements to insurance industry regulatory authorities. Those financial statements are prepared on the basis of statutory accounting practices ("SAP") and are significantly different from financial statements prepared in accordance with GAAP. See Note 18 for additional discussion on SAP. Certain amounts reported in prior years' financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications had no effect on net income or stockholder's equity of the prior years. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets, asset valuation allowances, deferred acquisition costs ("DAC"), value of business acquired ("VOBA"), deferred sales inducements ("DSI"), goodwill, future contract benefits, other contract holder funds which includes deferred front-end loads ("DFEL"), pension plans, income taxes and the potential effects of resolving litigated matters. BUSINESS COMBINATIONS For all business combination transactions occurring after January 1, 2009, we use the acquisition method of accounting, and accordingly generally, recognize the fair values of assets acquired, liabilities assumed and any noncontrolling interests. For all business combination transactions initiated after June 30, 2001, but before January 1, 2009, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information relative to the fair values as of the acquisition date becomes available. The financial statements include the results of operations of any acquired company since the acquisition date. FAIR VALUE MEASUREMENT Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability ("exit price") in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability ("entry price"). Pursuant to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board ("FASB") ACCOUNTING STANDARDS CODIFICATION(TM) ("ASC"), we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows: Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to "blockage discounts" that are excluded; Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, that are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing S-8 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources. AVAILABLE-FOR-SALE SECURITIES -- FAIR VALUATION METHODOLOGIES AND ASSOCIATED INPUTS Securities classified as available-for-sale ("AFS") consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) ("OCI"), net of associated DAC, VOBA, DSI, other contract holder funds and deferred income taxes. See Notes 3 and 12 for additional details. We measure the fair value of our securities classified as AFS based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and we consistently apply the valuation methodology to measure the security's fair value. Our fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations or pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services' valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy. We use observable and unobservable inputs in our valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with senior business leaders and brokers and observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on management's judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity. The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our AFS securities. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all AFS securities on any given day. The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our AFS securities discussed above: Corporate bonds and U. S. Government bonds - We also use Trade Reporting and Compliance Engine(TM) reported tables for our corporate bonds and vendor trading platform data for our U. S. Government bonds. Mortgage- and asset-backed securities - We also utilize additional inputs which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over collateralization features for each of our mortgage-backed securities ("MBS"), which include collat- eralized mortgage obligations ("CMOs"), mortgage pass through securities backed by residential mortgages ("MPTS") and MBS backed by commercial mortgages ("CMBS"), and for our asset-backed securities ("ABS") collateralized debt obligations ("CDOs"). State and municipal bonds - We also use additional inputs which include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds. Hybrid and redeemable preferred and equity securities - We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred and equity securities, including banking, insurance, other financial services and other securities. AFS SECURITIES -- EVALUATION FOR RECOVERY OF AMORTIZED COST We regularly review our AFS securities for declines in fair value that we determine to be other-than-temporary. For an equity security, if we do not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, we conclude that an other-than-temporary impairment ("OTTI") has occurred and the amortized cost of the equity security is written down to the current fair value, with a corresponding charge to realized gain (loss) on our Statements of Income (Loss). When assessing our ability and intent to hold the equity security to recovery, we consider, among other things, the severity and duration of the decline in fair value of the equity security as well as the cause of the decline, a fundamental analysis of the liquidity, and business prospects and overall financial condition of the issuer. S-9 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For our fixed maturity AFS securities, we generally consider the following to determine that our unrealized losses are not OTTI: The estimated range and average period until recovery; The estimated range and average holding period to maturity; Remaining payment terms of the security; Current delinquencies and nonperforming assets of underlying collateral; Expected future default rates; Collateral value by vintage, geographic region, industry concentration or property type; Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and Contractual and regulatory cash obligations. For a debt security, if we intend to sell a security or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Statements of Income (Loss). If we do not intend to sell a debt security or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized gain (loss) on our Statements of Income (Loss), as this amount is deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded in OCI to unrealized OTTI on AFS securities on our Statements of Stockholder's Equity, as this amount is considered a noncredit (i.e., recoverable) impairment. When assessing our intent to sell a debt security or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying debt security. The effective interest rate is the original yield or the coupon if the debt security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, which we use to determine the amount of a credit loss. Our conclusion that it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows are equal to or greater than the amortized cost basis of the debt securities, or we have the ability to hold the equity AFS securities for a period of time sufficient for recovery is based upon our asset-liability management process. Management considers the following as part of the evaluation: The current economic environment and market conditions; Our business strategy and current business plans; The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk; Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies; The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts; The capital risk limits approved by management; and Our current financial condition and liquidity demands. To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following: Historic and implied volatility of the security; Length of time and extent to which the fair value has been less than amortized cost; Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area; Failure, if any, of the issuer of the security to make scheduled payments; and Recoveries or additional declines in fair value subsequent to the balance sheet date. In periods subsequent to the recognition of an OTTI, the AFS security is accounted for as if it had been purchased on the measurement date of the OTTI. Therefore, for the fixed maturity AFS security, the original discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield. To determine recovery value of a corporate bond or ABS CDOs, we perform additional analysis related to the underlying issuer including, but not limited to, the following: Fundamentals of the issuer to determine what we would recover if they were to fle bankruptcy versus the price at which the market is trading; Fundamentals of the industry in which the issuer operates; Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation; Expected cash flows of the issuer (e.g. , whether the issuer has cash flows in excess of what is required to fund its operations); Expectations regarding defaults and recovery rates; Changes to the rating of the security by a rating agency; and Additional market information (e.g. , if there has been a replacement of the corporate debt security). S-10 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Each quarter we review the cash flows for the MBS to determine whether or not they are sufficient to provide for the recovery of our amortized cost. We revise our cash flow projections only for those securities that are at most risk for impairment based on current credit enhancement and trends in the underlying collateral performance. To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following: Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover; Level of creditworthiness of the home equity loans that back a CMO, residential mortgages that back a MPTS or commercial mortgages that back a CMBS; Susceptibility to fair value fluctuations for changes in the interest rate environment; Susceptibility to reinvestment risks, in cases where market yields are lower than the securities' book yield earned; Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security; Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and Susceptibility to variability of prepayments. When evaluating MBS and mortgage-related ABS, we consider a number of pool-specific factors as well as market level factors when determining whether or not the impairment on the security is temporary or other-than-temporary. The most important factor is the performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis include type of underlying collateral (e.g., prime, Alt-A or subprime), geographic distribution of underlying loans and timing of liquidations by state. Once default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur. Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Once default and severity assumptions are determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is reviewed for OTTI by comparing the expected cash flows to amortized cost. To the extent that the security has already been impaired or was purchased at a discount, such that the amortized cost of the security is less than or equal to the present value of cash flows expected to be collected, no impairment is required. Otherwise, if the amortized cost of the security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount greater than the expected principal loss, then impairment is recognized. We further monitor the cash flows of all of our AFS securities backed by pools on an ongoing basis. We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our AFS securities backed by pools of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable. If it is not recoverable, we record an impairment of the security. MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances. Interest income is accrued on the principal balance of the loan based on the loan's contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income on our Statements of Income (Loss) along with mortgage loan fees, which are recorded as they are incurred. Our commercial loan portfolio is comprised of long-term loans secured by existing commercial real estate. As such, it does not exhibit risk characteristics unique to mezzanine, construction, residential, agricultural, land or other types of real estate loans. We believe all of the loans in our portfolio share three primary risks: borrower creditworthiness; sustainability of the cash flow of the property; and market risk; therefore, our methods for monitoring and assessing credit risk are consistent for our entire portfolio. Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated value. The loan's estimated value is based on: the present value of expected future cash flows discounted at the loan's effective interest rate; the loan's observable market price; or the fair value of the loan's collateral. Valuation allowances are maintained at a level we believe is adequate to absorb estimated probable credit losses of each specific loan. Our periodic evaluation of the adequacy of the allowance for losses is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. Trends in market vacancy and rental rates are S-11 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) incorporated into the analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for credit losses. In addition, we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit profiles. Where warranted, we establish or increase loss reserves for a specific loan based upon this analysis. Our process for determining past due or delinquency status begins when a payment date is missed, at which time the borrower is contacted. After the grace period expiration that may last up to 10 days, we send a default notice. The default notice generally provides a short time period to cure the default. Our policy is to report loans that are 60 or more days past due, which equates to two or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these loans is either applied to the principal or recorded in net investment income on our Statements of Income (Loss) when received, depending on the assessment of the collectibility of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the allowance for losses, and subsequent recoveries, if any, are credited to the allowance for losses. All mortgage loans that are impaired have an established allowance for credit losses. Changes in valuation allowances are reported in realized gain (loss) on our Statements of Income (Loss). We measure and assess the credit quality of our mortgage loans by using loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan. The debt-service coverage ratio compares a property's net operating income to its debt-service payments. Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a higher debt-service coverage ratio generally indicates a higher quality loan. POLICY LOANS Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances. DERIVATIVE INSTRUMENTS We have certain variable annuity products with guaranteed withdrawal benefits ("GWB") and guaranteed income benefits ("GIB") features that are embedded derivatives. These derivative instruments are recognized as either assets or liabilities on our Balance Sheets at estimated fair value. The change in fair value of the embedded derivatives flows through net income as realized gain (loss) on our Statements of Income (Loss). CASH AND CASH EQUIVALENTS Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with a maturity of three months or less. DAC, VOBA, DSI AND DFEL Commissions and other costs of acquiring universal life ("UL") insurance, variable universal life ("VUL") insurance, traditional life insurance, annuities and other investment contracts, which vary with and are related primarily to the production of new business, have been deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for dollar cost averaging contracts are considered DSI, and the unamortized balance is reported in other assets on our Balance Sheets. Contract sales charges that are collected in the early years of an insurance contract are deferred (referred to as "DFEL"), and the un-amortized balance is reported in other contract holder funds on our Balance Sheets. Both DAC and VOBA amortization is reported within underwriting, acquisition, insurance and other expenses on our Statements of Income (Loss). DSI amortization is reported in interest credited on our Statements of Income (Loss). The amortization of DFEL is reported within insurance fees on our Statements of Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits ("EGPs") from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 40 years and 30 years, respectively, based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 12 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that have demonstrated favorable lapse experience. Acquisition costs for all traditional contracts, including traditional life insurance, which include individual whole life, group business and term life insurance contracts, are amortized over periods of 7 to 30 years on either a straight-line S-12 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) basis or as a level percent of premium of the related policies depending on the block of business. There is currently no DAC, VOBA, DSI or DFEL balance or related amortization for fixed and variable payout annuities. The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as AFS and certain embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Statements of Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss). On a quarterly basis, we may record an adjustment to the amounts included within our Balance Sheets for DAC, VOBA, DSI and DFEL with an offsetting benefit or charge to revenue or expense for the effect of the difference between future EGPs used in the prior quarter and the emergence of actual and updated future EGPs in the current quarter ("retrospective unlocking"). In addition, in the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. These assumptions include investment margins, mortality, retention, rider utilization and maintenance expenses (costs associated with maintaining records relating to insurance and individual and group annuity contracts and with the processing of premium collections, deposits, withdrawals and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL, included on our Balance Sheets, are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change ("prospective unlocking - assumption changes"). We may have prospective unlocking in other quarters as we become aware of information that warrants updating prospective assumptions outside of our annual comprehensive review. We may also identify and implement actuarial modeling refinements ("prospective unlocking - model refinements") that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. The primary distinction between retrospective and prospective unlocking is that retrospective unlocking is driven by the difference between actual gross profits compared to EGPs each period, while prospective unlocking is driven by changes in assumptions or projection models related to our expectations of future EGPs. DAC, VOBA, DSI and DFEL are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts. REINSURANCE We enter into reinsurance agreements with other companies in the normal course of business. Assets and liabilities and premiums and benefits from certain reinsurance contracts that grant statutory surplus relief to other insurance companies are netted on our Balance Sheets and Statements of Income (Loss), respectively, because there is a right of offset. All other reinsurance agreements are reported on a gross basis on our Balance Sheets as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of modified coinsurance ("Modco") agreements for which the right of offset also exists. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums, benefits and DAC are reported net of insurance ceded. GOODWILL We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events, including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator or unanticipated competition, would cause us to review the carrying amounts of goodwill for impairment. We are required to perform a two-step test in our evaluation of the carrying value of goodwill for impairment. In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value is greater than the carrying value, then the carrying value is deemed to be sufficient and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist and Step 2 is required to be performed. In Step 2, the implied fair value of the reporting unit's goodwill is determined by assigning the reporting unit's fair value as determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value, and a charge is reported in impairment of intangibles on our Statements of Income (Loss). SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS Specifically identifiable intangible assets, net of accumulated amortization, are reported in other assets on our Balance Sheets. The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive environments in which the Company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of S-13 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impairment, then the cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our Statements of Income (Loss). Sales force intangibles are attributable to the value of the new business distribution system for certain life insurance products within the Insurance Solutions -- Life Insurance segment acquired through business combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. OTHER LONG-LIVED ASSETS Property and equipment owned for company use is included in other assets on our Balance Sheets and is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. SEPARATE ACCOUNT ASSETS AND LIABILITIES We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts. See Note 9 for additional information regarding arrangements with contractual guarantees. We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of guaranteed death benefit ("GDB"), GWB and GIB features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals ("return of net deposits"); total deposits made to the contract less any partial withdrawals plus a minimum return ("minimum return"); or the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary ("anniversary contract value"). As discussed in Note 4, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees are accounted for as benefit reserves. Other guarantees contain characteristics of both and are accounted for under an approach that calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each guaranteed living benefit ("GLB") feature. The net impact of these changes is reported as a component of realized gain (loss) on our Statements of Income (Loss) in a category referred to as GLBs. The "market consistent scenarios" used in the determination of the fair value of the GWB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. In our calculation, risk-neutral Monte-Carlo simulations resulting in over 10 million scenarios are utilized to value the entire block of guarantees. The market consistent scenario assumptions, as of each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include assumptions for the capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, benefit utilization, mortality, etc.), risk margins, administrative expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to pay for future benefits and claims. Other contract holder funds represent liabilities for account values, dividends payable, premium deposit funds, undistributed earnings on participating business and other contract holder funds as well the carrying value of DFEL discussed above. The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that accrue to the benefit of the contract holders, excluding surrender charges. The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted S-14 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.75% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.50% to 10.00%. These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable. The liabilities for future claim reserves for variable annuity products containing GDB features are calculated by estimating the present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments over the life of the contract ("benefit ratio") multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GDB payments plus interest on the reserves. The change in the reserve for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. With respect to our future contract benefits and other contract holder funds, we continually review: overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur. The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. UL and VUL products with secondary guarantees represented approximately 11% of permanent life insurance in force as of December 31, 2010, and approximately 65% of sales for these products in 2010. Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI. Future contract benefits on our Balance Sheets include GLB features and remaining guaranteed interest and similar contracts that are carried at fair value, which represents approximate surrender value including an estimate for our nonperformance risk. Our LINCOLN SMARTSECURITY(R) Advantage GWB feature, GIB and 4LATER(R) features have elements of both insurance benefits and embedded derivatives. We weight these features and their associated reserves accordingly based on their hybrid nature. We classify these items in Level 3 within the hierarchy levels described above in "Fair Value Measurement." The fair value of our indexed annuity contracts is based on their approximate surrender values. COMMITMENTS AND CONTINGENCIES Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable. INSURANCE FEES Insurance fees for investment and interest-sensitive life insurance contracts consist of asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance. In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the "attributed fees"), which are not reported within insurance fees on our Statements of Income (Loss). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Statements of Income (Loss). The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms. For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue. S-15 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INSURANCE PREMIUMS Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Our group non-medical insurance products consist primarily of term life, disability and dental. NET INVESTMENT INCOME Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield. For ABS and MBS, included in the AFS fixed maturity securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on our Statements of Income (Loss). REALIZED GAIN (LOSS) Realized gain (loss) on our Statements of Income (Loss) includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivatives. Realized gains and losses on the sale of investments are determined using the specific identification method. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation. INTEREST CREDITED Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in our general account during 2008 through 2010 ranged from 3.00% to 9.00%. BENEFITS Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits and annuity products with guaranteed death benefits. For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Our employees participate in the pension and postretirement benefit plans which are sponsored by LNC and LNL. Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate. See Note 15 for additional information. STOCK-BASED COMPENSATION In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date LNC's Board of Directors approves stock awards, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholder's equity. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on our balance sheet and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in underwriting, acquisition, insurance and other expenses on our Statements of Income (Loss). See Note 17 for additional information. INCOME TAXES We have elected to file consolidated federal income tax returns with LNC and its subsidiaries. Pursuant to an intercompany tax sharing agreement with LNC, we provide for income taxes on a separate return filing basis. The tax sharing agreement also provides that we will receive benefit for net operating losses, capital losses and tax credits which are not usable on a separate return basis to the extent such items may be utilized in the consolidated income tax returns of LNC. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required to reduce the deferred tax asset to an amount that we expect, more likely than not, will be realized. See Note 5 for additional information. S-16 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARDS ADOPTION OF NEW ACCOUNTING STANDARDS DERIVATIVES AND HEDGING TOPIC In March 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-11, "Scope Exception Related to Embedded Credit Derivatives" ("ASU 2010-11"), to clarify the scope exception when evaluating an embedded credit derivative, which may potentially require separate accounting. Specifically, ASU 2010-11 states that only an embedded credit derivative feature related to the transfer of credit risk that is solely in the form of subordination of one financial instrument to another is not subject to further analysis as a potential embedded derivative under the Derivatives and Hedging Topic of the FASB ASC. Embedded credit derivatives, which no longer qualify for the scope exception, are subject to a bifurcation analysis. The fair value option may be elected for investments within the scope of ASU 2010-11 on an instrument-by-instrument basis. If the fair value option is not elected, preexisting contracts acquired, issued or subject to a remeasurement event on or after January 1, 2007 are within the scope of ASU 2010-11. We adopted ASU 2010-11 at the beginning of the interim reporting period ended September 30, 2010. The adoption did not have a material impact on our financial condition and results of operations. FAIR VALUE MEASUREMENTS AND DISCLOSURES TOPIC In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"), which requires additional disclosure related to the three-level fair value hierarchy. Entities are required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy, and separately present information related to purchases, sales, issuances and settlements in the reconciliation of fair value measurements classified as Level 3. We adopted the amendments in ASU 2010-06 effective January 1, 2010, and have prospectively included the required disclosures in Note 19 related to Levels 1 and 2 of the fair value hierarchy. The disclosures related to purchases, sales, issuances and settlements for Level 3 fair value measurements are effective for reporting periods beginning after December 15, 2010, and as such, these disclosures will be included in the Notes to Financial Statements effective January 1, 2011. INVESTMENTS -- DEBT AND EQUITY SECURITIES TOPIC In April 2009, the FASB replaced the guidance in the Investments - Debt and Equity Securities Topic of the FASB ASC related to OTTI. Under this new accounting guidance, management's assertion that it has the intent and ability to hold an impaired debt security until recovery was replaced by the requirement for management to assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis. Our accounting policy for OTTI, included in Note 1, reflects these changes to the accounting guidance adopted by FASB. As permitted by the transition guidance, we early adopted these amendments to the Investments -- Debt and Equity Securities Topic effective January 1, 2009, by recording an increase of $16 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on our Statements of Stockholder's Equity to reclassify the noncredit portion of previously other-than-temporarily impaired debt securities held as of January 1, 2009. The following summarizes the components (in millions) for this cumulative effect adjustment:
NET UNREALIZED UNREALIZED OTTI LOSS ON AFS ON AFS SECURITIES SECURITIES TOTAL ------------- ------------- -------- Increase in amortized cost of fixed maturity AFS securities $11 $ 29 $ 40 Change in DAC, VOBA, DSI, and DFEL (4) (11) (15) Income tax (2) (7) (9) ------------- ------------- -------- Net cumulative effect adjustment $ 5 $ 11 $ 16 ============= ============= ========
The cumulative effect adjustment was calculated for all debt securities held as of January 1, 2009, for which an OTTI was previously recognized, and for which we did not intend to sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of January 1, 2009, to the amortized cost basis of the debt securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective debt security in effect before recognizing any OTTI. In addition, because the carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on fixed maturity AFS securities, we recognized a true-up to our DAC, VOBA, DSI and DFEL balances for this cumulative effect adjustment. The following summarizes the increase to the amortized cost of our fixed maturity AFS securities (in millions) as of January 1, 2009, resulting from the recognition of the cumulative effect adjustment: Corporate bonds $25 CMOs 15 --- Total fixed maturity AFS securities $40 ===
In addition, we include on the face of our Statements of Income (Loss) the total OTTI recognized in realized gain (loss), with an offset for the amount of noncredit impairments recognized in accumulated OCI. We disclose the amount of OTTI recognized in accumulated OCI in Note 12, and the enhanced disclosures related to OTTI are included in Note 3. RECEIVABLES TOPIC In July 2010, the FASB issued ASU No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" ("ASU 2010-20"), in order to enhance and expand the financial statement disclosures. These amendments are intended to provide more information regarding the nature of the risk associated with financing receivables and how the assessment of the risk is used to estimate S-17 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARDS (CONTINUED) the allowance for credit losses. In addition, expanded disclosures provide more information regarding changes recognized during the reporting period to the allowance for credit losses. Comparative disclosures are not required for earlier reporting periods ending prior to the initial adoption date, and the amendments in ASU 2010-20 are effective in phases over two reporting periods. We adopted the amendments related to information required as of the end of the reporting period for the reporting period ending December 31, 2010, and have included the required disclosures in Notes 1 and 3. Disclosures that provide information about the activity during a reporting period, primarily the allowance for credit losses and modifications of financing receivables, are effective for interim and annual reporting periods beginning on or after December 15, 2010, and will be included in the Notes to Financial Statements beginning with the reporting period ending March 31, 2011. FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS FINANCIAL SERVICES -- INSURANCE INDUSTRY TOPIC In April 2010, the FASB issued ASU No. 2010-15, "How Investments Held through Separate Accounts Affect an Insurer's Consolidation Analysis of Those Investments" ("ASU 2010-15"), to clarify a consolidation issue for insurance entities that hold a controlling interest in an investment fund either partially or completely through separate accounts. ASU 2010-15 concludes that an insurance entity would not be required to consider interests held in separate accounts when determining whether or not to consolidate an investment fund, unless the separate account interest is held for the benefit of a related party. If an investment fund is consolidated, the portion of the assets representing interests held in separate accounts would be recorded as a separate account asset with a corresponding separate account liability. The remaining investment fund assets would be consolidated in the insurance entity's general accounts. ASU 2010-15 will be applied retrospectively for fiscal years and interim periods within those fiscal years beginning after December 15, 2010, with early application permitted. We will adopt ASU 2010-15 as of the beginning of the reporting period ending March 31, 2011, and do not expect the adoption will have a material impact on our financial condition and results of operations. In October 2010, the FASB issued ASU No. 2010-26, "Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts" ("ASU 2010-26"), which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts. Only those costs incurred which result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized. Incremental costs related to unsuccessful attempts to acquire insurance contracts must be expensed as incurred. Under ASU 2010-26, the capitalization criteria in the direct-response advertising guidance of the Other Assets and Deferred Costs Topic of the FASB ASC must be met in order to capitalize advertising costs. The amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted, and an entity may elect to apply the guidance prospectively or retrospectively. We will adopt the provisions of ASU 2010-26 effective January 1, 2012, and are currently evaluating the impact of the adoption on our financial condition and results of operations. INTANGIBLES -- GOODWILL AND OTHER TOPIC In December 2010, the FASB issued ASU No. 2010-28, "When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts" ("ASU 2010-28"). Generally, reporting units with zero or negative carrying amounts will pass Step 1 of the goodwill impairment test as the fair value will exceed carrying value; therefore, goodwill impairment is not assessed under Step 2. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts, and requires these reporting units to perform Step 2 of the impairment test to determine if it is more likely than not that goodwill impairment exists. The amendments are effective for fiscal years and interim periods beginning after December 15, 2010, and early adoption is not permitted. Upon adoption of this ASU, all reporting units within scope must be evaluated under the new accounting guidance, and any resulting impairment will be recognized as a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Impairments identified after the period of adoption must be recognized in earnings. We will adopt the amendments in ASU 2010-28 effective as of the beginning of the reporting period ending March 31, 2011, and do not expect the adoption will have a material impact on our financial condition and result of operations. 3. INVESTMENTS AFS SECURITIES Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1, which also includes additional disclosures regarding our fair value measurements. S-18 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:
AS OF DECEMBER 31, 2010 ---------------------------------------- GROSS UNREALIZED AMORTIZED ----------------------- FAIR COST GAINS LOSSES OTTI VALUE --------- ----- --------- ------- ------ FIXED MATURITY SECURITIES Corporate bonds $4,898 $348 $ 93 $13 $5,140 U.S. Government bonds 29 4 -- -- 33 Foreign government bonds 28 2 -- -- 30 MBS: CMOs 639 38 23 12 642 MPTS 250 7 -- -- 257 CMBS 200 8 25 -- 183 ABS CDOs 3 -- -- -- 3 State and municipal bonds 257 1 8 -- 250 Hybrid and redeemable preferred securities 125 6 10 -- 121 --------- ----- --------- ------- ------ Total fixed maturity securities 6,429 414 159 25 6,659 --------- ----- --------- ------- ------ EQUITY SECURITIES Other securities 2 1 -- -- 3 --------- ----- --------- ------- ------ Total equity securities 2 1 -- -- 3 --------- ----- --------- ------- ------ Total AFS securities $6,431 $415 $159 $25 $6,662 ========= ===== ========= ======= ======
AS OF DECEMBER 31, 2009 ---------------------------------------- GROSS UNREALIZED AMORTIZED ----------------------- FAIR COST GAINS LOSSES OTTI VALUE --------- ----- --------- ------- ------ FIXED MATURITY SECURITIES Corporate bonds $4,723 $219 $183 $15 $4,744 U.S. Government bonds 29 3 -- -- 32 Foreign government bonds 23 1 -- -- 24 MBS: CMOs 674 31 40 16 649 MPTS 245 4 2 -- 247 CMBS 255 6 43 -- 218 ABS CDOs 4 -- 1 -- 3 State and municipal bonds 176 1 7 -- 170 Hybrid and redeemable preferred securities 100 8 15 -- 93 --------- ----- ------ ---------- ------ Total fixed maturity securities 6,229 273 291 31 6,180 --------- ----- ------ ---------- ------ EQUITY SECURITIES Other securities 2 -- -- -- 2 --------- ----- ------ ---------- ------ Total equity securities 2 -- -- -- 2 --------- ----- ------ ---------- ------ Total AFS securities $6,231 $273 $291 $31 $6,182 ========= ===== ====== ========== ======
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) were as follows:
AS OF DECEMBER 31, 2010 ----------------------- AMORTIZED FAIR COST VALUE --------- ------------- Due in one year or less $ 254 $ 260 Due after one year through five years 999 1,059 Due after five years through ten years 2,001 2,169 Due after ten years 2,083 2,086 --------- ------------- Subtotal 5,337 5,574 --------- ------------- MBS 1,089 1,082 CDOs 3 3 --------- ------------- Total fixed maturity AFS securities $6,429 $6,659 ========= =============
S-19 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations. The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AS OF DECEMBER 31, 2010 ------------------------------------------------------------ LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ------------------ ----------------------- ----------------- GROSS GROSS GROSS UNREALIZED UNREALIZED UNREALIZED FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND VALUE OTTI VALUE OTTI VALUE OTTI ----- ------------ ----- ----------------- ------ ---------- FIXED MATURITY SECURITIES Corporate bonds $505 $26 $371 $ 80 $ 876 $106 MBS: CMOs 42 14 94 21 136 35 CMBS 4 -- 39 25 43 25 State and municipal bonds 179 7 8 1 187 8 Hybrid and redeemable preferred securities 21 2 43 8 64 10 ----- ------------ ----- ----------------- ------ ---------- Total fixed maturity AFS securities $751 $49 $555 $135 $1,306 $184 ===== ============ ===== ================= ====== ========== Total number of AFS securities in an unrealized loss position 401 ==========
AS OF DECEMBER 31, 2009 ------------------------------------------------------------ LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ------------------ ----------------------- ----------------- GROSS GROSS GROSS UNREALIZED UNREALIZED UNREALIZED FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND VALUE OTTI VALUE OTTI VALUE OTTI ----- ------------ ----- ----------------- ------ ---------- FIXED MATURITY SECURITIES Corporate bonds $479 $42 $ 850 $156 $1,329 $198 MBS: CMOs 34 16 117 40 151 56 MPTS 122 1 4 1 126 2 CMBS 24 2 61 41 85 43 ABS CDOs -- -- 3 1 3 1 State and municipal bonds 116 5 17 2 133 7 Hybrid and redeemable preferred securities 3 -- 70 15 73 15 ----- ---------- ------ ----------------- ------ ---------- Total fixed maturity AFS securities $778 $66 $1,122 $256 $1,900 $322 ===== ========== ====== ================= ====== ========== Total number of AFS securities in an unrealized loss position 580 ==========
S-20 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
AS OF DECEMBER 31, 2010 --------------------------------------- GROSS UNREALIZED FAIR ---------------- NUMBER OF VALUE LOSSES OTTI SECURITIES(1) ----- ------ --------- ---------------- Less than six months $ 25 $ 12 $-- 17 Six months or greater, but less than nine months 9 3 -- 2 Nine months or greater, but less than twelve months 6 2 -- 3 Twelve months or greater 126 84 22 76 ----- ------ --------- ---------------- Total $166 $101 $22 98 ===== ====== ========= ================
AS OF DECEMBER 31, 2009 -------------------------------------- GROSS UNREALIZED FAIR ---------------- NUMBER OF VALUE LOSSES OTTI SECURITIES(1) ----- ------ --------- ---------------- Less than six months $ 47 $ 14 $ 1 23 Six months or greater, but less than nine months 39 26 -- 13 Nine months or greater, but less than twelve months 55 23 17 35 Twelve months or greater 191 135 12 104 ----- ------ --------- --------------- Total $332 $198 $30 175 ===== ====== ========= ===============
(1) We may reflect a security in more than one aging category based on various purchase dates. We regularly review our investment holdings for OTTI. Our gross unrealized losses on AFS securities as of December 31, 2010, decreased $138 million in comparison to December 31, 2009. This change was attributable to a decline in overall market yields, which was driven, in part, by improved credit fundamentals (i.e., market improvement and narrowing credit spreads). As discussed further below, we believe the unrealized loss position as of December 31, 2010, does not represent OTTI as we did not intend to sell these fixed maturity AFS securities, it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities or we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery. Based upon this evaluation as of December 31, 2010, management believed we had the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities. As of December 31, 2010, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security. As of December 31, 2010, the unrealized losses associated with our MBS were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model as discussed above. The key assumptions included default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each security. As of December 31, 2010, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined we expected to recover the entire amortized cost of each security. Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was S-21 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) recognized in OCI (in millions) on fixed maturity AFS securities were as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------- 2010 2009 ------- ------- Balance as of beginning-of-year $46 $-- Cumulative effect from adoption of new accounting standard -- 5 Increases attributable to: Credit losses on securities for which an OTTI was not previously recognized 1 46 Credit losses on securities for which an OTTI was previously recognized 9 -- Decreases attributable to: Securities sold (9) (5) ------- ------- Balance as of end-of-year $47 $46 ======= =======
During the years ended December 31, 2010 and 2009, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons: Failure of the issuer of the security to make scheduled payments; Deterioration of creditworthiness of the issuer; Deterioration of conditions specifically related to the security; Deterioration of fundamentals of the industry in which the issuer operates; Deterioration of fundamentals in the economy including, but not limited to, higher unemployment and lower housing prices; and Deterioration of the rating of the security by a rating agency. We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities. MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in New York and Texas, which accounted for 38% of mortgage loans as of December 31, 2010, and New York, Illinois and Texas, which accounted for 36% of mortgage loans as of December 31, 2009. The following provides the current and past due composition of our mortgage loans on real estate (in millions):
AS OF DECEMBER 31, --------------------- 2010 2009 ------- ------------- Current $226 $230 Valuation allowance associated with impaired mortgage loans on real estate -- (1) Unamortized premium (discount) (1) (1) ------- ------------- Total carrying value $225 $228 ======= =============
The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ---- ---------------- Number of impaired mortgage loans on real estate -- 1 ==== ================ Principal balance of impaired mortgage loans on real estate $-- $3 Valuation allowance associated with impaired mortgage loans on real estate -- (1) ---- ---------------- Carrying value of impaired mortgage loans on real estate $-- $2 ==== ================
The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ---- ------------ ---- Average carrying value for impaired mortgage loans on real estate $-- $1 $-- Interest income recognized on impaired mortgage loans on real estate -- -- -- Amount of interest income collected on impaired mortgage loans on real estate -- -- -- ==== ============ ====
S-22 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) As described in Note 1, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans on real estate, which were as follows (dollars in millions):
AS OF DECEMBER 31, 2010 --------------------------- DEBT- SERVICE PRINCIPAL COVERAGE AMOUNT % RATIO --------- -------- -------- LOAN-TO-VALUE Less than 65% $187 82.8% 1.58 65% to 74% 34 15.0% 1.50 75% to 100% 5 2.2% 0.41 --------- -------- Total mortgage loans on real estate $226 100.0% ========= ========
NET INVESTMENT INCOME The major categories of net investment income (in millions) on our Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ------- --------------- ------- Fixed maturity AFS securities $384 $372 $355 Mortgage loans on real estate 15 15 17 Policy loans 25 25 24 Invested cash -- -- 3 Consent fees 1 -- -- ------- --------------- ------- Investment income 425 412 399 Investment expense (7) (4) (4) ------- --------------- ------- Net investment income $418 $408 $395 ======= =============== =======
REALIZED GAIN (LOSS) RELATED TO CERTAIN INVESTMENTS The detail of the realized gain (loss) related to certain investments (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2010 2009 2008 ------- --------------- -------- Fixed maturity AFS securities: Gross gains $ 7 $ 13 $ 4 Gross losses (29) (103) (151) Gain (loss) on other investments 1 (1) -- Associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds 6 25 51 ------- --------------- -------- Total realized gain (loss) related to certain investments $(15) $ (66) $ (96) ======= =============== ========
Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 ------- --------------- ----------- OTTI RECOGNIZED IN NET INCOME (LOSS) Fixed maturity securities: Corporate bonds $ (8) $(37) $ (65) MBS: CMOs (12) (49) (68) CMBS (5) -- -- ------- --------------- ----------- Total fixed maturity securities (25) (86) (133) ------- --------------- ----------- Equity securities: Other securities -- (1) -- ------- --------------- ----------- Total equity securities -- (1) -- ------- --------------- ----------- Gross OTTI recognized in net income (loss) (25) (87) (133) Associated amortization of DAC, VOBA, DSI and DFEL 10 28 27 ------- --------------- ----------- Net OTTI recognized in net income (loss), pre-tax $(15) $(59) $(106) ======= =============== =========== PORTION OF OTTI RECOGNIZED IN OCI Gross OTTI recognized in OCI $ 6 $ 46 $ -- Change in DAC, VOBA, DSI and DFEL (1) (15) -- ------- --------------- ----------- Net portion of OTTI recognized in OCI, pre-tax $ 5 $31 $ -- ======= =============== ===========
DETERMINATION OF CREDIT LOSSES ON CORPORATE BONDS As of December 31, 2010 and 2009, we reviewed our corporate bond portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers. DETERMINATION OF CREDIT LOSSES ON MBS As of December 31, 2010 and 2009, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 25% to 100% depending on loan type and severity of delinquency status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent S-23 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) in the pool to project the future expected cash flows. We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further housing price depreciation. INVESTMENT COMMITMENTS As of December 31, 2010, our investment commitments were $1 million, which included private placements and mortgage loans. CONCENTRATIONS OF FINANCIAL INSTRUMENTS As of December 31, 2010 and 2009, our most significant investment in one issuer was our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $507 million and $472 million, or 7% of our invested assets portfolio, respectively. These investments are included in corporate bonds in the tables above. As of December 31, 2010 and 2009, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $713 million and $623 million, or 10% and 9% of our invested assets portfolio, respectively, and our investment securities in the CMO industry with a fair value of $647 million and $676 million, or 9% and 10% of our invested assets portfolio, respectively. We utilized the industry classifications to obtain the concentration of financial instruments amounts; as such, these amounts will not agree to the AFS securities table above. ASSETS ON DEPOSIT The Company had investment assets on deposit with regulatory agencies with a fair market value of $14 million and $13 million as of December 31, 2010 and 2009, respectively. 4. DERIVATIVE INSTRUMENTS TYPES OF DERIVATIVE INSTRUMENTS AND DERIVATIVE STRATEGIES Through LNL, we use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with living benefit guarantees offered in our variable annuity products, including the LINCOLN SMARTSECURITY(R) Advantage GWB feature, the 4LATER(R) Advantage GIB feature and the I4LIFE(R) Advantage GIB feature. See below for further details. See Note 19 for additional disclosures related to the fair value of our financial instruments. We have embedded derivatives with off-balance-sheet risks whose contract amounts exceed the credit exposure. Outstanding embedded derivatives not designated and not qualifying as hedging instruments, with off-balance-sheet risks (in millions) were as follows:
AS OF DECEMBER 31, 2010 -------------------------------------------------------------------- ASSET CARRYING (LIABILITY) CARRYING NUMBER OR FAIR VALUE OR FAIR VALUE OF NOTIONAL ----------------------- ----------------------- INSTRUMENTS AMOUNTS GAIN LOSS GAIN LOSS ----------- -------- ---- ------------------ ---- ------------------ GLB reserves(1) 10,646 $-- $-- $-- $18 $(42) =========== ======== ==== ================== ==== ================== AS OF DECEMBER 31, 2009 -------------------------------------------------------------------- ASSET CARRYING (LIABILITY) CARRYING NUMBER OR FAIR VALUE OR FAIR VALUE OF NOTIONAL ----------------------- ----------------------- INSTRUMENTS AMOUNTS GAIN LOSS GAIN LOSS ----------- -------- ---- ------------------ ---- ------------------ GLB reserves(1) 9,748 $-- $-- $-- $11 $(43) =========== ======== ==== ================== ==== ==================
(1) Reported in future contract benefits on our Balance Sheets. S-24 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. DERIVATIVE INSTRUMENTS (CONTINUED) The gains (losses) on embedded derivatives not designated and not qualifying as hedging instruments (in millions), recorded within net income (loss) on our Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2010 2009 2008 ---- ------------ -------- GLB reserves(1) $8 $92 $(107) ==== ============ ========
(1) Reported in realized gain (loss) on our Statements of Income (Loss). We have certain GLB variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees, notably our GIB, 4LATER(R) and LINCOLN LIFETIME INCOME(SM) ADVANTAGE features, have elements of both insurance benefits accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC ("benefit reserves") and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC ("embedded derivative reserves"). We calculate the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature. As of December 31, 2010, we had $1.3 billion of account values that were attributable to variable annuities with a GWB feature and $383 million of account values that were attributable to variable annuities with a GIB feature. We transfer the liability for our GWB and GIB features to LNL, who along with an affiliate, use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with these features. The hedging strategy is designed such that changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities move in the opposite direction of changes in embedded derivative reserves of the GWB and GIB caused by those same factors. As part of the current hedging program, equity markets, interest rates and volatility in market conditions are monitored on a daily basis. The hedge positions are re-balanced based upon changes in these factors as needed. While the hedge positions are actively managed, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and the ability to purchase hedging instruments at prices consistent with the desired risk and return trade off. 5. FEDERAL INCOME TAXES The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2010 2009 2008 ---- --------------- ---- Current $30 $(9) $13 Deferred 25 44 1 ---- --------------- ---- Federal income tax expense (benefit) $55 $35 $14 ==== =============== ====
A reconciliation of the effective tax rate differences (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ------- --------------- ------- Tax rate times pre-tax income $59 $38 $18 Effect of: Separate account dividend received deduction (3) (2) (3) Other items (1) (1) (1) ------- --------------- ------- Federal income tax expense (benefit) $55 $35 $14 ======= =============== ======= Effective tax rate 33% 32% 28% ======= =============== =======
The separate account dividend received deduction included in the table above is exclusive of any prior years' tax return resolution. The federal income tax asset (liability) (in millions), which is included in other liabilities on our Balance Sheets, was as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 -------- ------------ Current $ (24) $ (6) Deferred (259) (178) -------- ------------ Total federal income tax asset (liability) $(283) $(184) ======== ============
S-25 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. FEDERAL INCOME TAXES (CONTINUED) Significant components of our deferred tax assets and liabilities (in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 -------- ------------ DEFERRED TAX ASSETS Future contract benefits and other contract holder funds $ 66 $ 83 Investments 11 14 Net unrealized loss on AFS Securities -- 15 Net capital loss carryforward 9 11 Other 4 6 -------- ------------ Total deferred tax assets 90 129 -------- ------------ DEFERRED TAX LIABILITIES DAC 140 150 VOBA 112 146 Net unrealized gain on AFS securities 82 -- Other 15 11 -------- ------------ Total deferred tax liabilities 349 307 -------- ------------ Net deferred tax asset (liability) $(259) $(178) ======== ============
As of December 31, 2010, LLANY had net capital loss carryfor-wards of $26 million which will expire in 2014. We believe that it is more likely than not that the capital losses will be fully utilized within the allowable carryforward period. The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary, to reduce our deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, including our capital loss deferred tax asset, will be realized. As of December 31, 2010 and 2009, $6 million and $5 million of our unrecognized tax benefits presented below, if recognized, would have impacted our income tax expense (benefit) and our effective tax rate. We anticipate a change to our unrecognized tax benefits during 2011 in the range of none to $3 million. A reconciliation of the unrecognized tax benefits (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2010 2009 ------- ----------- Balance as of beginning-of-year $24 $23 Increases for prior year tax positions -- 1 Decreases for current year tax positions (2) -- ------- ----------- Balance as of end-of-year $22 $24 ======= ===========
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. During the years ended December 31, 2010, 2009, and 2008, we recognized interest and penalty expense related to uncertain tax positions of $1 million, in each year. We had accrued interest and penalty expense related to the unrecognized tax benefits of $4 million and $3 million as of December 31, 2010 and 2009, respectively We are subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the third quarter of 2008, the IRS completed its examination for tax years 2003 and 2004 resulting in a proposed assessment. During the second quarter of 2010, the IRS completed its examination for tax years 2005 and 2006 resulting in a proposed assessment. Also, during the second quarter of 2010, the IRS completed its examination of tax year 2006 for the former Jefferson-Pilot Corporation ("JP") and its subsidiaries. We believe a portion of the assessments is inconsistent with existing law and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our results of operations or financial condition. We are currently under audit by the IRS for years 2007 and 2008. The JP subsidiaries acquired in the April 2006 merger are subject to a separate IRS examination cycle. For the former JP LifeAmerica Insurance Company, the IRS is examining the tax year ended April 1, 2007. S-26 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DAC, VOBA, DSI AND DFEL During the fourth quarter of 2008, we recorded a decrease to income (loss) totaling $7 million, for a reversion to the mean prospective unlocking of DAC, VOBA, DSI and DFEL as a result of significant and sustained declines in the equity markets during 2008. During 2010 and 2009, we did not have a reversion to the mean prospective unlocking of DAC, VOBA, DSI and DFEL. The pre-tax impact for these items is included within the prospective unlocking line items in the changes in DAC, VOBA, DSI and DFEL tables below. Changes in DAC (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------- ------- 2010 2009 2008 ------- ------- ------- Balance as of beginning-of-year $439 $460 $306 Deferrals 72 76 95 Amortization, net of interest: Prospective unlocking -- assumption changes (6) -- (12) Prospective unlocking -- model refinements (4) -- 9 Retrospective unlocking 9 3 (10) Other amortization, net of interest (50) (40) (36) Adjustment related to realized (gains) losses 2 20 36 Adjustment related to unrealized (gains) losses (50) (80) 72 ------- ------- ------- Balance as of end-of-year $412 $439 $460 ======= ======= =======
Changes in VOBA (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- Balance as of beginning-of-year $417 $655 $493 Deferrals 1 2 3 Amortization: Prospective unlocking -- assumption changes 21 3 4 Prospective unlocking -- model refinements (2) -- -- Retrospective unlocking (2) (2) 3 Other amortization (68) (73) (72) Accretion of interest(1) 22 24 26 Adjustment related to realized (gains) losses -- 6 7 Adjustment related to unrealized (gains) losses (70) (198) 191 ------- ------- ------- Balance as of end-of-year $319 $417 $655 ======= ======= =======
(1) The interest accrual rates utilized to calculate the accre- tion of interest ranged from 3.50% to 7.25%. Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2010, was as follows: 2011 $37 2012 32 2013 30 2014 28 2015 27
Changes in DSI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- Balance as of beginning-of-year $16 $14 $14 Deferrals 3 3 4 Amortization, net of interest: Prospective unlocking -- assumption changes -- -- (2) Other amortization, net of interest (2) (1) (2) Adjustment related to unrealized (gains) losses (4) -- -- ------- ------- ------- Balance as of end-of-year $13 $16 $14 ======= ======= =======
Changes in DFEL (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- Balance as of beginning-of-year $ 87 $65 $48 Deferrals 35 34 27 Amortization, net of interest: Prospective unlocking -- assumption changes (2) (1) -- Prospective unlocking -- model refinements 1 -- 4 Retrospective unlocking 1 (1) (4) Other amortization, net of interest (13) (10) (10) Adjustment related to unrealized (gains) losses (8) -- -- ------- ------- ------- Balance as of end-of-year $101 $87 $65 ======= ======= =======
S-27 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REINSURANCE The following summarizes reinsurance amounts (in millions) recorded on our Statements of Income (Loss):
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2010 2009 2008 -------- -------- -------- Direct insurance premiums and fees $ 529 $ 502 $ 480 Reinsurance ceded (143) (143) (134) -------- -------- -------- Total insurance premiums and fees, net $ 386 $ 359 $ 346 ======== ======== ======== Direct insurance benefits $ 425 $ 365 $ 395 Reinsurance recoveries netted against benefits (171) (140) (167) -------- -------- -------- Total benefits, net $ 254 $ 225 $ 228 ======== ======== ========
We cede insurance to other companies. The portion of risks exceeding our retention limit is reinsured with other insurers. We seek reinsurance coverage within the businesses that sell life insurance and annuities in order to limit our exposure to mortality losses and enhance our capital management. As discussed in Note 22, a portion of this reinsurance activity is with affiliated companies. Under our reinsurance program, we reinsure approximately 40% to 45% of the mortality risk on newly issued non-term life insurance contracts and approximately 35% of total mortality risk including term insurance contracts. Our policy for this program is to retain no more than $10 million on a single insured life issued on fixed, VUL and term life insurance contracts. The retention per single insured life for corporate-owned life insurance is $2 million. Portions of our deferred annuity business have been reinsured on a Modco basis with other companies to limit our exposure to interest rate risks. As of December 31, 2010, the reserves associated with these reinsurance arrangements totaled $5 million. To cover products other than life insurance, we acquire other reinsurance coverages with retentions and limits. Reinsurance contracts do not relieve an insurer from its primary obligation to policyholders. Therefore, the failure of a reinsurer to discharge its reinsurance obligations could result in a loss to us. We regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk related to reinsurance activities. 8. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS The carrying amount of our goodwill (in millions) for the years ended December 31, 2010 and 2009, was as follows:
GROSS CARRYING AMOUNT -------- Retirement Solutions -- Annuities $ 26 Insurance Solutions -- Life Insurance 136 -------- Total $162 ========
There were no changes in the carrying amount of goodwill during the years ended December 31, 2010, or December 31, 2009. We perform a Step 1 goodwill impairment analysis on all of our reporting units at least annually on October 1. The Step 1 analysis for the reporting units within our Insurance Solutions and Retirement Solutions businesses utilizes primarily a discounted cash flow valuation technique ("income approach"), although limited available market data is also considered. In determining the estimated fair value, we consider discounted cash flow calculations, the level of LNC's share price and assumptions that market participants would make in valuing the reporting unit. This analysis requires us to make judgments about revenues, earnings projections, capital market assumptions and discount rates. As of October 1, 2010, all of our reporting units passed the Step 1 analysis, and although Insurance Solutions - Life Insurance carrying value of the net assets was within the estimated fair value range, we deemed it necessary to validate the carrying value of goodwill through a Step 2 analysis. In our Step 2 analysis of Insurance Solutions - Life Insurance, we estimated the implied fair value of the reporting unit's goodwill, including assigning the reporting unit's fair value determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit were acquired in a business combination as of October 1, 2010, and determined there was no impairment due to the implied fair value of goodwill being in excess of the carrying value of goodwill. As of October 1, 2009, all of our reporting units passed the Step 1 analysis. The gross carrying amount and accumulated amortization (in millions) for the major specifically identifiable intangible asset class by reportable segment was as follows:
AS OF DECEMBER 31, ------------------------------------------- 2010 2009 --------------------- --------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Insurance Solutions -- Life Insurance: Sales force $7 $1 $7 $1 ======== ============ ======== ============
Future estimated amortization of the specifically identifiable intangible asset was immaterial as of December 31, 2010. S-28 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. GUARANTEED BENEFIT FEATURES Information on the GDB features outstanding (dollars in millions) was as follows (our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive):
AS OF DECEMBER 31, ----------------------- 2010 2009 ----------- ----------- RETURN OF NET DEPOSITS Total account value $1,834 $1,558 Net amount at risk(1) 25 63 Average attained age of contract holders 54 YEARS 53 years MINIMUM RETURN Average attained age of contract holders 79 YEARS 78 years Guaranteed minimum return 5% 5% ANNIVERSARY CONTRACT VALUE Total account value $ 995 $ 915 Net amount at risk(1) 78 162 Average attained age of contract holders 66 YEARS 65 years
(1) Represents the amount of death benefit in excess of the account balance. The decrease in net amount at risk when comparing December 31, 2010, to December 31, 2009, was attributable primarily to the rise in equity markets and associated increase in the account values. The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDB (in millions), which were recorded in future contract benefits on our Balance Sheets:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- Balance as of beginning-of-year $ 2 $ 8 $ 1 Changes in reserves -- -- 9 Benefits paid (1) (6) (2) ------- ------- ------- Balance as of end-of-year $ 1 $ 2 $ 8 ======= ======= =======
Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 --------- ----------- ASSET TYPE Domestic equity $ 990 $ 890 International equity 454 392 Bonds 479 300 Money market 184 231 --------- ----------- Total $2,107 $1,813 ========= =========== Percent of total variable annuity separate account values 89% 89%
Future contract benefits also include reserves for our products with secondary guarantees for our products sold through our Insurance Solutions - Life Insurance segment. These UL and VUL products with secondary guarantees represented approximately 11% of permanent life insurance in force as of December 31, 2010, and approximately 65% of total sales for these products for the year ended December 31, 2010. 10. OTHER CONTRACT HOLDER FUNDS Details of other contract holder funds (in millions) were as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ------ ----------- Fixed account values, including the fixed portion of variable and other contract holder funds $4,965 $4,808 DFEL 101 87 Contract holder dividends payable 161 164 Premium deposit funds 11 10 Undistributed earnings on participating business 30 15 ------ ----------- Total other contract holder funds $5,268 $5,084 ====== ===========
As of December 31, 2010 and 2009, participating policies comprised approximately 3% and 4%, respectively, of the face amount of insurance in force, and dividend expenses were $27 million, $29 million and $29 million for the years ended December 31, 2010, 2009 and 2008, respectively. S-29 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. CONTINGENCIES AND COMMITMENTS CONTINGENCIES REGULATORY AND LITIGATION MATTERS Regulatory bodies, such as state insurance departments, the SEC, Financial Industry Regulatory Authority and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws and securities laws. In the ordinary course of our business, we are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting our financial position. However, given the large and indeterminate amounts sought in certain of these proceedings and the inherent difficulty in predicting the outcome of such legal proceedings, it is possible that an adverse outcome in certain matters could be material to our operating results for any particular reporting period. VULNERABILITY FROM CONCENTRATIONS As of December 31, 2010, we did not have a concentration of business transactions with a particular customer or lender or sources of supply of labor or services used in the business. However, we do have a concentration in market and geographic area in which business is conducted. For the year ended December 31, 2010, approximately 88% of the premiums, on the basis of SAP, were generated in New York. OTHER CONTINGENCY MATTERS State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. The accrual for expected assessments was immaterial as of December 31, 2010 and 2009. 12. SHARES AND STOCKHOLDER'S EQUITY All authorized and issued shares of LLANY are owned by LNL. ACCUMULATED OCI The following summarizes the components and changes in accumulated OCI (in millions):
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2010 2009 2008 ------- -------- -------- UNREALIZED GAIN (LOSS) ON AFS SECURITIES Balance as of beginning-of-year $(19) $(211) $ (8) Cumulative effect from adoption of new accounting standards -- (11) -- Unrealized holding gains (losses) arising during the year 252 541 (758) Change in DAC, VOBA, DSI and other contract holder funds (123) (282) 337 Income tax benefit (expense) (51) (98) 156 Less: Reclassification adjustment for gains (losses) included in net income (loss) (22) (90) (147) Associated amortization of DAC, VOBA, DSI and DFEL 6 25 51 Income tax benefit (expense) 6 23 34 ------- -------- -------- Balance as of end-of-year $ 69 $ (19) $(211) ======= ======== ========
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2010 2009 2008 ------- ----------- ------- UNREALIZED OTTI ON AFS SECURITIES Balance as of beginning-of-year $(12) $ -- $-- (Increases) attributable to: Cumulative effect from adoption of new accounting standards -- (5) -- Gross OTTI recognized in OCI during the year (6) (46) -- Change in DAC, VOBA, DSI and DFEL 1 15 -- Income tax benefit (expense) 2 11 -- Decreases attributable to: Sales, maturities or other settlements of AFS securities 12 26 -- Change in DAC, VOBA, DSI and DFEL (4) (6) -- Income tax benefit (expense) (3) (7) -- ------- ----------- ------- Balance as of end-of-year $(10) $(12) $-- ======= =========== ======= UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS Balance as of beginning-of-year $ 1 $ 1 $ 1 ------- ----------- ------- Balance as of end-of-year $ 1 $ 1 $ 1 ======= =========== =======
S-30 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. REALIZED (GAIN) LOSS Details underlying realized gain (loss) (in millions) reported on our Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ------- ---- --------- Total realized gain (loss) on investments(1) $(15) $(66) $(96) Realized gain (loss) on certain reinsurance derivatives(2) -- -- (1) Guaranteed living benefits(3): Gross gain (loss) -- 1 -- Associated amortization of DAC, VOBA, DSI and DFEL (2) -- (1) ------- ---- --------- Total realized gain (loss) $(17) $(65) $(98) ======= ==== =========
(1) See "Realized Gain (Loss) Related to Certain Investments" section in Note 3. (2) Represents changes in the fair value of total return swaps (embedded derivatives that are theoretically included in our various modified coinsurance and coinsurance with funds withheld reinsurance arrangements that have contractual returns related to various assets and liabilities associated with these arrangements). (3) Represents the change in embedded derivative reserves of our GLB products. 14. UNDERWRITING, ACQUISITION, INSURANCE, RESTRUCTURING AND OTHER EXPENSES Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ---- ---- ------------ Commissions $ 74 $ 71 $ 84 General and administrative expenses 61 65 66 DAC and VOBA deferrals and interest, net of amortization 7 7 (10) Taxes, licenses and fees 16 16 16 ---- ---- ------------ Total $158 $159 $156 ==== ==== ============
15. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS LNC and LNL maintain qualified funded defined benefit pension plans for our employees and agents, respectively, including those of LLANY. LNC and LNL also maintain non-qualified, unfunded defined benefit pension plans for certain employees, including certain former employees of acquired companies, and agents, respectively. In addition, for certain former employees, LNC has supplemental retirement plans that provide defined benefit pension benefits in excess of limits imposed by federal tax law. All of LNC's and LNL's defined benefit pension plans were "frozen" as of December 31, 2007, or earlier. For their frozen plans, there are no new participants and no future accruals of benefits from the date of the freeze. The eligibility requirements for each plan are described in each plan document and vary for each plan based on completion of a specified period of continuous service and date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional or cash balance formula. Those formulas are based upon years of credited service and eligible earnings as defined in each plan document. The traditional formula provides benefits stated in terms of a single life annuity payable at age 65. The cash balance formula provides benefits stated as a lump sum hypothetical account balance. That account balance equals the sum of the employee's accumulated annual benefit credits plus interest credits. Benefit credits, which are based on years of service and base salary plus bonus, ceased as of the date the plan was frozen. Interest credits continue until the participant's benefit is paid. LNC and LNL also sponsor a voluntary employees' beneficiary association ("VEBA") trust that provides postretirement medical, dental and life insurance benefits to retired full-time employees and agents who, depending on the plan, have worked for us for 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide benefits that are subject to preferential tax treatment under the Internal Revenue Code. Medical and dental benefits are available to spouses and other eligible dependents of retired employees and agents. Retirees may be required to contribute toward the cost of these benefits. Eligibility and the amount of required contribution for these benefits varies based upon a variety of factors including years of service and year of retirement. Effective January 1, 2008, the postretire-ment plan providing benefits to former employees of JP was amended such that only employees who had attained age 55 with a minimum of 10 years of service by December 31, 2007, and who later retire on or after age 60 with 15 years of service will be eligible to receive life insurance benefits when they retire. S-31 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS DEFINED CONTRIBUTION PLANS LNC and LNL sponsor contributory defined contribution plans for eligible employees and agents, respectively, including those of LLANY, which includes money purchase plans. LNC and LNL make contributions and matching contributions to each of the active plans in accordance with the plan document and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. The expenses related to these plans was $2 million for the years ended December 31, 2010, 2009 and 2008, which are recorded in the underwriting, acquisition, insurance and other expenses on our Statements of Income (Loss). DEFERRED COMPENSATION PLANS LNC sponsors six separate non-qualified unfunded, deferred compensation plans for various groups: employees; agents and non-employee directors. LLANY participants in five of these deferred compensation plans. The liability for these five plans was $1 million and $2 million as of December 31, 2010 and 2009, respectively, which is recorded in other liabilities in our Balance Sheets. THE DEFERRED COMPENSATION PLAN FOR EMPLOYEES Eligible participants in this plan may elect to defer payment of a portion of their compensation as defined by the plan. Plan participants may select from a menu of "phantom" investment options (identical to those offered under LNC and LNL qualified defined contribution plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of the plan, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of LNC contribution is calculated in accordance with the plan document, which is similar to LNC and LNL qualified defined contribution plans. Our expense for this plan was not significant for the years December 31, 2010, 2009 and 2008. DEFERRED COMPENSATION PLAN FOR AGENTS LNC sponsors three deferred compensation plans for certain eligible agents. Eligible participants in these plans may elect to defer payment of a portion of their compensation as defined by the various plans. The plans' participants may select from a menu of "phantom" investment options (identical to those offered under LNC and LNL qualified defined contribution plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of this plan, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of LNC contribution is calculated in accordance with the plan document, which is similar to LNC and LNL qualified defined contribution plans. Our expenses for these plans were not significant for the years December 31, 2010, 2009 and 2008. 17. STOCK-BASED INCENTIVE COMPENSATION PLANS Our employees and agents are included in LNC's various incentive plans that provide for the issuance of stock options, performance shares (performance-vested shares as opposed to time-vested shares), SARS, restricted stock units, and restricted stock awards. LNC has a policy of issuing new shares to satisfy option exercises. Total compensation expense for stock-based awards to our employees and agents was not material for the years ended December 31, 2010, 2009 and 2008. 18. STATUTORY INFORMATION AND RESTRICTIONS We prepare financial statements in accordance with SAP prescribed or permitted by the New York Department of Insurance, which may vary materially from GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. We are subject to the applicable laws and regulations of our state of domicile. Changes in these laws and regulations could change capital levels or capital requirements for the Company. S-32 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 18. STATUTORY INFORMATION AND RESTRICTIONS (CONTINUED) Specified statutory information (in millions) was as follows:
AS OF DECEMBER 31, ---------------------- 2010 2009 ---- ------------ Capital and surplus $794 $819 FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ---- ---- ------------ Net gain (loss) from operations, after-tax $73 $107 $ 13 Net income (loss) 55 13 (95) Dividends to LNC 80 -- --
The increase in statutory net income (loss) for the year ended December 31, 2010, from that of 2009 was primarily due to a significant decrease in realized losses on investments due to improving market conditions throughout 2010. The increase in statutory net income (loss) for the year ended December 31, 2009, from that of 2008 was primarily due to the improved market conditions in 2009. The new statutory reserving standard (commonly called "VACARVM") that was developed by the NAIC replaced current statutory reserve practices for variable annuities with guaranteed benefits, such as GWBs, and was effective December 31, 2009. The actual effect of adoption was relatively neutral to our RBC ratios and future dividend capacity with a slight decrease in statutory reserves offset by a higher capital requirement. LNC utilizes captive reinsurance structures, as well as third-party reinsurance arrangements, to lessen the negative effect on statutory capital and dividend capacity in its life insurance subsidiaries. Our state of domicile, New York, has adopted a certain prescribed accounting practice that differs from those found in NAIC SAP. This prescribed practice is the use of continuous Commissioners Annuity Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed by the state of New York. We also have an accounting practice permitted by our state of domicile that differs from that found in NAIC SAP. Specifically, the use of a more conservative valuation interest rate on certain annuities as of December 31, 2010 and 2009. The effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed practices (in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ------- ------------- Calculation of reserves using continuous CARVM $(5) $(6) Conservative valuation rate on certain variable annuities (1) --
We are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to LNL. Under New York laws and regulations, we may pay dividends to LNL without prior approval from the Superintendent of the New York Department of Insurance, provided such dividend, along with all other dividends paid within the preceding twelve consecutive months, would not exceed the statutory limitation. The current statutory limitation is the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year-end or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We expect we could pay dividends of approximately $73 million in 2011 without prior approval from the Superintendent. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
AS OF DECEMBER 31, --------------------------------------------- 2010 2009 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ---------- ----------- ---------- ASSETS AFS securities: Fixed maturity securities $ 6,659 $ 6,659 $ 6,180 $ 6,180 Equity securities 3 3 2 2 Mortgage loans on real estate 225 243 228 234 Other investments 1 1 2 2 Cash and invested cash 48 48 65 65 Separate account assets 2,660 2,660 2,263 2,263 LIABILITIES Future contract benefits: GLB reserves embedded derivatives (24) (24) (32) (32) Other contract holder funds: Remaining guaranteed interest and similar contracts (98) (98) (81) (81) Account values of certain investment contracts (1,396) (1,442) (1,356) (1,364) Other liabilities: Deferred compensation plans embedded derivatives (1) (1) (2) (2)
S-33 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments. MORTGAGE LOANS ON REAL ESTATE The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price or the fair value of the collateral if the loan is collateral dependent. OTHER INVESTMENTS The carrying value of our assets classified as other investments approximates their fair value. Other investments include privately held investments that are accounted for using the equity method of accounting. OTHER CONTRACT HOLDER FUNDS Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of December 31, 2010 and 2009, the remaining guaranteed interest and similar contracts carrying value approximates fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2010, or December 31, 2009, and we noted no changes in our valuation methodologies between these periods. The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels described above:
AS OF DECEMBER 31, 2010 ------------------------------------------------ QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE ----------- ------------- ------------ --------- ASSETS Investments: Fixed maturity AFS securities: Corporate bonds $ 5 $4,996 $139 $5,140 U.S. Government bonds 32 -- 1 33 Foreign government bonds -- 29 1 30 MBS: CMOs -- 640 2 642 MPTS -- 257 -- 257 CMBS -- 168 15 183 ABS CDOs -- -- 3 3 State and municipal bonds -- 250 -- 250 Hybrid and redeemable preferred securities -- 117 4 121 Equity AFS securities: Other securities 3 -- -- 3 Cash and invested cash -- 48 -- 48 Separate account assets -- 2,660 -- 2,660 --------- ------------- -------------- --------- Total assets $40 $9,165 $165 $9,370 ========= ============= ============== ========= LIABILITIES Future contract benefits: GLB reserves embedded derivatives $-- $ -- $(24) $ (24) Other liabilities: Deferred compensation plans embedded derivatives -- -- (1) (1) --------- ------------- -------------- --------- Total liabilities $-- $ -- $(25) $ (25) ========= ============= ============== =========
S-34 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
AS OF DECEMBER 31, 2009 ------------------------------------------------ QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE --------- ------------- -------------- --------- ASSETS Investments: Fixed maturity AFS securities: Corporate bonds $ 5 $4,579 $160 $4,744 U.S. Government bonds 31 1 -- 32 Foreign government bonds -- 24 -- 24 MBS: CMOs -- 646 3 649 MPTS -- 247 -- 247 CMBS -- 167 51 218 ABS: CDOs -- -- 3 3 State and municipal bonds -- 170 -- 170 Hybrid and redeemable preferred securities -- 79 14 93 Equity AFS securities: Other securities 2 -- -- 2 Cash and invested cash -- 65 -- 65 Separate account assets -- 2,263 -- 2,263 --------- ------------- -------------- --------- Total assets $38 $8,241 $231 $8,510 ========= ============= ============== ========= LIABILITIES Future contract benefits: GLB reserves embedded derivatives $-- $ -- $(32) $ (32) Other liabilities: Deferred compensation plans embedded derivatives -- -- (2) (2) --------- ------------- -------------- --------- Total liabilities $-- $ -- $(34) $ (34) ========= ============= ============== =========
S-35 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any impact of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
FOR THE YEAR ENDED DECEMBER 31, 2010 ------------------------------------------------------------------------ SALES, TRANSFERS ITEMS ISSUANCES, IN OR INCLUDED GAINS MATURITIES, OUT BEGINNING IN (LOSSES) SETTLEMENTS, OF ENDING FAIR NET IN CALLS, LEVEL 3, FAIR VALUE INCOME OCI NET NET(1) VALUE ------------ ----------- -------- --------------- ------------ --------- Investments(2): Fixed maturity AFS securities: Corporate bonds $ 160 $ 1 $ 6 $ (10) $ (18) $139 U.S. Government bonds -- -- -- -- 1 1 Foreign government bonds -- -- -- -- 1 1 MBS: CMOs 3 -- -- (1) -- 2 CMBS 51 (5) 12 (14) (29) 15 ABS: CDOs 3 -- -- -- -- 3 Hybrid and redeemable preferred securities 14 -- (10) -- -- 4 Future contract benefits(3): GLB reserves embedded derivatives (32) 8 -- -- -- (24) Other liabilities: Deferred compensation plans embedded derivatives(4) (2) (2) -- 3 -- (1) ------------ ----------- -------- --------------- ------------ --------- Total, net $ 197 $ 2 $ 8 $ (22) $ (45) $140 ============ =========== ======== =============== ============ =========
FOR THE YEAR ENDED DECEMBER 31, 2009 ------------------------------------------------------------------------ SALES, TRANSFERS ITEMS ISSUANCES, IN OR INCLUDED GAINS MATURITIES, OUT BEGINNING IN (LOSSES) SETTLEMENTS, OF ENDING FAIR NET IN CALLS, LEVEL 3, FAIR VALUE INCOME OCI NET NET(1) VALUE ------------ ----------- -------- --------------- ------------ --------- Investments(2): Fixed maturity AFS securities: Corporate bonds $ 176 $ (2) $ 3 $ 6 $(23) $160 MBS: CMOs 22 -- -- (1) (18) 3 CMBS 42 -- 12 (3) -- 51 ABS: CDOs 4 -- 2 (3) -- 3 State and municipal bonds 37 -- -- (5) (32) -- Hybrid and redeemable preferred securities 6 -- 8 -- -- 14 Future contract benefits(3): GLB reserves embedded derivatives (124) 92 -- -- -- (32) Other liabilities: Deferred compensation plans embedded derivatives(4) (2) (5) -- 5 -- (2) ------------ ----------- -------- --------------- ------------ --------- Total, net $ 161 $85 $25 $(1) $(73) $197 ============ =========== ======== =============== ============ =========
S-36 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2008 --------------------------------------------------------------------------- SALES, TRANSFERS ITEMS ISSUANCES, IN OR INCLUDED GAINS MATURITIES, OUT BEGINNING IN (LOSSES) SETTLEMENTS, OF ENDING FAIR NET IN CALLS, LEVEL 3, FAIR VALUE INCOME OCI NET NET(1) VALUE ------------ ----------- ----------- --------------- ------------ --------- Investments(2): Fixed maturity AFS securities: Corporate bonds $220 $ (16) $(18) $(17) $ 7 $ 176 Foreign government bonds 5 -- -- (5) -- -- MBS: CMOs 42 (4) 1 (3) (14) 22 CMBS 60 -- (30) 7 5 42 ABS: CDOs 7 -- (3) -- -- 4 State and municipal bonds 38 -- (1) -- -- 37 Hybrid and redeemable preferred securities -- -- -- 6 -- 6 Future contract benefits(3): GLB reserves embedded derivatives (17) (107) -- -- -- (124) Other liabilities: Deferred compensation plans embedded derivatives(4) (1) (8) -- 7 -- (2) ------------ ----------- ----------- --------------- ------------ --------- Total, net $354 $(135) $(51) $(5) $ (2) $ 161 ============ =========== =========== =============== ============ =========
(1) Transfers in or out of Level 3 for AFS are displayed at amortized cost as of the beginning-of-period. For AFS, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in prior years. (2) Amortization and accretion of premiums and discounts are included in net investment income on our Statements of Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Statements of Income (Loss). (3) Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Statements of Income (Loss). (4) Deferrals and subsequent changes in fair value for the participants' investment options are reported in underwriting, acquisi- tion, insurance and other expenses on our Statements of Income (Loss). The following summarizes changes in unrealized gains (losses) included in net income, excluding any impact of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2010 2009 2008 ------- ------- -------- Investments(1): GLB reserves embedded derivatives $16 $99 $(100) Other liabilities: Deferred compensation plans embedded derivatives(2) (2) (5) (8) ------- ------- -------- Total, net $14 $94 $(108) ======= ======= ========
(1) Included in realized gain (loss) on our Statements of Income (Loss). (2) Included in underwriting, acquisition, insurance and other expenses on our Statements of Income (Loss). The following provides the components of the transfers in and out of Level 3 (in millions) as reported above:
FOR THE YEAR ENDED DECEMBER 31, 2010 ------------------------------- TRANSFERS TRANSFERS IN TO OUT OF LEVEL 3 LEVEL 3 TOTAL ------- -------------- -------- Investments: Fixed maturity AFS securities: Corporate bonds $5 $(23) $(18) U.S. Government bonds 1 -- 1 Foreign government bonds 1 -- 1 MBS CMBS 1 (30) (29) ------- -------------- -------- Total, net $8 $(53) $(45) ======= ============== ========
Transfers in and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the year ended December 31, 2010, our corporate bonds and CMBS transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available. For the year ended December 31, 2010, there were no significant transfers between Level 1 and 2 of the fair value hierarchy. S-37 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 20. SEGMENT INFORMATION We provide products and services in two operating businesses and report results through four business segments as follows:
BUSINESS CORRESPONDING SEGMENTS -------------------- ---------------------- Retirement Solutions Annuities Defined Contribution Insurance Solutions Life Insurance Group Protection
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations. RETIREMENT SOLUTIONS The Retirement Solutions business provides its products through two segments: Annuities and Defined Contribution. The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering individual fixed annuities, including indexed annuities and variable annuities. The Defined Contribution segment provides employer-sponsored variable and fixed annuities, defined benefit, individual retirement accounts and mutual-fund based programs in the retirement plan marketplaces. INSURANCE SOLUTIONS The Insurance Solutions business provides its products through two segments: Life Insurance and Group Protection. The Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs) and both single and survivorship versions of UL and VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL insurance products. The Group Protection segment offers group life, disability and dental insurance to employers, and its products are marketed primarily through a national distribution system of regional group offices. These offices develop business through employee benefit brokers, third-party administrators and other employee benefit firms. OTHER OPERATIONS Other Operations includes investments related to excess capital, other corporate investments and benefit plan net liability. Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: Realized gains and losses associated with the following ("excluded realized gain (loss)"): - Sale or disposal of securities; - Impairments of securities; - Change in the fair value of embedded derivatives within certain reinsurance arrangements; and - Change in the GLB embedded derivative reserves. Change in reserves accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC resulting from benefit ratio unlocking on our GDB and GLB riders ("benefit ratio unlocking"); Income (loss) from the initial adoption of new accounting standards; Income (loss) from reserve changes (net of related amortiza-tion) on business sold through reinsurance; Gain (loss) on early extinguishment of debt; Losses from the impairment of intangible assets; and Income (loss) from discontinued operations. Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: Excluded realized gain (loss); Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and Revenue adjustments from the initial adoption of new accounting standards. We use our prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our results of operations. Segment information (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 ------- ------------------ -------- REVENUES Operating revenues: Retirement Solutions: Annuities $111 $ 99 $ 96 Defined Contribution 53 52 52 ------- ------------------ -------- Total Retirement Solutions 164 151 148 ------- ------------------ -------- Insurance Solutions: Life Insurance 563 550 531 Group Protection 62 48 39 ------- ------------------ -------- Total Insurance Solutions 625 598 570 ------- ------------------ -------- Other Operations 18 20 25 Excluded realized gain (loss), pre-tax (20) (68) (100) ------- ------------------ -------- Total revenues $787 $701 $ 643 ======= ================== ========
S-38 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 20. SEGMENT INFORMATION (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ------- --------------- ------- NET INCOME (LOSS) Income (loss) from operations: Retirement Solutions: Annuities $22 $22 $ 3 Defined Contribution (1) 3 4 ------- --------------- ------- Total Retirement Solutions 21 25 7 ------- --------------- ------- Insurance Solutions: Life Insurance 96 80 75 Group Protection (2) -- 2 ------- --------------- ------- Total Insurance Solutions 94 80 77 ------- --------------- ------- Other Operations 11 12 17 Excluded realized gain (loss), after-tax (13) (44) (65) ------- --------------- ------- Net income (loss) $113 $73 $ 36 ======= =============== =======
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ---- ------------ ----- NET INVESTMENT INCOME Retirement Solutions: Annuities $ 69 $ 62 $ 57 Defined Contribution 49 48 48 ---- ------------ ----- Total Retirement Solutions 118 110 105 ---- ------------ ----- Insurance Solutions: Life Insurance 277 274 262 Group Protection 5 4 3 ---- ------------ ----- Total Insurance Solutions 282 278 265 ---- ------------ ----- Other Operations 18 20 25 ---- ------------ ----- Total net investment income $418 $408 $ 395 ==== ============ =====
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2010 2009 2008 ---- ------------ ------- AMORTIZATION OF DAC AND VOBA, NET OF INTEREST Retirement Solutions: Annuities $15 $10 $ 31 Defined Contribution 10 7 5 ---- ------------ --- --- Total Retirement Solutions 25 17 36 ---- ------------ --- --- Insurance Solutions: Life Insurance 53 66 51 Group Protection 2 2 1 ---- ------------ --- --- Total Insurance Solutions 55 68 52 ---- ------------ --- --- Total amortization of DAC and VOBA, net of interest $80 $85 $ 88 ==== ============ =======
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ------- --------------- ------- FEDERAL INCOME TAX EXPENSE (BENEFIT) Retirement Solutions: Annuities $ 7 $ 8 $(3) Defined Contribution (1) 2 2 ------- --------------- ------- Total Retirement Solutions 6 10 (1) ------- --------------- ------- Insurance Solutions: Life Insurance 51 43 40 Group Protection (1) -- 1 ------- --------------- ------- Total Insurance Solutions 50 43 41 ------- --------------- ------- Other Operations 6 6 9 Excluded realized gain (loss) (7) (24) (35) ------- --------------- ------- Total federal income tax expense (benefit) $55 $35 $14 ======= =============== =======
AS OF DECEMBER 31, ------------------ 2010 2009 ------- ---------- ASSETS Retirement Solutions: Annuities $ 3,542 $ 3,187 Defined Contribution 1,337 1,253 ------- ---------- Total Retirement Solutions 4,879 4,440 ------- ---------- Insurance Solutions: Life Insurance 6,387 6,076 Group Protection 102 77 ------- ---------- Total Insurance Solutions 6,489 6,153 ------- ---------- Other Operations 268 311 ------- ---------- Total assets $11,636 $10,904 ======= ==========
S-39 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS (CONTINUED) 21. SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA The following summarizes our supplemental cash flow data (in millions):
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2010 2009 2008 ---- --------- ---- Income taxes paid (received) $15 $(9) $40 ==== ========= ====
22. TRANSACTIONS WITH AFFILIATES Transactions with affiliates (in millions) recorded on our financial statements were as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ---- ------------- Assets with affiliates: Service agreement receivable(1) $16 $16 Reinsurance on ceded reinsurance contracts(2) 64 57
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ------- --------------- ------- Revenues with affiliates: Premiums paid on ceded reinsurance contracts(3) $(10) $(17) $(15) Fees for management of general account(4) -- (4) (4) Benefits and expenses with affiliates: Service agreement payments(5) 57 59 59
(1) Reported in other assets on our Balance Sheets. (2) Reported in reinsurance recoverables on our Balance Sheets. (3) Reported in insurance premiums on our Statements of Income (Loss). (4) Reported in net investment income on our Statements of Income (Loss). (5) Reported in underwriting, acquisition, insurance and other expenses on our Statements of Income (Loss). SERVICE AGREEMENT In accordance with service agreements with LNL and certain of its affiliates for personnel and facilities usage, general management services and investment management services, we receive services from and provide services to affiliated companies and also receive an allocation of corporate overhead from LNC. Corporate overhead expenses are assigned based on specific methodologies for each function. The majority of the expenses are assigned based on the following methodologies: assets by product, assets under management, weighted number of policy applications, weighted policies in force and sales. FEES FOR MANAGEMENT OF GENERAL ACCOUNT On January 4, 2010, LNC closed on a purchase and sale agreement pursuant to which all of the outstanding capital stock of Delaware Management Holdings, Inc. ("Delaware") was sold. In addition, we entered into investment advisory agreements with Delaware, pursuant to which Delaware will continue to manage the majority of our general account insurance assets. CEDED REINSURANCE CONTRACTS We cede business to two affiliated companies, LNL and Lincoln National Reinsurance Company (Barbados) Ltd. S-40 LINCOLN NEW YORK ACCOUNT N FOR VARIABLE ANNUITIES N-1 LINCOLN NEW YORK ACCOUNT N FOR VARIABLE ANNUITIES STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2010
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO LINCOLN LIFE & LINCOLN LIFE & LINCOLN LIFE & ANNUITY ANNUITY ANNUITY COMPANY COMPANY COMPANY SUBACCOUNT INVESTMENTS OF NEW YORK TOTAL ASSETS OF NEW YORK OF NEW YORK NET ASSETS -------------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 1,698,257 $ -- $ 1,698,257 $ -- $ 80 $ 1,698,177 ABVPSF Growth and Income Class B 7,283,502 -- 7,283,502 29 326 7,283,147 ABVPSF International Value Class B 8,261,994 2,103 8,264,097 -- 372 8,263,725 ABVPSF Large Cap Growth Class B 758,665 -- 758,665 -- 33 758,632 ABVPSF Small/Mid Cap Value Class B 8,999,689 3,795 9,003,484 -- 417 9,003,067 American Century VP Inflation Protection Class II 24,350,080 -- 24,350,080 194 1,129 24,348,757 American Funds Global Growth Class 2 17,546,307 -- 17,546,307 2,012 817 17,543,478 American Funds Global Small Capitalization Class 2 16,493,338 3,184 16,496,522 -- 742 16,495,780 American Funds Growth Class 2 93,257,705 -- 93,257,705 1,799 4,280 93,251,626 American Funds Growth-Income Class 2 83,563,887 74 83,563,961 -- 3,814 83,560,147 American Funds International Class 2 44,067,160 -- 44,067,160 1,355 1,989 44,063,816 BlackRock Global Allocation V.I. Class III 13,269,006 537,727 13,806,733 -- 624 13,806,109 Delaware VIP Diversified Income Service Class 44,404,319 2,250 44,406,569 -- 2,005 44,404,564 Delaware VIP Emerging Markets Service Class 17,594,572 3,746 17,598,318 -- 787 17,597,531 Delaware VIP High Yield Standard Class 651,538 -- 651,538 -- 25 651,513 Delaware VIP High Yield Service Class 16,394,820 -- 16,394,820 63 733 16,394,024 Delaware VIP Limited-Term Diversified Income Service Class 13,142,579 14,463 13,157,042 -- 556 13,156,486 Delaware VIP REIT Standard Class 790,451 -- 790,451 -- 31 790,420 Delaware VIP REIT Service Class 10,341,968 -- 10,341,968 733 472 10,340,763 Delaware VIP Small Cap Value Standard Class 896,679 -- 896,679 -- 35 896,644 Delaware VIP Small Cap Value Service Class 18,103,106 -- 18,103,106 140 846 18,102,120 Delaware VIP Smid Cap Growth Standard Class 485,553 -- 485,553 -- 19 485,534 Delaware VIP Smid Cap Growth Service Class 6,424,734 -- 6,424,734 1 299 6,424,434 Delaware VIP U.S. Growth Service Class 2,442,593 2,882 2,445,475 -- 95 2,445,380 Delaware VIP Value Standard Class 184,590 -- 184,590 -- 7 184,583 Delaware VIP Value Service Class 7,602,719 -- 7,602,719 -- 348 7,602,371 DWS VIP Alternative Asset Allocation Plus Class B 3,835,933 3,745 3,839,678 -- 179 3,839,499 DWS VIP Equity 500 Index Class A 2,341,751 23 2,341,774 -- 100 2,341,674 DWS VIP Equity 500 Index Class B 3,086,973 -- 3,086,973 -- 136 3,086,837 DWS VIP Small Cap Index Class A 592,350 -- 592,350 18 26 592,306 DWS VIP Small Cap Index Class B 1,947,082 -- 1,947,082 -- 93 1,946,989 Fidelity VIP Contrafund Service Class 2 40,252,502 -- 40,252,502 466 1,845 40,250,191 Fidelity VIP Equity-Income Initial Class 589,968 -- 589,968 -- 23 589,945 Fidelity VIP Equity-Income Service Class 2 2,043,434 -- 2,043,434 -- 88 2,043,346 Fidelity VIP Growth Initial Class 217,334 -- 217,334 -- 8 217,326 Fidelity VIP Growth Service Class 2 3,090,082 -- 3,090,082 -- 140 3,089,942 Fidelity VIP Mid Cap Service Class 2 22,276,765 9,811 22,286,576 -- 1,025 22,285,551 Fidelity VIP Overseas Initial Class 101,133 -- 101,133 -- 4 101,129 Fidelity VIP Overseas Service Class 2 4,156,724 -- 4,156,724 9 181 4,156,534 FTVIPT Franklin Income Securities Class 2 25,816,671 -- 25,816,671 216 1,192 25,815,263 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 9,301,210 -- 9,301,210 409 433 9,300,368 FTVIPT Mutual Shares Securities Class 2 18,044,525 4,267 18,048,792 -- 791 18,048,001 FTVIPT Templeton Global Bond Securities Class 2 17,080,880 -- 17,080,880 -- 775 17,080,105 FTVIPT Templeton Growth Securities Class 2 5,102,270 -- 5,102,270 8 230 5,102,032 Goldman Sachs VIT Large Cap Value Service Class 851,564 5,790 857,354 -- 23 857,331 Invesco V.I. Capital Appreciation Series I 177,644 -- 177,644 -- 8 177,636
See accompanying notes. N-2
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO LINCOLN LIFE & LINCOLN LIFE & LINCOLN LIFE & ANNUITY ANNUITY ANNUITY COMPANY COMPANY COMPANY SUBACCOUNT INVESTMENTS OF NEW YORK TOTAL ASSETS OF NEW YORK OF NEW YORK NET ASSETS -------------------------------------------------------------------------------------------------------------------------------- Invesco V.I. Capital Appreciation Series II $ 69,487 $ -- $ 69,487 $-- $ 3 $ 69,484 Invesco V.I. Core Equity Series I 420,009 -- 420,009 -- 17 419,992 Invesco V.I. Core Equity Series II 9,230 -- 9,230 -- -- 9,230 Invesco V.I. International Growth Series I 122,728 -- 122,728 -- 5 122,723 Invesco V.I. International Growth Series II 219,872 -- 219,872 -- 9 219,863 Janus Aspen Series Balanced Service Class 653,650 -- 653,650 -- 28 653,622 Janus Aspen Series Enterprise Service Class 663,558 -- 663,558 -- 28 663,530 Janus Aspen Series Worldwide Service Class 20,305 -- 20,305 -- 1 20,304 LVIP American Global Growth Service Class II 129,270 -- 129,270 -- 5 129,265 LVIP American Global Small Capitalization Service Class II 75,554 -- 75,554 -- 3 75,551 LVIP American Growth Service Class II 398,015 -- 398,015 -- 17 397,998 LVIP American Growth-Income Service Class II 346,451 24,999 371,450 -- 15 371,435 LVIP American International Service Class II 119,376 12,706 132,082 -- 4 132,078 LVIP Baron Growth Opportunities Service Class 7,308,535 13,595 7,322,130 -- 351 7,321,779 LVIP BlackRock Inflation Protected Bond Service Class 1,156,131 -- 1,156,131 -- 52 1,156,079 LVIP Capital Growth Service Class 1,755,505 3,619 1,759,124 -- 60 1,759,064 LVIP Cohen & Steers Global Real Estate Service Class 5,332,887 5,076 5,337,963 -- 244 5,337,719 LVIP Columbia Value Opportunities Service Class 790,665 -- 790,665 1 37 790,627 LVIP Delaware Bond Standard Class 12,529,193 -- 12,529,193 95 532 12,528,566 LVIP Delaware Bond Service Class 46,794,640 73,534 46,868,174 -- 2,058 46,866,116 LVIP Delaware Diversified Floating Rate Service Class 798,300 -- 798,300 -- 38 798,262 LVIP Delaware Foundation Aggressive Allocation Standard Class 368,250 -- 368,250 -- 15 368,235 LVIP Delaware Foundation Aggressive Allocation Service Class 3,525,111 -- 3,525,111 -- 160 3,524,951 LVIP Delaware Growth and Income Service Class 1,509,438 -- 1,509,438 -- 67 1,509,371 LVIP Delaware Social Awareness Standard Class 815,972 -- 815,972 -- 34 815,938 LVIP Delaware Social Awareness Service Class 2,248,592 -- 2,248,592 12 95 2,248,485 LVIP Delaware Special Opportunities Service Class 1,310,200 -- 1,310,200 -- 66 1,310,134 LVIP Global Income Service Class 7,499,141 12,700 7,511,841 -- 366 7,511,475 LVIP Janus Capital Appreciation Standard Class 121,498 -- 121,498 -- 5 121,493 LVIP Janus Capital Appreciation Service Class 1,721,992 -- 1,721,992 -- 85 1,721,907 LVIP JPMorgan High Yield Service Class 138,593 -- 138,593 -- 6 138,587 LVIP MFS International Growth Service Class 2,960,478 12,321 2,972,799 -- 129 2,972,670 LVIP MFS Value Service Class 7,912,157 18,669 7,930,826 -- 333 7,930,493 LVIP Mid-Cap Value Service Class 2,979,875 -- 2,979,875 6 138 2,979,731 LVIP Mondrian International Value Standard Class 1,789,738 -- 1,789,738 -- 77 1,789,661 LVIP Mondrian International Value Service Class 7,448,614 -- 7,448,614 8 338 7,448,268 LVIP Money Market Standard Class 3,792,053 -- 3,792,053 65 153 3,791,835 LVIP Money Market Service Class 14,883,139 -- 14,883,139 45 672 14,882,422 LVIP SSgA Bond Index Service Class 30,584,962 18,933 30,603,895 -- 1,480 30,602,415 LVIP SSgA Conservative Structured Allocation Service Class 50,559 -- 50,559 -- 2 50,557
See accompanying notes. N-3
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO LINCOLN LIFE & LINCOLN LIFE & LINCOLN LIFE & ANNUITY ANNUITY ANNUITY COMPANY COMPANY COMPANY SUBACCOUNT INVESTMENTS OF NEW YORK TOTAL ASSETS OF NEW YORK OF NEW YORK NET ASSETS -------------------------------------------------------------------------------------------------------------------------------- LVIP SSgA Developed International 150 Service Class $ 4,678,116 $ -- $ 4,678,116 $ 143 $ 227 $ 4,677,746 LVIP SSgA Emerging Markets 100 Service Class 7,218,618 -- 7,218,618 505 344 7,217,769 LVIP SSgA Global Tactical Allocation Service Class 3,349,939 -- 3,349,939 -- 154 3,349,785 LVIP SSgA International Index Service Class 6,867,192 -- 6,867,192 1,383 337 6,865,472 LVIP SSgA Large Cap 100 Service Class 11,679,523 -- 11,679,523 2,080 567 11,676,876 LVIP SSgA Moderate Index Allocation Service Class 519,266 -- 519,266 -- 19 519,247 LVIP SSgA Moderate Structured Allocation Service Class 678,121 208,605 886,726 -- 31 886,695 LVIP SSgA Moderately Aggressive Index Allocation Service Class 196,864 -- 196,864 -- 8 196,856 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 854,634 -- 854,634 -- 38 854,596 LVIP SSgA S&P 500 Index Standard Class 463,488 -- 463,488 -- 28 463,460 LVIP SSgA S&P 500 Index Service Class 17,464,819 -- 17,464,819 10,204 845 17,453,770 LVIP SSgA Small-Cap Index Service Class 5,847,565 -- 5,847,565 5,026 279 5,842,260 LVIP SSgA Small-Mid Cap 200 Service Class 3,271,689 -- 3,271,689 1,065 160 3,270,464 LVIP T. Rowe Price Growth Stock Service Class 2,156,749 11,436 2,168,185 -- 103 2,168,082 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 109,989 -- 109,989 -- 5 109,984 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 2,667,528 10,160 2,677,688 -- 128 2,677,560 LVIP Templeton Growth Service Class 4,175,204 -- 4,175,204 20 193 4,174,991 LVIP Turner Mid-Cap Growth Service Class 1,480,791 -- 1,480,791 -- 70 1,480,721 LVIP Wells Fargo Intrinsic Value Service Class 1,256,011 -- 1,256,011 -- 59 1,255,952 LVIP Wilshire 2010 Profile Service Class 935,903 -- 935,903 -- 45 935,858 LVIP Wilshire 2020 Profile Service Class 501,708 -- 501,708 -- 24 501,684 LVIP Wilshire 2030 Profile Service Class 414,923 -- 414,923 -- 18 414,905 LVIP Wilshire 2040 Profile Service Class 76,456 -- 76,456 -- 4 76,452 LVIP Wilshire Conservative Profile Service Class 12,636,232 -- 12,636,232 -- 597 12,635,635 LVIP Wilshire Moderate Profile Service Class 39,013,416 -- 39,013,416 -- 1,816 39,011,600 LVIP Wilshire Moderately Aggressive Profile Service Class 19,728,692 -- 19,728,692 -- 909 19,727,783 Lord Abbett Fundamental Equity Class VC 35,938 -- 35,938 -- 1 35,937 MFS VIT Core Equity Service Class 91,403 -- 91,403 -- 4 91,399 MFS VIT Growth Initial Class 151,712 -- 151,712 -- 6 151,706 MFS VIT Growth Service Class 364,494 -- 364,494 -- 16 364,478 MFS VIT Total Return Initial Class 816,827 -- 816,827 -- 31 816,796 MFS VIT Total Return Service Class 15,471,287 -- 15,471,287 44 686 15,470,557 MFS VIT Utilities Initial Class 584,259 -- 584,259 -- 22 584,237 MFS VIT Utilities Service Class 11,093,620 -- 11,093,620 776 497 11,092,347 NB AMT Mid-Cap Growth I Class 4,293,855 -- 4,293,855 11 195 4,293,649 NB AMT Regency I Class 4,932,709 -- 4,932,709 2 221 4,932,486 Oppenheimer Global Securities Service Class 67,375 -- 67,375 -- 2 67,373 PIMCO VIT Commodity Real Return Advisor Class 851,486 -- 851,486 3 36 851,447 Putnam VT Global Health Care Class IB 87,258 -- 87,258 -- 4 87,254 Putnam VT Growth & Income Class IB 58,404 -- 58,404 -- 3 58,401
See accompanying notes. N-4 [THIS PAGE INTENTIONALLY LEFT BLANK] LINCOLN NEW YORK ACCOUNT N FOR VARIABLE ANNUITIES STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2010
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) -------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 33,092 $ (26,383) $ 6,709 ABVPSF Growth and Income Class B -- (110,419) (110,419) ABVPSF International Value Class B 210,708 (125,719) 84,989 ABVPSF Large Cap Growth Class B 1,940 (11,532) (9,592) ABVPSF Small/Mid Cap Value Class B 19,100 (116,786) (97,686) American Century VP Inflation Protection Class II 367,091 (368,158) (1,067) American Funds Global Growth Class 2 241,330 (272,240) (30,910) American Funds Global Small Capitalization Class 2 234,648 (233,218) 1,430 American Funds Growth Class 2 608,496 (1,392,384) (783,888) American Funds Growth-Income Class 2 1,147,823 (1,232,081) (84,258) American Funds International Class 2 847,359 (680,939) 166,420 BlackRock Global Allocation V.I. Class III 139,738 (112,039) 27,699 Delaware VIP Diversified Income Service Class 1,564,257 (647,297) 916,960 Delaware VIP Emerging Markets Service Class 92,142 (252,220) (160,078) Delaware VIP High Yield Standard Class 51,999 (9,359) 42,640 Delaware VIP High Yield Service Class 1,096,764 (237,483) 859,281 Delaware VIP Limited-Term Diversified Income Service Class 199,975 (157,045) 42,930 Delaware VIP REIT Standard Class 22,108 (11,143) 10,965 Delaware VIP REIT Service Class 259,086 (160,205) 98,881 Delaware VIP Small Cap Value Standard Class 5,722 (12,590) (6,868) Delaware VIP Small Cap Value Service Class 70,494 (260,155) (189,661) Delaware VIP Smid Cap Growth Standard Class -- (1,524) (1,524) Delaware VIP Smid Cap Growth Service Class -- (22,019) (22,019) Delaware VIP Trend Standard Class -- (4,701) (4,701) Delaware VIP Trend Service Class -- (54,870) (54,870) Delaware VIP U.S. Growth Service Class -- (29,780) (29,780) Delaware VIP Value Standard Class 6,091 (2,991) 3,100 Delaware VIP Value Service Class 152,244 (114,146) 38,098 DWS VIP Alternative Asset Allocation Plus Class B 2,919 (12,730) (9,811) DWS VIP Equity 500 Index Class A 50,396 (39,406) 10,990 DWS VIP Equity 500 Index Class B 53,238 (50,046) 3,192 DWS VIP Small Cap Index Class A 5,984 (9,674) (3,690) DWS VIP Small Cap Index Class B 11,992 (32,159) (20,167) Fidelity VIP Contrafund Service Class 2 371,964 (592,000) (220,036) Fidelity VIP Equity-Income Initial Class 10,103 (8,659) 1,444 Fidelity VIP Equity-Income Service Class 2 30,769 (31,369) (600) Fidelity VIP Growth Initial Class 537 (2,868) (2,331) Fidelity VIP Growth Service Class 2 843 (43,435) (42,592) Fidelity VIP Mid Cap Service Class 2 24,210 (320,301) (296,091) Fidelity VIP Overseas Initial Class 1,308 (1,319) (11) Fidelity VIP Overseas Service Class 2 45,285 (63,072) (17,787) FTVIPT Franklin Income Securities Class 2 1,547,071 (404,061) 1,143,010 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 -- (137,501) (137,501) FTVIPT Mutual Shares Securities Class 2 256,221 (254,029) 2,192 FTVIPT Templeton Global Bond Securities Class 2 235,007 (279,001) (43,994) FTVIPT Templeton Growth Securities Class 2 68,686 (83,116) (14,430) Goldman Sachs VIT Large Cap Value Service Class 4,989 (3,863) 1,126 Invesco V.I. Capital Appreciation Series I 1,361 (2,680) (1,319) Invesco V.I. Capital Appreciation Series II 451 (1,276) (825) Invesco V.I. Core Equity Series I 4,093 (6,420) (2,327) Invesco V.I. Core Equity Series II 67 (216) (149) Invesco V.I. International Growth Series I 2,599 (1,558) 1,041 Invesco V.I. International Growth Series II 3,664 (3,123) 541 Janus Aspen Series Balanced Service Class 17,110 (10,872) 6,238 Janus Aspen Series Enterprise Service Class -- (10,696) (10,696) Janus Aspen Series Worldwide Service Class 88 (283) (195) LVIP American Global Growth Service Class II -- (91) (91)
N-6
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN UNREALIZED (DECREASE) NET REALIZED NET REALIZED NET REALIZED APPRECIATION OR IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------------------------------------------------------------------------------ ABVPSF Global Thematic Growth Class B $ (11,401) $ -- $ (11,401) $ 225,894 $ 221,202 ABVPSF Growth and Income Class B (458,766) -- (458,766) 1,298,774 729,589 ABVPSF International Value Class B (737,950) -- (737,950) 884,858 231,897 ABVPSF Large Cap Growth Class B 6,059 -- 6,059 60,645 57,112 ABVPSF Small/Mid Cap Value Class B 89,211 -- 89,211 1,598,448 1,589,973 American Century VP Inflation Protection Class II 301,623 -- 301,623 308,918 609,474 American Funds Global Growth Class 2 (105,957) -- (105,957) 1,721,099 1,584,232 American Funds Global Small Capitalization Class 2 (243,991) -- (243,991) 2,885,395 2,642,834 American Funds Growth Class 2 (2,213,335) -- (2,213,335) 16,257,656 13,260,433 American Funds Growth-Income Class 2 (2,152,064) -- (2,152,064) 9,395,908 7,159,586 American Funds International Class 2 (598,607) -- (598,607) 2,751,183 2,318,996 BlackRock Global Allocation V.I. Class III 43,579 75,901 119,480 682,755 829,934 Delaware VIP Diversified Income Service Class 970,802 82,010 1,052,812 191,465 2,161,237 Delaware VIP Emerging Markets Service Class 131,757 -- 131,757 2,446,725 2,418,404 Delaware VIP High Yield Standard Class 15,412 -- 15,412 27,817 85,869 Delaware VIP High Yield Service Class 235,024 -- 235,024 707,240 1,801,545 Delaware VIP Limited-Term Diversified Income Service Class 122,838 55,429 178,267 (26,579) 194,618 Delaware VIP REIT Standard Class (99,064) -- (99,064) 266,862 178,763 Delaware VIP REIT Service Class (1,883,863) -- (1,883,863) 3,839,312 2,054,330 Delaware VIP Small Cap Value Standard Class 37,714 -- 37,714 201,732 232,578 Delaware VIP Small Cap Value Service Class (96,449) -- (96,449) 4,403,182 4,117,072 Delaware VIP Smid Cap Growth Standard Class 1,518 -- 1,518 58,782 58,776 Delaware VIP Smid Cap Growth Service Class 31,075 -- 31,075 687,849 696,905 Delaware VIP Trend Standard Class 59,171 16,926 76,097 5,781 77,177 Delaware VIP Trend Service Class 285,340 208,374 493,714 330,506 769,350 Delaware VIP U.S. Growth Service Class 23,982 -- 23,982 247,047 241,249 Delaware VIP Value Standard Class (9,456) -- (9,456) 29,693 23,337 Delaware VIP Value Service Class (311,966) -- (311,966) 1,165,316 891,448 DWS VIP Alternative Asset Allocation Plus Class B 6,653 3,244 9,897 133,338 133,424 DWS VIP Equity 500 Index Class A 12,151 -- 12,151 254,098 277,239 DWS VIP Equity 500 Index Class B (70,247) -- (70,247) 417,466 350,411 DWS VIP Small Cap Index Class A (56,283) -- (56,283) 175,845 115,872 DWS VIP Small Cap Index Class B (133,711) -- (133,711) 564,874 410,996 Fidelity VIP Contrafund Service Class 2 (1,439,530) 16,975 (1,422,555) 6,859,728 5,217,137 Fidelity VIP Equity-Income Initial Class (46,676) -- (46,676) 119,383 74,151 Fidelity VIP Equity-Income Service Class 2 (126,262) -- (126,262) 378,489 251,627 Fidelity VIP Growth Initial Class (2,429) 680 (1,749) 47,345 43,265 Fidelity VIP Growth Service Class 2 (51,558) 9,210 (42,348) 615,808 530,868 Fidelity VIP Mid Cap Service Class 2 (167,749) 62,814 (104,935) 4,994,722 4,593,696 Fidelity VIP Overseas Initial Class (1,239) 178 (1,061) 10,600 9,528 Fidelity VIP Overseas Service Class 2 (226,247) 7,506 (218,741) 654,614 418,086 FTVIPT Franklin Income Securities Class 2 (575,418) -- (575,418) 1,794,502 2,362,094 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 (77,993) -- (77,993) 2,135,567 1,920,073 FTVIPT Mutual Shares Securities Class 2 (403,305) -- (403,305) 1,896,734 1,495,621 FTVIPT Templeton Global Bond Securities Class 2 433,128 42,513 475,641 1,528,601 1,960,248 FTVIPT Templeton Growth Securities Class 2 (289,721) -- (289,721) 570,801 266,650 Goldman Sachs VIT Large Cap Value Service Class 2,305 -- 2,305 63,342 66,773 Invesco V.I. Capital Appreciation Series I (17,136) -- (17,136) 40,856 22,401 Invesco V.I. Capital Appreciation Series II (5,703) -- (5,703) 16,650 10,122 Invesco V.I. Core Equity Series I 1,371 -- 1,371 33,621 32,665 Invesco V.I. Core Equity Series II (686) -- (686) 817 (18) Invesco V.I. International Growth Series I 2,091 -- 2,091 9,269 12,401 Invesco V.I. International Growth Series II 3,164 -- 3,164 17,620 21,325 Janus Aspen Series Balanced Service Class 15,224 -- 15,224 18,546 40,008 Janus Aspen Series Enterprise Service Class 55,466 -- 55,466 97,522 142,292 Janus Aspen Series Worldwide Service Class 400 -- 400 2,571 2,776 LVIP American Global Growth Service Class II 2 -- 2 2,884 2,795
See accompanying notes. N-7
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) -------------------------------------------------------------------------------------------------- LVIP American Global Small Capitalization Service Class II $ -- $ (57) $ (57) LVIP American Growth Service Class II -- (368) (368) LVIP American Growth-Income Service Class II -- (184) (184) LVIP American International Service Class II -- (55) (55) LVIP Baron Growth Opportunities Service Class -- (97,874) (97,874) LVIP BlackRock Inflation Protected Bond Service Class 7,662 (1,660) 6,002 LVIP Capital Growth Service Class -- (16,207) (16,207) LVIP Cohen & Steers Global Real Estate Service Class -- (73,173) (73,173) LVIP Columbia Value Opportunities Service Class -- (10,246) (10,246) LVIP Delaware Bond Standard Class 435,018 (212,208) 222,810 LVIP Delaware Bond Service Class 1,471,565 (809,406) 662,159 LVIP Delaware Diversified Floating Rate Service Class 2,317 (903) 1,414 LVIP Delaware Foundation Aggressive Allocation Standard Class 9,449 (5,499) 3,950 LVIP Delaware Foundation Aggressive Allocation Service Class 83,281 (55,995) 27,286 LVIP Delaware Growth and Income Service Class 8,509 (20,076) (11,567) LVIP Delaware Social Awareness Standard Class 4,661 (12,096) (7,435) LVIP Delaware Social Awareness Service Class 5,689 (34,336) (28,647) LVIP Delaware Special Opportunities Service Class 3,790 (16,815) (13,025) LVIP Global Income Service Class 157,430 (75,160) 82,270 LVIP Janus Capital Appreciation Standard Class 846 (1,788) (942) LVIP Janus Capital Appreciation Service Class 8,242 (26,671) (18,429) LVIP JPMorgan High Yield Service Class 480 (97) 383 LVIP MFS International Growth Service Class 13,175 (37,669) (24,494) LVIP MFS Value Service Class 73,031 (96,189) (23,158) LVIP Mid-Cap Value Service Class 206 (38,920) (38,714) LVIP Mondrian International Value Standard Class 58,188 (30,406) 27,782 LVIP Mondrian International Value Service Class 225,895 (123,845) 102,050 LVIP Money Market Standard Class 2,234 (72,251) (70,017) LVIP Money Market Service Class 6,872 (273,700) (266,828) LVIP SSgA Bond Index Service Class 487,025 (396,550) 90,475 LVIP SSgA Conservative Structured Allocation Service Class -- (41) (41) LVIP SSgA Developed International 150 Service Class 42,031 (58,475) (16,444) LVIP SSgA Emerging Markets 100 Service Class 51,509 (75,530) (24,021) LVIP SSgA Global Tactical Allocation Service Class 25,243 (52,793) (27,550) LVIP SSgA International Index Service Class 73,257 (86,914) (13,657) LVIP SSgA Large Cap 100 Service Class 101,232 (135,030) (33,798) LVIP SSgA Moderate Index Allocation Service Class -- (375) (375) LVIP SSgA Moderate Structured Allocation Service Class -- (536) (536) LVIP SSgA Moderately Aggressive Index Allocation Service Class -- (70) (70) LVIP SSgA Moderately Aggressive Structured Allocation Service Class -- (503) (503) LVIP SSgA S&P 500 Index Standard Class 4,849 (4,883) (34) LVIP SSgA S&P 500 Index Service Class 143,747 (227,813) (84,066) LVIP SSgA Small-Cap Index Service Class 14,843 (73,583) (58,740) LVIP SSgA Small-Mid Cap 200 Service Class 42,913 (39,236) 3,677 LVIP T. Rowe Price Growth Stock Service Class -- (30,197) (30,197) LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class -- (1,865) (1,865) LVIP T. Rowe Price Structured Mid-Cap Growth Service Class -- (38,415) (38,415) LVIP Templeton Growth Service Class 63,359 (62,147) 1,212 LVIP Turner Mid-Cap Growth Service Class -- (20,291) (20,291) LVIP Wells Fargo Intrinsic Value Service Class 8,782 (21,028) (12,246) LVIP Wilshire 2010 Profile Service Class 7,504 (14,915) (7,411) LVIP Wilshire 2020 Profile Service Class 3,113 (8,220) (5,107) LVIP Wilshire 2030 Profile Service Class 2,287 (6,323) (4,036) LVIP Wilshire 2040 Profile Service Class 390 (1,669) (1,279) LVIP Wilshire Conservative Profile Service Class 401,524 (190,778) 210,746 LVIP Wilshire Moderate Profile Service Class 959,979 (568,846) 391,133 LVIP Wilshire Moderately Aggressive Profile Service Class 442,346 (260,959) 181,387
N-8
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN UNREALIZED (DECREASE) NET REALIZED NET REALIZED NET REALIZED APPRECIATION OR IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------------------------------------------------------------------------------ LVIP American Global Small Capitalization Service Class II $ 1 $ -- $ 1 $ 2,200 $ 2,144 LVIP American Growth Service Class II 7 -- 7 10,015 9,654 LVIP American Growth-Income Service Class II 2 -- 2 3,318 3,136 LVIP American International Service Class II -- -- -- 1,374 1,319 LVIP Baron Growth Opportunities Service Class (46,244) -- (46,244) 1,497,547 1,353,429 LVIP BlackRock Inflation Protected Bond Service Class (27) -- (27) (25,197) (19,222) LVIP Capital Growth Service Class 4,430 -- 4,430 253,970 242,193 LVIP Cohen & Steers Global Real Estate Service Class 10,566 -- 10,566 728,379 665,772 LVIP Columbia Value Opportunities Service Class (14,712) -- (14,712) 158,702 133,744 LVIP Delaware Bond Standard Class 314,589 265,141 579,730 147,427 949,967 LVIP Delaware Bond Service Class 1,517,981 1,007,819 2,525,800 (97,685) 3,090,274 LVIP Delaware Diversified Floating Rate Service Class (2) -- (2) (1,482) (70) LVIP Delaware Foundation Aggressive Allocation Standard Class (22,650) -- (22,650) 55,545 36,845 LVIP Delaware Foundation Aggressive Allocation Service Class (32,047) -- (32,047) 334,006 329,245 LVIP Delaware Growth and Income Service Class (53,094) -- (53,094) 181,378 116,717 LVIP Delaware Social Awareness Standard Class 7,800 -- 7,800 75,258 75,623 LVIP Delaware Social Awareness Service Class (28,343) -- (28,343) 255,194 198,204 LVIP Delaware Special Opportunities Service Class 73,718 -- 73,718 116,778 177,471 LVIP Global Income Service Class 17,114 -- 17,114 144,626 244,010 LVIP Janus Capital Appreciation Standard Class 11,972 -- 11,972 (210) 10,820 LVIP Janus Capital Appreciation Service Class 12,092 -- 12,092 150,982 144,645 LVIP JPMorgan High Yield Service Class -- -- -- 373 756 LVIP MFS International Growth Service Class (82,452) -- (82,452) 397,937 290,991 LVIP MFS Value Service Class 48,205 -- 48,205 640,652 665,699 LVIP Mid-Cap Value Service Class 25,060 -- 25,060 521,941 508,287 LVIP Mondrian International Value Standard Class (98,422) -- (98,422) 43,114 (27,526) LVIP Mondrian International Value Service Class (321,910) -- (321,910) 203,114 (16,746) LVIP Money Market Standard Class -- 18 18 -- (69,999) LVIP Money Market Service Class 1 66 67 (1) (266,762) LVIP SSgA Bond Index Service Class 370,007 -- 370,007 160,961 621,443 LVIP SSgA Conservative Structured Allocation Service Class -- -- -- 580 539 LVIP SSgA Developed International 150 Service Class 144,137 -- 144,137 171,630 299,323 LVIP SSgA Emerging Markets 100 Service Class 652,647 -- 652,647 555,206 1,183,832 LVIP SSgA Global Tactical Allocation Service Class (144,545) -- (144,545) 384,054 211,959 LVIP SSgA International Index Service Class 179,144 -- 179,144 324,607 490,094 LVIP SSgA Large Cap 100 Service Class 479,247 -- 479,247 962,854 1,408,303 LVIP SSgA Moderate Index Allocation Service Class 144 -- 144 5,095 4,864 LVIP SSgA Moderate Structured Allocation Service Class 3 -- 3 8,091 7,558 LVIP SSgA Moderately Aggressive Index Allocation Service Class -- -- -- 1,139 1,069 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 3 -- 3 8,623 8,123 LVIP SSgA S&P 500 Index Standard Class 12,548 -- 12,548 34,062 46,576 LVIP SSgA S&P 500 Index Service Class 403,949 -- 403,949 1,598,916 1,918,799 LVIP SSgA Small-Cap Index Service Class 191,964 -- 191,964 944,027 1,077,251 LVIP SSgA Small-Mid Cap 200 Service Class 209,381 -- 209,381 371,367 584,425 LVIP T. Rowe Price Growth Stock Service Class 55,466 -- 55,466 242,272 267,541 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 10,959 -- 10,959 15,085 24,179 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 51,627 -- 51,627 529,660 542,872 LVIP Templeton Growth Service Class (99,888) -- (99,888) 289,539 190,863 LVIP Turner Mid-Cap Growth Service Class (17,107) -- (17,107) 317,622 280,224 LVIP Wells Fargo Intrinsic Value Service Class (158,610) -- (158,610) 296,646 125,790 LVIP Wilshire 2010 Profile Service Class 11,938 -- 11,938 75,866 80,393 LVIP Wilshire 2020 Profile Service Class 3,138 -- 3,138 47,083 45,114 LVIP Wilshire 2030 Profile Service Class 26,518 -- 26,518 19,699 42,181 LVIP Wilshire 2040 Profile Service Class (5,766) -- (5,766) 18,040 10,995 LVIP Wilshire Conservative Profile Service Class 131,404 -- 131,404 586,986 929,136 LVIP Wilshire Moderate Profile Service Class (72,840) -- (72,840) 3,055,287 3,373,580 LVIP Wilshire Moderately Aggressive Profile Service Class (139,767) -- (139,767) 1,683,493 1,725,113
See accompanying notes. N-9
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ---------------------------------------------------------------------------------------------------- Lord Abbett Fundamental Equity Class VC $ 100 $ (129) $ (29) MFS VIT Core Equity Service Class 802 (1,461) (659) MFS VIT Growth Initial Class 180 (2,119) (1,939) MFS VIT Growth Service Class -- (5,272) (5,272) MFS VIT Total Return Initial Class 26,256 (12,735) 13,521 MFS VIT Total Return Service Class 381,351 (245,267) 136,084 MFS VIT Utilities Initial Class 17,627 (7,750) 9,877 MFS VIT Utilities Service Class 314,892 (171,278) 143,614 NB AMT Mid-Cap Growth I Class -- (67,272) (67,272) NB AMT Regency I Class 32,574 (77,433) (44,859) Oppenheimer Global Securities Service Class -- (257) (257) PIMCO VIT Commodity Real Return Advisor Class 80,481 (8,027) 72,454 Putnam VT Global Health Care Class IB 1,718 (1,358) 360 Putnam VT Growth & Income Class IB 800 (849) (49)
N-10
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN UNREALIZED (DECREASE) NET REALIZED NET REALIZED NET REALIZED APPRECIATION OR IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------------------------------------------------------------------------------ Lord Abbett Fundamental Equity Class VC $ 184 $ -- $ 184 $ 4,907 $ 5,062 MFS VIT Core Equity Service Class 2,405 -- 2,405 9,863 11,609 MFS VIT Growth Initial Class 9,122 -- 9,122 12,154 19,337 MFS VIT Growth Service Class 12,928 -- 12,928 34,911 42,567 MFS VIT Total Return Initial Class (17,017) -- (17,017) 73,292 69,796 MFS VIT Total Return Service Class (182,075) -- (182,075) 1,194,539 1,148,548 MFS VIT Utilities Initial Class 3,525 -- 3,525 48,727 62,129 MFS VIT Utilities Service Class (146,636) -- (146,636) 1,181,973 1,178,951 NB AMT Mid-Cap Growth I Class 160,576 -- 160,576 873,824 967,128 NB AMT Regency I Class (92,827) -- (92,827) 1,169,712 1,032,026 Oppenheimer Global Securities Service Class 409 -- 409 9,687 9,839 PIMCO VIT Commodity Real Return Advisor Class (7,006) 12,938 5,932 65,839 144,225 Putnam VT Global Health Care Class IB 1,861 -- 1,861 (474) 1,747 Putnam VT Growth & Income Class IB (345) -- (345) 6,906 6,512
See accompanying notes. N-11 LINCOLN NEW YORK ACCOUNT N FOR VARIABLE ANNUITIES STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2009 AND 2010
ABVPSF GLOBAL ABVPSF ABVPSF ABVPSF THEMATIC GROWTH INTERNATIONAL LARGE CAP GROWTH AND INCOME VALUE GROWTH CLASS B CLASS B CLASS B CLASS B SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $1,422,126 $6,545,593 $ 6,298,328 $ 802,609 Changes From Operations: - Net investment income (loss) (24,888) 123,876 (37,547) (12,213) - Net realized gain (loss) on investments (229,465) (954,027) (1,352,368) (41,953) - Net change in unrealized appreciation or depreciation on investments 859,430 1,885,399 3,421,677 289,042 ---------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 605,077 1,055,248 2,031,762 234,876 Changes From Unit Transactions: Accumulation Units: - Contract purchases 110,644 134,891 458,915 9,582 - Contract withdrawals and transfers to annuity reserves (246,590) (521,918) (321,295) (158,161) - Contract transfers (156,347) (426,929) (444,269) (18,605) ---------- ---------- ----------- --------- (292,293) (813,956) (306,649) (167,184) Annuity Reserves: - Annuity Payments -- (300) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 21 -- -- ---------- ---------- ----------- --------- -- (279) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (292,293) (814,235) (306,649) (167,184) ---------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 312,784 241,013 1,725,113 67,692 ---------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2009 1,734,910 6,786,606 8,023,441 870,301 Changes From Operations: - Net investment income (loss) 6,709 (110,419) 84,989 (9,592) - Net realized gain (loss) on investments (11,401) (458,766) (737,950) 6,059 - Net change in unrealized appreciation or depreciation on investments 225,894 1,298,774 884,858 60,645 ---------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 221,202 729,589 231,897 57,112 Changes From Unit Transactions: Accumulation Units: - Contract purchases 133,624 320,254 594,591 91 - Contract withdrawals and transfers to annuity reserves (337,621) (769,551) (535,035) (186,009) - Contract transfers (53,938) 206,381 (51,169) 17,137 ---------- ---------- ----------- --------- (257,935) (242,916) 8,387 (168,781) Annuity Reserves: - Transfer from accumulation units -- 10,249 -- -- - Annuity Payments -- (410) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 29 -- -- ---------- ---------- ----------- --------- -- 9,868 -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (257,935) (233,048) 8,387 (168,781) ---------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (36,733) 496,541 240,284 (111,669) ---------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2010 $1,698,177 $7,283,147 $ 8,263,725 $ 758,632 ========== ========== =========== =========
N-12
AMERICAN AMERICAN ABVPSF CENTURY VP FUNDS AMERICAN SMALL/MID CAP INFLATION AMERICAN FUNDS GLOBAL SMALL FUNDS VALUE PROTECTION GLOBAL GROWTH CAPITALIZATION GROWTH CLASS B CLASS II CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $3,564,791 $16,622,077 $11,336,240 $ 7,813,603 $65,510,396 Changes From Operations: - Net investment income (loss) (41,265) 21,286 (30,159) (141,392) (751,650) - Net realized gain (loss) on investments (103,277) (94,955) (750,046) (1,182,554) (5,334,396) - Net change in unrealized appreciation or depreciation on investments 1,843,799 1,393,615 5,184,204 6,067,568 30,149,481 ---------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,699,257 1,319,946 4,403,999 4,743,622 24,063,435 Changes From Unit Transactions: Accumulation Units: - Contract purchases 431,182 1,408,406 531,550 617,453 2,999,426 - Contract withdrawals and transfers to annuity reserves (219,767) (2,104,242) (540,030) (649,569) (4,791,257) - Contract transfers 965,939 5,350,772 115,976 1,511,159 (3,209,210) ---------- ----------- ----------- ----------- ----------- 1,177,354 4,654,936 107,496 1,479,043 (5,001,041) Annuity Reserves: - Annuity Payments -- (3,612) -- -- (1,468) - Receipt (reimbursement) of mortality guarantee adjustments -- 188 -- -- 57 ---------- ----------- ----------- ----------- ----------- -- (3,424) -- -- (1,411) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,177,354 4,651,512 107,496 1,479,043 (5,002,452) ---------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,876,611 5,971,458 4,511,495 6,222,665 19,060,983 ---------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 6,441,402 22,593,535 15,847,735 14,036,268 84,571,379 Changes From Operations: - Net investment income (loss) (97,686) (1,067) (30,910) 1,430 (783,888) - Net realized gain (loss) on investments 89,211 301,623 (105,957) (243,991) (2,213,335) - Net change in unrealized appreciation or depreciation on investments 1,598,448 308,918 1,721,099 2,885,395 16,257,656 ---------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,589,973 609,474 1,584,232 2,642,834 13,260,433 Changes From Unit Transactions: Accumulation Units: - Contract purchases 329,833 3,542,400 857,305 1,129,785 4,926,673 - Contract withdrawals and transfers to annuity reserves (448,338) (2,053,570) (904,331) (1,009,270) (6,908,989) - Contract transfers 1,090,197 (339,671) 158,537 (303,837) (2,606,372) ---------- ----------- ----------- ----------- ----------- 971,692 1,149,159 111,511 (183,322) (4,588,688) Annuity Reserves: - Transfer from accumulation units -- -- -- -- 10,249 - Annuity Payments -- (3,703) -- -- (1,849) - Receipt (reimbursement) of mortality guarantee adjustments -- 292 -- -- 102 ---------- ----------- ----------- ----------- ----------- -- (3,411) -- -- 8,502 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 971,692 1,145,748 111,511 (183,322) (4,580,186) ---------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,561,665 1,755,222 1,695,743 2,459,512 8,680,247 ---------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $9,003,067 $24,348,757 $17,543,478 $16,495,780 $93,251,626 ========== =========== =========== =========== =========== AMERICAN DELAWARE FUNDS AMERICAN BLACKROCK VIP GROWTH- FUNDS GLOBAL DIVERSIFIED INCOME INTERNATIONAL ALLOCATION V.I. INCOME CLASS 2 CLASS 2 CLASS III SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $65,081,606 $32,607,236 $ -- $19,410,248 Changes From Operations: - Net investment income (loss) (63,497) (36,961) 14,415 900,908 - Net realized gain (loss) on investments (4,687,592) (1,860,736) 4,166 126,053 - Net change in unrealized appreciation or depreciation on investments 23,033,418 14,528,917 29,862 4,063,317 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 18,282,329 12,631,220 48,443 5,090,278 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,505,985 1,219,558 804,323 2,235,974 - Contract withdrawals and transfers to annuity reserves (4,758,236) (2,395,777) (5,817) (1,557,786) - Contract transfers (4,200,427) (973,200) 1,081,926 5,194,740 ----------- ----------- ----------- ----------- (6,452,678) (2,149,419) 1,880,432 5,872,928 Annuity Reserves: - Annuity Payments (1,426) (1,352) -- (2,957) - Receipt (reimbursement) of mortality guarantee adjustments 44 91 -- 164 ----------- ----------- ----------- ----------- (1,382) (1,261) -- (2,793) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (6,454,060) (2,150,680) 1,880,432 5,870,135 ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 11,828,269 10,480,540 1,928,875 10,960,413 ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 76,909,875 43,087,776 1,928,875 30,370,661 Changes From Operations: - Net investment income (loss) (84,258) 166,420 27,699 916,960 - Net realized gain (loss) on investments (2,152,064) (598,607) 119,480 1,052,812 - Net change in unrealized appreciation or depreciation on investments 9,395,908 2,751,183 682,755 191,465 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,159,586 2,318,996 829,934 2,161,237 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,555,058 3,085,709 7,167,060 7,732,978 - Contract withdrawals and transfers to annuity reserves (6,671,069) (3,349,701) (403,094) (4,077,226) - Contract transfers 2,608,218 (1,077,499) 4,283,334 8,219,962 ----------- ----------- ----------- ----------- (507,793) (1,341,491) 11,047,300 11,875,714 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments (1,610) (1,597) -- (3,308) - Receipt (reimbursement) of mortality guarantee adjustments 89 132 -- 260 ----------- ----------- ----------- ----------- (1,521) (1,465) -- (3,048) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (509,314) (1,342,956) 11,047,300 11,872,666 ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 6,650,272 976,040 11,877,234 14,033,903 ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $83,560,147 $44,063,816 $13,806,109 $44,404,564 =========== =========== =========== ===========
See accompanying notes. N-13
DELAWARE DELAWARE VIP VIP DELAWARE DELAWARE LIMITED-TERM EMERGING VIP VIP DIVERSIFIED MARKETS HIGH YIELD HIGH YIELD INCOME SERVICE CLASS STANDARD CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ 8,985,568 $ 628,708 $ 8,670,568 $ 1,854,976 Changes From Operations: - Net investment income (loss) (86,988) 42,963 649,877 66,625 - Net realized gain (loss) on investments (550,482) (20,731) (363,546) 40,414 - Net change in unrealized appreciation or depreciation on investments 7,122,221 231,460 4,080,994 241,039 ----------- --------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,484,751 253,692 4,367,325 348,078 Changes From Unit Transactions: Accumulation Units: - Contract purchases 516,601 9,422 752,253 1,686,446 - Contract withdrawals and transfers to annuity reserves (788,435) (216,721) (1,022,770) (350,495) - Contract transfers (484,354) (15,601) 1,261,706 2,419,640 ----------- --------- ----------- ----------- (756,188) (222,900) 991,189 3,755,591 Annuity Reserves: - Annuity Payments (808) (281) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 52 22 -- -- ----------- --------- ----------- ----------- (756) (259) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (756,944) (223,159) 991,189 3,755,591 ----------- --------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,727,807 30,533 5,358,514 4,103,669 ----------- --------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 14,713,375 659,241 14,029,082 5,958,645 Changes From Operations: - Net investment income (loss) (160,078) 42,640 859,281 42,930 - Net realized gain (loss) on investments 131,757 15,412 235,024 178,267 - Net change in unrealized appreciation or depreciation on investments 2,446,725 27,817 707,240 (26,579) ----------- --------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,418,404 85,869 1,801,545 194,618 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,153,503 73 1,683,756 5,692,793 - Contract withdrawals and transfers to annuity reserves (971,983) (78,305) (1,608,313) (850,407) - Contract transfers (714,824) (15,018) 487,954 2,160,837 ----------- --------- ----------- ----------- 466,696 (93,250) 563,397 7,003,223 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments (1,031) (380) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 87 33 -- -- ----------- --------- ----------- ----------- (944) (347) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 465,752 (93,597) 563,397 7,003,223 ----------- --------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,884,156 (7,728) 2,364,942 7,197,841 ----------- --------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $17,597,531 $ 651,513 $16,394,024 $13,156,486 =========== ========= =========== ===========
N-14
DELAWARE VIP DELAWARE VIP DELAWARE VIP DELAWARE DELAWARE SMALL CAP SMALL CAP SMID CAP VIP REIT VIP REIT VALUE VALUE GROWTH STANDARD CLASS SERVICE CLASS STANDARD CLASS SERVICE CLASS STANDARD CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 756,320 $ 8,055,493 $ 880,274 $11,838,703 $ -- Changes From Operations: - Net investment income (loss) 22,725 198,478 (3,487) (126,473) -- - Net realized gain (loss) on investments (144,682) (2,450,016) (42,546) (941,150) -- - Net change in unrealized appreciation or depreciation on investments 261,418 3,837,716 275,519 4,419,825 -- --------- ----------- --------- ----------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 139,461 1,586,178 229,486 3,352,202 -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,010 169,833 312 263,216 -- - Contract withdrawals and transfers to annuity reserves (43,029) (667,755) (98,746) (637,065) -- - Contract transfers (57,965) (355,590) (75,246) (289,588) -- --------- ----------- --------- ----------- -------- (96,984) (853,512) (173,680) (663,437) -- Annuity Reserves: - Annuity Payments -- -- (1,471) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- 19 -- -- --------- ----------- --------- ----------- -------- -- -- (1,452) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (96,984) (853,512) (175,132) (663,437) -- --------- ----------- --------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 42,477 732,666 54,354 2,688,765 -- --------- ----------- --------- ----------- -------- NET ASSETS AT DECEMBER 31, 2009 798,797 8,788,159 934,628 14,527,468 -- Changes From Operations: - Net investment income (loss) 10,965 98,881 (6,868) (189,661) (1,524) - Net realized gain (loss) on investments (99,064) (1,883,863) 37,714 (96,449) 1,518 - Net change in unrealized appreciation or depreciation on investments 266,862 3,839,312 201,732 4,403,182 58,782 --------- ----------- --------- ----------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 178,763 2,054,330 232,578 4,117,072 58,776 Changes From Unit Transactions: Accumulation Units: - Contract purchases 84 829,710 2,234 1,474,002 -- - Contract withdrawals and transfers to annuity reserves (116,857) (1,179,870) (209,620) (1,214,527) (20,570) - Contract transfers (70,367) (161,756) (61,853) (801,895) 442,965 --------- ----------- --------- ----------- -------- (187,140) (511,916) (269,239) (542,420) 422,395 Annuity Reserves: - Transfer from accumulation units -- 10,249 -- -- -- - Annuity Payments -- (59) (1,355) -- 4,335 - Receipt (reimbursement) of mortality guarantee adjustments -- -- 32 -- 28 --------- ----------- --------- ----------- -------- -- 10,190 (1,323) -- 4,363 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (187,140) (501,726) (270,562) (542,420) 426,758 --------- ----------- --------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (8,377) 1,552,604 (37,984) 3,574,652 485,534 --------- ----------- --------- ----------- -------- NET ASSETS AT DECEMBER 31, 2010 $ 790,420 $10,340,763 $ 896,644 $18,102,120 $485,534 ========= =========== ========= =========== ======== DELAWARE VIP SMID CAP DELAWARE DELAWARE DELAWARE VIP GROWTH VIP TREND VIP TREND U.S. GROWTH SERVICE CLASS STANDARD CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ -- $ 401,917 $ 2,895,182 $1,437,444 Changes From Operations: - Net investment income (loss) -- (5,964) (54,094) (25,035) - Net realized gain (loss) on investments -- (46,771) (332,900) (66,588) - Net change in unrealized appreciation or depreciation on investments -- 232,740 1,800,688 650,994 ---------- --------- --------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 180,005 1,413,694 559,371 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- 28,888 147,075 - Contract withdrawals and transfers to annuity reserves -- (64,024) (271,485) (83,764) - Contract transfers -- (24,858) (77,046) (104,618) ---------- --------- ----------- ---------- -- (88,882) (319,643) (41,307) Annuity Reserves: - Annuity Payments -- (189) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 17 -- -- ---------- --------- ----------- ---------- -- (172) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- (89,054) (319,643) (41,307) ---------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- 90,951 1,094,051 518,064 ---------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2009 -- 492,868 3,989,233 1,955,508 Changes From Operations: - Net investment income (loss) (22,019) (4,701) (54,870) (29,780) - Net realized gain (loss) on investments 31,075 76,097 493,714 23,982 - Net change in unrealized appreciation or depreciation on investments 687,849 5,781 330,506 247,047 ---------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 696,905 77,177 769,350 241,249 Changes From Unit Transactions: Accumulation Units: - Contract purchases 25,888 600 149,226 324,708 - Contract withdrawals and transfers to annuity reserves (114,303) (144,333) (388,390) (277,007) - Contract transfers 5,815,944 (421,688) (4,519,419) 200,922 ---------- --------- ----------- ---------- 5,727,529 (565,421) (4,758,583) 248,623 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- (4,624) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- --------- ----------- ---------- -- (4,624) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 5,727,529 (570,045) (4,758,583) 248,623 ---------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 6,424,434 (492,868) (3,989,233) 489,872 ---------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2010 $6,424,434 $ -- $ -- $2,445,380 ========== ========= =========== ==========
See accompanying notes. N-15
DWS VIP DWS VIP DELAWARE DELAWARE ALTERNATIVE EQUITY 500 VIP VALUE VIP VALUE ASSET ALLOCATION INDEX STANDARD CLASS SERVICE CLASS PLUS CLASS B CLASS A SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ 316,031 $6,481,523 $ -- $2,872,840 Changes From Operations: - Net investment income (loss) 3,466 79,543 (158) 37,418 - Net realized gain (loss) on investments (66,986) (827,397) 22 (113,485) - Net change in unrealized appreciation or depreciation on investments 98,081 1,653,162 1,416 685,839 --------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 34,561 905,308 1,280 609,772 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 257,803 25,055 6,699 - Contract withdrawals and transfers to annuity reserves (61,618) (482,509) (10,302) (395,491) - Contract transfers (25,255) (206,449) 33,737 (120,567) --------- ---------- ---------- ---------- (86,873) (431,155) 48,490 (509,359) Annuity Reserves: - Annuity Payments -- -- -- (73,538) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- (29) --------- ---------- ---------- ---------- -- -- -- (73,567) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (86,873) (431,155) 48,490 (582,926) --------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (52,312) 474,153 49,770 26,846 --------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2009 263,719 6,955,676 49,770 2,899,686 Changes From Operations: - Net investment income (loss) 3,100 38,098 (9,811) 10,990 - Net realized gain (loss) on investments (9,456) (311,966) 9,897 12,151 - Net change in unrealized appreciation or depreciation on investments 29,693 1,165,316 133,338 254,098 --------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 23,337 891,448 133,424 277,239 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 248,907 422,456 31,742 - Contract withdrawals and transfers to annuity reserves (50,655) (659,044) (28,596) (479,316) - Contract transfers (51,818) 165,384 3,262,445 (301,925) --------- ---------- ---------- ---------- (102,473) (244,753) 3,656,305 (749,499) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- (85,768) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- 16 --------- ---------- ---------- ---------- -- -- -- (85,752) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (102,473) (244,753) 3,656,305 (835,251) --------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (79,136) 646,695 3,789,729 (558,012) --------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2010 $ 184,583 $7,602,371 $3,839,499 $2,341,674 ========= ========== ========== ==========
N-16
DWS VIP DWS VIP DWS VIP FIDELITY VIP FIDELITY VIP EQUITY 500 SMALL CAP SMALL CAP CONTRAFUND EQUITY-INCOME INDEX INDEX INDEX SERVICE INITIAL CLASS B CLASS A CLASS B CLASS 2 CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $3,199,057 $ 674,464 $1,833,481 $26,189,519 $ 667,683 Changes From Operations: - Net investment income (loss) 34,395 2,123 (1,412) (134,989) 5,016 - Net realized gain (loss) on investments (165,350) (24,636) (135,778) (2,951,440) (112,701) - Net change in unrealized appreciation or depreciation on investments 852,327 164,575 544,162 11,546,033 258,402 ---------- --------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 721,372 142,062 406,972 8,459,604 150,717 Changes From Unit Transactions: Accumulation Units: - Contract purchases 54,898 8 6,282 1,179,672 9,799 - Contract withdrawals and transfers to annuity reserves (270,842) (96,367) (80,183) (1,450,055) (133,469) - Contract transfers (341,827) (56,329) (297,883) (142,139) (33,332) ---------- --------- ---------- ----------- --------- (557,771) (152,688) (371,784) (412,522) (157,002) Annuity Reserves: - Annuity Payments (588) -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 34 -- -- -- -- ---------- --------- ---------- ----------- --------- (554) -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (558,325) (152,688) (371,784) (412,522) (157,002) ---------- --------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 163,047 (10,626) 35,188 8,047,082 (6,285) ---------- --------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2009 3,362,104 663,838 1,868,669 34,236,601 661,398 Changes From Operations: - Net investment income (loss) 3,192 (3,690) (20,167) (220,036) 1,444 - Net realized gain (loss) on investments (70,247) (56,283) (133,711) (1,422,555) (46,676) - Net change in unrealized appreciation or depreciation on investments 417,466 175,845 564,874 6,859,728 119,383 ---------- --------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 350,411 115,872 410,996 5,217,137 74,151 Changes From Unit Transactions: Accumulation Units: - Contract purchases 20,675 100 43,164 3,609,748 57 - Contract withdrawals and transfers to annuity reserves (437,638) (192,681) (234,132) (2,516,532) (106,634) - Contract transfers (208,095) 5,177 (141,708) (306,953) (39,027) ---------- --------- ---------- ----------- --------- (625,058) (187,404) (332,676) 786,263 (145,604) Annuity Reserves: - Transfer from accumulation units -- -- -- 10,249 -- - Annuity Payments (675) -- -- (59) -- - Receipt (reimbursement) of mortality guarantee adjustments 55 -- -- -- -- ---------- --------- ---------- ----------- --------- (620) -- -- 10,190 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (625,678) (187,404) (332,676) 796,453 (145,604) ---------- --------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (275,267) (71,532) 78,320 6,013,590 (71,453) ---------- --------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2010 $3,086,837 $ 592,306 $1,946,989 $40,250,191 $ 589,945 ========== ========= ========== =========== ========= FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP EQUITY-INCOME GROWTH GROWTH MID CAP SERVICE INITIAL SERVICE SERVICE CLASS 2 CLASS CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $2,067,281 $193,967 $2,237,876 $11,957,576 Changes From Operations: - Net investment income (loss) 8,502 (1,923) (30,583) (166,657) - Net realized gain (loss) on investments (355,397) (8,318) (233,064) (1,219,237) - Net change in unrealized appreciation or depreciation on investments 844,827 58,692 774,626 5,868,582 ---------- -------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 497,932 48,451 510,979 4,482,688 Changes From Unit Transactions: Accumulation Units: - Contract purchases 33,175 3,000 18,468 827,531 - Contract withdrawals and transfers to annuity reserves (202,744) (21,879) (174,140) (788,041) - Contract transfers (203,138) -- (130,892) 1,140,833 ---------- -------- ---------- ----------- (372,707) (18,879) (286,564) 1,180,323 Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- -------- ---------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (372,707) (18,879) (286,564) 1,180,323 ---------- -------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 125,225 29,572 224,415 5,663,011 ---------- -------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 2,192,506 223,539 2,462,291 17,620,587 Changes From Operations: - Net investment income (loss) (600) (2,331) (42,592) (296,091) - Net realized gain (loss) on investments (126,262) (1,749) (42,348) (104,935) - Net change in unrealized appreciation or depreciation on investments 378,489 47,345 615,808 4,994,722 ---------- -------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 251,627 43,265 530,868 4,593,696 Changes From Unit Transactions: Accumulation Units: - Contract purchases 17,173 -- 295,912 2,783,532 - Contract withdrawals and transfers to annuity reserves (205,006) (49,106) (369,714) (1,372,828) - Contract transfers (212,954) (372) 170,585 (1,339,436) ---------- -------- ---------- ----------- (400,787) (49,478) 96,783 71,268 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- -------- ---------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (400,787) (49,478) 96,783 71,268 ---------- -------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (149,160) (6,213) 627,651 4,664,964 ---------- -------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $2,043,346 $217,326 $3,089,942 $22,285,551 ========== ======== ========== ===========
See accompanying notes. N-17
FTVIPT FTVIPT FRANKLIN FIDELITY VIP FIDELITY VIP FRANKLIN SMALL-MID CAP OVERSEAS OVERSEAS INCOME GROWTH INITIAL SERVICE SECURITIES SECURITIES CLASS CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $118,640 $3,816,208 $16,199,724 $5,415,804 Changes From Operations: - Net investment income (loss) 503 12,998 1,223,904 (108,611) - Net realized gain (loss) on investments (11,186) (309,077) (1,129,841) (425,443) - Net change in unrealized appreciation or depreciation on investments 29,669 1,180,039 5,534,470 2,796,528 -------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 18,986 883,960 5,628,533 2,262,474 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 84,310 1,897,630 260,514 - Contract withdrawals and transfers to annuity reserves (9,411) (228,819) (995,756) (386,674) - Contract transfers (29,096) (205,260) (372,841) 424,185 -------- ---------- ----------- ---------- (38,507) (349,769) 529,033 298,025 Annuity Reserves: - Annuity Payments -- -- -- (1,061) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ---------- ----------- ---------- -- -- -- (1,061) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (38,507) (349,769) 529,033 296,964 -------- ---------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (19,521) 534,191 6,157,566 2,559,438 -------- ---------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2009 99,119 4,350,399 22,357,290 7,975,242 Changes From Operations: - Net investment income (loss) (11) (17,787) 1,143,010 (137,501) - Net realized gain (loss) on investments (1,061) (218,741) (575,418) (77,993) - Net change in unrealized appreciation or depreciation on investments 10,600 654,614 1,794,502 2,135,567 -------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 9,528 418,086 2,362,094 1,920,073 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,022 210,884 2,223,771 324,348 - Contract withdrawals and transfers to annuity reserves (9,665) (429,918) (1,315,402) (608,894) - Contract transfers 125 (392,917) 187,510 (309,548) -------- ---------- ----------- ---------- (7,518) (611,951) 1,095,879 (594,094) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- (853) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ---------- ----------- ---------- -- -- -- (853) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (7,518) (611,951) 1,095,879 (594,947) -------- ---------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,010 (193,865) 3,457,973 1,325,126 -------- ---------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2010 $101,129 $4,156,534 $25,815,263 $9,300,368 ======== ========== =========== ==========
N-18
GOLDMAN FTVIPT FTVIPT FTVIPT SACHS VIT MUTUAL TEMPLETON TEMPLETON LARGE CAP INVESCO V.I. SHARES GLOBAL BOND GROWTH VALUE CAPITAL SECURITIES SECURITIES SECURITIES SERVICE APPRECIATION CLASS 2 CLASS 2 CLASS 2 CLASS SERIES I SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $10,807,864 $13,020,428 $5,040,454 $ -- $181,176 Changes From Operations: - Net investment income (loss) 38,485 1,940,958 77,317 1,271 (1,476) - Net realized gain (loss) on investments (769,281) 117,257 (585,864) 393 (21,763) - Net change in unrealized appreciation or depreciation on investments 3,455,495 312,385 1,804,892 2,947 51,247 ----------- ----------- ---------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,724,699 2,370,600 1,296,345 4,611 28,008 Changes From Unit Transactions: Accumulation Units: - Contract purchases 868,735 1,144,870 32,205 90,349 5,951 - Contract withdrawals and transfers to annuity reserves (488,927) (684,837) (268,634) (260) (4,042) - Contract transfers 751,124 848,701 (576,488) 24,335 (31,407) ----------- ----------- ---------- -------- -------- 1,130,932 1,308,734 (812,917) 114,424 (29,498) Annuity Reserves: - Annuity Payments -- -- (1,076) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ----------- ----------- ---------- -------- -------- -- -- (1,076) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,130,932 1,308,734 (813,993) 114,424 (29,498) ----------- ----------- ---------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 3,855,631 3,679,334 482,352 119,035 (1,490) ----------- ----------- ---------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 14,663,495 16,699,762 5,522,806 119,035 179,686 Changes From Operations: - Net investment income (loss) 2,192 (43,994) (14,430) 1,126 (1,319) - Net realized gain (loss) on investments (403,305) 475,641 (289,721) 2,305 (17,136) - Net change in unrealized appreciation or depreciation on investments 1,896,734 1,528,601 570,801 63,342 40,856 ----------- ----------- ---------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,495,621 1,960,248 266,650 66,773 22,401 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,650,684 246,322 20,664 372,798 41,525 - Contract withdrawals and transfers to annuity reserves (843,931) (1,298,787) (420,327) (14,967) (48,921) - Contract transfers 82,132 (527,440) (286,964) 313,692 (17,055) ----------- ----------- ---------- -------- -------- 1,888,885 (1,579,905) (686,627) 671,523 (24,451) Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- -- (797) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ----------- ----------- ---------- -------- -------- -- -- (797) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,888,885 (1,579,905) (687,424) 671,523 (24,451) ----------- ----------- ---------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 3,384,506 380,343 (420,774) 738,296 (2,050) ----------- ----------- ---------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $18,048,001 $17,080,105 $5,102,032 $857,331 $177,636 =========== =========== ========== ======== ======== INVESCO V.I. INVESCO V.I. CAPITAL INVESCO V.I. INVESCO V.I. INTERNATIONAL APPRECIATION CORE EQUITY CORE EQUITY GROWTH SERIES II SERIES I SERIES II SERIES I SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 80,198 $ 560,729 $ 36,379 $178,491 Changes From Operations: - Net investment income (loss) (968) 1,286 (122) (245) - Net realized gain (loss) on investments (5,090) (40,330) (5,129) 12,104 - Net change in unrealized appreciation or depreciation on investments 19,542 151,404 10,266 15,010 -------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 13,484 112,360 5,015 26,869 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7 14,714 1,500 -- - Contract withdrawals and transfers to annuity reserves (7,435) (99,581) (8,959) (27,033) - Contract transfers -- (54,321) (17,452) (63,821) -------- --------- -------- -------- (7,428) (139,188) (24,911) (90,854) Annuity Reserves: - Annuity Payments -- (437) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- (8) -- -- -------- --------- -------- -------- -- (445) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (7,428) (139,633) (24,911) (90,854) -------- --------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 6,056 (27,273) (19,896) (63,985) -------- --------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 86,254 533,456 16,483 114,506 Changes From Operations: - Net investment income (loss) (825) (2,327) (149) 1,041 - Net realized gain (loss) on investments (5,703) 1,371 (686) 2,091 - Net change in unrealized appreciation or depreciation on investments 16,650 33,621 817 9,269 -------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 10,122 32,665 (18) 12,401 Changes From Unit Transactions: Accumulation Units: - Contract purchases 30 -- 1,498 -- - Contract withdrawals and transfers to annuity reserves (26,922) (145,172) (6) (4,407) - Contract transfers -- (474) (8,727) 223 -------- --------- -------- -------- (26,892) (145,646) (7,235) (4,184) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- (487) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 4 -- -- -------- --------- -------- -------- -- (483) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (26,892) (146,129) (7,235) (4,184) -------- --------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (16,770) (113,464) (7,253) 8,217 -------- --------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $ 69,484 $ 419,992 $ 9,230 $122,723 ======== ========= ======== ========
See accompanying notes. N-19
INVESCO V.I. JANUS JANUS JANUS INTERNATIONAL ASPEN SERIES ASPEN SERIES ASPEN SERIES GROWTH BALANCED SERVICE ENTERPRISE WORLDWIDE SERIES II CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $171,182 $ 924,265 $ 592,797 $16,488 Changes From Operations: - Net investment income (loss) (225) 7,011 (10,270) (45) - Net realized gain (loss) on investments (5,084) (2,654) (5,364) (1,284) - Net change in unrealized appreciation or depreciation on investments 53,481 126,016 251,936 5,861 -------- --------- --------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 48,172 130,373 236,302 4,532 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 4,576 5 -- - Contract withdrawals and transfers to annuity reserves (853) (161,581) (35,483) (3,827) - Contract transfers (12,874) (154,865) (28,328) 14 -------- --------- --------- ------- (13,727) (311,870) (63,806) (3,813) Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- --------- --------- ------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (13,727) (311,870) (63,806) (3,813) -------- --------- --------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS 34,445 (181,497) 172,496 719 -------- --------- --------- ------- NET ASSETS AT DECEMBER 31, 2009 205,627 742,768 765,293 17,207 Changes From Operations: - Net investment income (loss) 541 6,238 (10,696) (195) - Net realized gain (loss) on investments 3,164 15,224 55,466 400 - Net change in unrealized appreciation or depreciation on investments 17,620 18,546 97,522 2,571 -------- --------- --------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,325 40,008 142,292 2,776 Changes From Unit Transactions: Accumulation Units: - Contract purchases 13 2,017 66 -- - Contract withdrawals and transfers to annuity reserves (8,317) (71,420) (104,728) (5,072) - Contract transfers 1,215 (59,751) (139,393) 5,393 -------- --------- --------- ------- (7,089) (129,154) (244,055) 321 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- --------- --------- ------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (7,089) (129,154) (244,055) 321 -------- --------- --------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS 14,236 (89,146) (101,763) 3,097 -------- --------- --------- ------- NET ASSETS AT DECEMBER 31, 2010 $219,863 $ 653,622 $ 663,530 $20,304 ======== ========= ========= =======
N-20
LVIP LVIP LVIP AMERICAN AMERICAN LVIP AMERICAN GLOBAL GLOBAL SMALL AMERICAN GROWTH- GROWTH CAPITALIZATION GROWTH INCOME SERVICE CLASS II SERVICE CLASS II SERVICE CLASS II SERVICE CLASS II SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) -- -- -- -- - Net realized gain (loss) on investments -- -- -- -- - Net change in unrealized appreciation or depreciation on investments -- -- -- -- -------- ------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- -- -- - Contract withdrawals and transfers to annuity reserves -- -- -- -- - Contract transfers -- -- -- -- -------- ------- -------- -------- -- -- -- -- Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ------- -------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- -- -- -- -------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- -- -- -------- ------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 -- -- -- -- Changes From Operations: - Net investment income (loss) (91) (57) (368) (184) - Net realized gain (loss) on investments 2 1 7 2 - Net change in unrealized appreciation or depreciation on investments 2,884 2,200 10,015 3,318 -------- ------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,795 2,144 9,654 3,136 Changes From Unit Transactions: Accumulation Units: - Contract purchases 126,424 72,377 387,285 368,300 - Contract withdrawals and transfers to annuity reserves -- (15) (108) (1) - Contract transfers 46 1,045 1,167 -- -------- ------- -------- -------- 126,470 73,407 388,344 368,299 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ------- -------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 126,470 73,407 388,344 368,299 -------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 129,265 75,551 397,998 371,435 -------- ------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $129,265 $75,551 $397,998 $371,435 ======== ======= ======== ======== LVIP LVIP LVIP LVIP BARON BLACKROCK COHEN & AMERICAN GROWTH INFLATION LVIP STEERS GLOBAL INTERNATIONAL OPPORTUNITIES PROTECTED BOND CAPITAL GROWTH REAL ESTATE SERVICE CLASS II SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ -- $3,672,296 $ -- $ 558,156 $2,289,889 Changes From Operations: - Net investment income (loss) -- (71,178) -- (9,543) (46,809) - Net realized gain (loss) on investments -- (379,336) -- (71,567) (288,885) - Net change in unrealized appreciation or depreciation on investments -- 1,758,334 -- 266,740 1,333,093 -------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 1,307,820 -- 185,630 997,399 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 312,832 -- 217,229 262,333 - Contract withdrawals and transfers to annuity reserves -- (237,010) -- (52,570) (121,840) - Contract transfers -- 173,121 -- (21,811) 665,239 -------- ---------- ---------- ---------- ---------- -- 248,943 -- 142,848 805,732 Annuity Reserves: - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- -------- ---------- ---------- ---------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- 248,943 -- 142,848 805,732 -------- ---------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- 1,556,763 -- 328,478 1,803,131 -------- ---------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2009 -- 5,229,059 -- 886,634 4,093,020 Changes From Operations: - Net investment income (loss) (55) (97,874) 6,002 (16,207) (73,173) - Net realized gain (loss) on investments -- (46,244) (27) 4,430 10,566 - Net change in unrealized appreciation or depreciation on investments 1,374 1,497,547 (25,197) 253,970 728,379 -------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,319 1,353,429 (19,222) 242,193 665,772 Changes From Unit Transactions: Accumulation Units: - Contract purchases 130,713 796,580 269,916 393,682 660,135 - Contract withdrawals and transfers to annuity reserves -- (318,391) (1,342) (62,495) (289,621) - Contract transfers 46 261,102 906,727 299,050 208,413 -------- ---------- ---------- ---------- ---------- 130,759 739,291 1,175,301 630,237 578,927 Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- -------- ---------- ---------- ---------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 130,759 739,291 1,175,301 630,237 578,927 -------- ---------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 132,078 2,092,720 1,156,079 872,430 1,244,699 -------- ---------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2010 $132,078 $7,321,779 $1,156,079 $1,759,064 $5,337,719 ======== ========== ========== ========== ==========
See accompanying notes. N-21
LVIP LVIP LVIP DELAWARE COLUMBIA DELAWARE LVIP DIVERSIFIED VALUE BOND DELAWARE FLOATING OPPORTUNITIES STANDARD BOND RATE SERVICE CLASS CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 340,393 $14,987,636 $31,297,680 $ -- Changes From Operations: - Net investment income (loss) (4,696) 361,814 1,033,451 -- - Net realized gain (loss) on investments (107,441) (31,331) (17,384) -- - Net change in unrealized appreciation or depreciation on investments 186,475 1,991,585 4,160,429 -- --------- ----------- ----------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 74,338 2,322,068 5,176,496 -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 81,535 144,184 2,874,720 -- - Contract withdrawals and transfers to annuity reserves (13,813) (2,607,477) (2,231,854) -- - Contract transfers (50,968) (705,363) 6,764,726 -- --------- ----------- ----------- -------- 16,754 (3,168,656) 7,407,592 -- Annuity Reserves: - Annuity Payments -- (738) (1,502) -- - Receipt (reimbursement) of mortality guarantee adjustments -- 49 81 -- --------- ----------- ----------- -------- -- (689) (1,421) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 16,754 (3,169,345) 7,406,171 -- --------- ----------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 91,092 (847,277) 12,582,667 -- --------- ----------- ----------- -------- NET ASSETS AT DECEMBER 31, 2009 431,485 14,140,359 43,880,347 -- Changes From Operations: - Net investment income (loss) (10,246) 222,810 662,159 1,414 - Net realized gain (loss) on investments (14,712) 579,730 2,525,800 (2) - Net change in unrealized appreciation or depreciation on investments 158,702 147,427 (97,685) (1,482) --------- ----------- ----------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 133,744 949,967 3,090,274 (70) Changes From Unit Transactions: Accumulation Units: - Contract purchases 133,519 98,889 8,551,569 84,677 - Contract withdrawals and transfers to annuity reserves (28,480) (2,403,062) (4,665,808) (1,129) - Contract transfers 120,359 (256,835) (3,988,764) 714,784 --------- ----------- ----------- -------- 225,398 (2,561,008) (103,003) 798,332 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- (821) (1,630) -- - Receipt (reimbursement) of mortality guarantee adjustments -- 69 128 -- --------- ----------- ----------- -------- -- (752) (1,502) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 225,398 (2,561,760) (104,505) 798,332 --------- ----------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 359,142 (1,611,793) 2,985,769 798,262 --------- ----------- ----------- -------- NET ASSETS AT DECEMBER 31, 2010 $ 790,627 $12,528,566 $46,866,116 $798,262 ========= =========== =========== ========
N-22
LVIP LVIP DELAWARE DELAWARE LVIP LVIP FOUNDATION FOUNDATION DELAWARE DELAWARE AGGRESSIVE AGGRESSIVE GROWTH SOCIAL ALLOCATION ALLOCATION AND INCOME AWARENESS STANDARD CLASS SERVICE CLASS SERVICE CLASS STANDARD CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 395,662 $2,777,935 $ 699,617 $ 737,175 Changes From Operations: - Net investment income (loss) 588 (5,712) (5,243) (6,392) - Net realized gain (loss) on investments (33,625) (242,231) (23,544) 27,193 - Net change in unrealized appreciation or depreciation on investments 139,500 1,034,430 215,064 179,593 --------- ---------- ---------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 106,463 786,487 186,277 200,394 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 65,912 64,287 6,053 - Contract withdrawals and transfers to annuity reserves (51,462) (112,172) (57,885) (63,568) - Contract transfers (12,077) (92,247) 285,792 8,397 --------- ---------- ---------- --------- (63,539) (138,507) 292,194 (49,118) Annuity Reserves: - Annuity Payments -- -- -- (740) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- (13) --------- ---------- ---------- --------- -- -- -- (753) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (63,539) (138,507) 292,194 (49,871) --------- ---------- ---------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 42,924 647,980 478,471 150,523 --------- ---------- ---------- --------- NET ASSETS AT DECEMBER 31, 2009 438,586 3,425,915 1,178,088 887,698 Changes From Operations: - Net investment income (loss) 3,950 27,286 (11,567) (7,435) - Net realized gain (loss) on investments (22,650) (32,047) (53,094) 7,800 - Net change in unrealized appreciation or depreciation on investments 55,545 334,006 181,378 75,258 --------- ---------- ---------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 36,845 329,245 116,717 75,623 Changes From Unit Transactions: Accumulation Units: - Contract purchases 4 706 104,433 24,556 - Contract withdrawals and transfers to annuity reserves (73,088) (140,482) (79,415) (121,943) - Contract transfers (34,112) (90,433) 189,548 (49,167) --------- ---------- ---------- --------- (107,196) (230,209) 214,566 (146,554) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- (837) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- 8 --------- ---------- ---------- --------- -- -- -- (829) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (107,196) (230,209) 214,566 (147,383) --------- ---------- ---------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (70,351) 99,036 331,283 (71,760) --------- ---------- ---------- --------- NET ASSETS AT DECEMBER 31, 2010 $ 368,235 $3,524,951 $1,509,371 $ 815,938 ========= ========== ========== ========= LVIP LVIP LVIP LVIP DELAWARE DELAWARE JANUS JANUS SOCIAL SPECIAL LVIP CAPITAL CAPITAL AWARENESS OPPORTUNITIES GLOBAL INCOME APPRECIATION APPRECIATION SERVICE CLASS SERVICE CLASS SERVICE CLASS STANDARD CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $2,187,066 $ 358,094 $ -- $121,269 $ 953,011 Changes From Operations: - Net investment income (loss) (25,794) (5,459) 10,486 (1,106) (9,348) - Net realized gain (loss) on investments 12,410 (28,373) 2,063 6,873 (74,462) - Net change in unrealized appreciation or depreciation on investments 563,113 232,051 (12,984) 48,106 453,976 ---------- ---------- ---------- -------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 549,729 198,219 (435) 53,873 370,166 Changes From Unit Transactions: Accumulation Units: - Contract purchases 46,050 31,260 874,489 16 83,639 - Contract withdrawals and transfers to annuity reserves (185,695) (50,497) (54,904) (26,043) (82,371) - Contract transfers (122,910) 671,120 540,319 (23,531) 125,708 ---------- ---------- ---------- -------- ---------- (262,555) 651,883 1,359,904 (49,558) 126,976 Annuity Reserves: - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ---------- ---------- ---------- -------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (262,555) 651,883 1,359,904 (49,558) 126,976 ---------- ---------- ---------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 287,174 850,102 1,359,469 4,315 497,142 ---------- ---------- ---------- -------- ---------- NET ASSETS AT DECEMBER 31, 2009 2,474,240 1,208,196 1,359,469 125,584 1,450,153 Changes From Operations: - Net investment income (loss) (28,647) (13,025) 82,270 (942) (18,429) - Net realized gain (loss) on investments (28,343) 73,718 17,114 11,972 12,092 - Net change in unrealized appreciation or depreciation on investments 255,194 116,778 144,626 (210) 150,982 ---------- ---------- ---------- -------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 198,204 177,471 244,010 10,820 144,645 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,311 237,522 3,898,953 34 268,486 - Contract withdrawals and transfers to annuity reserves (367,022) (78,585) (192,407) (33,664) (64,835) - Contract transfers (59,248) (234,470) 2,201,450 18,719 (76,542) ---------- ---------- ---------- -------- ---------- (423,959) (75,533) 5,907,996 (14,911) 127,109 Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ---------- ---------- ---------- -------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (423,959) (75,533) 5,907,996 (14,911) 127,109 ---------- ---------- ---------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (225,755) 101,938 6,152,006 (4,091) 271,754 ---------- ---------- ---------- -------- ---------- NET ASSETS AT DECEMBER 31, 2010 $2,248,485 $1,310,134 $7,511,475 $121,493 $1,721,907 ========== ========== ========== ======== ==========
See accompanying notes. N-23
LVIP LVIP MFS LVIP JPMORGAN INTERNATIONAL LVIP MID-CAP HIGH YIELD GROWTH MFS VALUE VALUE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $1,282,862 $2,393,206 $1,103,680 Changes From Operations: - Net investment income (loss) -- (15,218) (5,296) (19,299) - Net realized gain (loss) on investments -- (207,547) (185,204) (101,217) - Net change in unrealized appreciation or depreciation on investments -- 684,952 868,411 616,196 -------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 462,187 677,911 495,680 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 145,757 635,165 124,210 - Contract withdrawals and transfers to annuity reserves -- (60,046) (76,890) (40,403) - Contract transfers -- 190,426 951,308 199,103 -------- ---------- ---------- ---------- -- 276,137 1,509,583 282,910 Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ---------- ---------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- 276,137 1,509,583 282,910 -------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- 738,324 2,187,494 778,590 -------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2009 -- 2,021,186 4,580,700 1,882,270 Changes From Operations: - Net investment income (loss) 383 (24,494) (23,158) (38,714) - Net realized gain (loss) on investments -- (82,452) 48,205 25,060 - Net change in unrealized appreciation or depreciation on investments 373 397,937 640,652 521,941 -------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 756 290,991 665,699 508,287 Changes From Unit Transactions: Accumulation Units: - Contract purchases 94,722 590,762 1,715,793 615,503 - Contract withdrawals and transfers to annuity reserves -- (100,087) (357,569) (107,281) - Contract transfers 43,109 169,818 1,325,870 80,952 -------- ---------- ---------- ---------- 137,831 660,493 2,684,094 589,174 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- ---------- ---------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 137,831 660,493 2,684,094 589,174 -------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 138,587 951,484 3,349,793 1,097,461 -------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2010 $138,587 $2,972,670 $7,930,493 $2,979,731 ======== ========== ========== ==========
N-24
LVIP LVIP MONDRIAN MONDRIAN LVIP INTERNATIONAL INTERNATIONAL LVIP LVIP SSgA BOND VALUE VALUE SERVICE MONEY MARKET MONEY MARKET INDEX STANDARD CLASS CLASS STANDARD CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $2,154,235 $7,326,395 $10,085,363 $ 24,490,806 $ 4,112,314 Changes From Operations: - Net investment income (loss) 35,469 108,074 (87,236) (344,920) 45,148 - Net realized gain (loss) on investments (113,163) (362,147) 71 251 84,573 - Net change in unrealized appreciation or depreciation on investments 441,513 1,612,524 -- (3) 109,593 ---------- ---------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 363,819 1,358,451 (87,165) (344,672) 239,314 Changes From Unit Transactions: Accumulation Units: - Contract purchases 11,041 187,635 16,810 3,874,049 3,846,854 - Contract withdrawals and transfers to annuity reserves (171,987) (472,670) (5,405,709) (3,745,917) (458,803) - Contract transfers (89,382) (63,707) 1,789,926 (7,094,125) 6,673,073 ---------- ---------- ----------- ------------ ----------- (250,328) (348,742) (3,598,973) (6,965,993) 10,061,124 Annuity Reserves: - Annuity Payments -- (705) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 42 -- -- -- ---------- ---------- ----------- ------------ ----------- -- (663) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (250,328) (349,405) (3,598,973) (6,965,993) 10,061,124 ---------- ---------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 113,491 1,009,046 (3,686,138) (7,310,665) 10,300,438 ---------- ---------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 2,267,726 8,335,441 6,399,225 17,180,141 14,412,752 Changes From Operations: - Net investment income (loss) 27,782 102,050 (70,017) (266,828) 90,475 - Net realized gain (loss) on investments (98,422) (321,910) 18 67 370,007 - Net change in unrealized appreciation or depreciation on investments 43,114 203,114 -- (1) 160,961 ---------- ---------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (27,526) (16,746) (69,999) (266,762) 621,443 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,638 294,061 26,897 2,393,641 10,048,666 - Contract withdrawals and transfers to annuity reserves (269,658) (913,373) (2,670,352) (5,150,458) (1,119,346) - Contract transfers (182,519) (250,427) 106,064 725,860 6,638,900 ---------- ---------- ----------- ------------ ----------- (450,539) (869,739) (2,537,391) (2,030,957) 15,568,220 Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- (749) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 61 -- -- -- ---------- ---------- ----------- ------------ ----------- -- (688) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (450,539) (870,427) (2,537,391) (2,030,957) 15,568,220 ---------- ---------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (478,065) (887,173) (2,607,390) (2,297,719) 16,189,663 ---------- ---------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $1,789,661 $7,448,268 $ 3,791,835 $ 14,882,422 $30,602,415 ========== ========== =========== ============ =========== LVIP SSgA LVIP LVIP SSgA CONSERVATIVE SSgA LVIP SSgA GLOBAL STRUCTURED DEVELOPED EMERGING TACTICAL ALLOCATION INTERNATIONAL 150 MARKETS 100 ALLOCATION SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $ 569,302 $ 448,279 $2,576,159 Changes From Operations: - Net investment income (loss) -- 963 (2,290) 136,707 - Net realized gain (loss) on investments -- 77,584 151,242 34,949 - Net change in unrealized appreciation or depreciation on investments -- 416,378 1,023,300 565,059 ------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 494,925 1,172,252 736,715 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 550,069 528,188 73,800 - Contract withdrawals and transfers to annuity reserves -- (32,361) (100,738) (112,762) - Contract transfers -- 654,409 1,811,444 4,888 ------- ---------- ---------- ---------- -- 1,172,117 2,238,894 (34,074) Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ------- ---------- ---------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- 1,172,117 2,238,894 (34,074) ------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- 1,667,042 3,411,146 702,641 ------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2009 -- 2,236,344 3,859,425 3,278,800 Changes From Operations: - Net investment income (loss) (41) (16,444) (24,021) (27,550) - Net realized gain (loss) on investments -- 144,137 652,647 (144,545) - Net change in unrealized appreciation or depreciation on investments 580 171,630 555,206 384,054 ------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 539 299,323 1,183,832 211,959 Changes From Unit Transactions: Accumulation Units: - Contract purchases 50,018 1,495,197 1,579,400 320,314 - Contract withdrawals and transfers to annuity reserves -- (114,118) (215,018) (439,466) - Contract transfers -- 761,000 810,130 (21,822) ------- ---------- ---------- ---------- 50,018 2,142,079 2,174,512 (140,974) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ------- ---------- ---------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 50,018 2,142,079 2,174,512 (140,974) ------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 50,557 2,441,402 3,358,344 70,985 ------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2010 $50,557 $4,677,746 $7,217,769 $3,349,785 ======= ========== ========== ==========
See accompanying notes. N-25
LVIP SSgA LVIP SSgA LVIP SSgA MODERATE MODERATE INTERNATIONAL LVIP SSgA INDEX STRUCTURED INDEX SERVICE LARGE CAP 100 ALLOCATION ALLOCATION CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 686,271 $ 1,150,990 $ -- $ -- Changes From Operations: - Net investment income (loss) 2,926 (4,502) -- -- - Net realized gain (loss) on investments 77,799 62,766 -- -- - Net change in unrealized appreciation or depreciation on investments 488,378 1,010,626 -- -- ---------- ----------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 569,103 1,068,890 -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 988,837 1,106,082 -- -- - Contract withdrawals and transfers to annuity reserves (70,241) (80,290) -- -- - Contract transfers 836,070 1,484,966 -- -- ---------- ----------- -------- -------- 1,754,666 2,510,758 -- -- Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- -------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,754,666 2,510,758 -- -- ---------- ----------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,323,769 3,579,648 -- -- ---------- ----------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 3,010,040 4,730,638 -- -- Changes From Operations: - Net investment income (loss) (13,657) (33,798) (375) (536) - Net realized gain (loss) on investments 179,144 479,247 144 3 - Net change in unrealized appreciation or depreciation on investments 324,607 962,854 5,095 8,091 ---------- ----------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 490,094 1,408,303 4,864 7,558 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,228,834 3,002,289 432,334 879,137 - Contract withdrawals and transfers to annuity reserves (191,193) (284,622) (26,049) -- - Contract transfers 1,327,697 2,820,268 108,098 -- ---------- ----------- -------- -------- 3,365,338 5,537,935 514,383 879,137 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- -------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 3,365,338 5,537,935 514,383 879,137 ---------- ----------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 3,855,432 6,946,238 519,247 886,695 ---------- ----------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $6,865,472 $11,676,876 $519,247 $886,695 ========== =========== ======== ========
N-26
LVIP SSgA LVIP SSgA MODERATELY MODERATELY LVIP SSgA AGGRESSIVE AGGRESSIVE S&P 500 LVIP SSgA LVIP SSgA INDEX STRUCTURED INDEX S&P 500 SMALL-CAP ALLOCATION ALLOCATION STANDARD INDEX INDEX SERVICE CLASS SERVICE CLASS CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $ -- $ 230,929 $ 5,327,198 $1,868,880 Changes From Operations: - Net investment income (loss) -- -- (2,504) (18,377) (26,396) - Net realized gain (loss) on investments -- -- (51,437) (429,932) (144,903) - Net change in unrealized appreciation or depreciation on investments -- -- 104,640 2,232,948 856,991 -------- -------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- 50,699 1,784,639 685,692 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- 43,220 1,724,872 564,479 - Contract withdrawals and transfers to annuity reserves -- -- (56,343) (330,294) (75,463) - Contract transfers -- -- (107,111) 1,283,662 365,502 -------- -------- --------- ----------- ---------- -- -- (120,234) 2,678,240 854,518 Annuity Reserves: - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- -------- -------- --------- ----------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- -- (120,234) 2,678,240 854,518 -------- -------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- (69,535) 4,462,879 1,540,210 -------- -------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2009 -- -- 161,394 9,790,077 3,409,090 Changes From Operations: - Net investment income (loss) (70) (503) (34) (84,066) (58,740) - Net realized gain (loss) on investments -- 3 12,548 403,949 191,964 - Net change in unrealized appreciation or depreciation on investments 1,139 8,623 34,062 1,598,916 944,027 -------- -------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,069 8,123 46,576 1,918,799 1,077,251 Changes From Unit Transactions: Accumulation Units: - Contract purchases 195,787 846,473 19,200 4,532,955 1,319,350 - Contract withdrawals and transfers to annuity reserves -- -- (32,223) (461,631) (130,186) - Contract transfers -- -- 268,513 1,673,570 166,755 -------- -------- --------- ----------- ---------- 195,787 846,473 255,490 5,744,894 1,355,919 Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- -------- -------- --------- ----------- ---------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 195,787 846,473 255,490 5,744,894 1,355,919 -------- -------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 196,856 854,596 302,066 7,663,693 2,433,170 -------- -------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2010 $196,856 $854,596 $ 463,460 $17,453,770 $5,842,260 ======== ======== ========= =========== ========== LVIP LVIP T. ROWE PRICE T. ROWE PRICE LVIP SSgA LVIP STRUCTURED STRUCTURED SMALL-MID T. ROWE PRICE MID-CAP MID-CAP CAP 200 GROWTH STOCK GROWTH GROWTH SERVICE CLASS SERVICE CLASS STANDARD CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ 273,108 $ 672,060 $ 68,297 $ 930,708 Changes From Operations: - Net investment income (loss) 2,684 (16,451) (1,320) (22,803) - Net realized gain (loss) on investments 59,225 (67,550) (1,790) (65,468) - Net change in unrealized appreciation or depreciation on investments 345,395 412,148 35,471 565,235 ---------- ---------- -------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 407,304 328,147 32,361 476,964 Changes From Unit Transactions: Accumulation Units: - Contract purchases 368,024 55,484 2,501 130,376 - Contract withdrawals and transfers to annuity reserves (20,047) (25,603) (10,304) (55,683) - Contract transfers 412,227 336,875 21,298 443,233 ---------- ---------- -------- ---------- 760,204 366,756 13,495 517,926 Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- -------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 760,204 366,756 13,495 517,926 ---------- ---------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,167,508 694,903 45,856 994,890 ---------- ---------- -------- ---------- NET ASSETS AT DECEMBER 31, 2009 1,440,616 1,366,963 114,153 1,925,598 Changes From Operations: - Net investment income (loss) 3,677 (30,197) (1,865) (38,415) - Net realized gain (loss) on investments 209,381 55,466 10,959 51,627 - Net change in unrealized appreciation or depreciation on investments 371,367 242,272 15,085 529,660 ---------- ---------- -------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 584,425 267,541 24,179 542,872 Changes From Unit Transactions: Accumulation Units: - Contract purchases 890,144 300,329 18 306,227 - Contract withdrawals and transfers to annuity reserves (62,983) (125,170) (39,474) (114,951) - Contract transfers 418,262 358,419 11,108 17,814 ---------- ---------- -------- ---------- 1,245,423 533,578 (28,348) 209,090 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- -------- ---------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,245,423 533,578 (28,348) 209,090 ---------- ---------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,829,848 801,119 (4,169) 751,962 ---------- ---------- -------- ---------- NET ASSETS AT DECEMBER 31, 2010 $3,270,464 $2,168,082 $109,984 $2,677,560 ========== ========== ======== ==========
See accompanying notes. N-27
LVIP LVIP TURNER LVIP LVIP TEMPLETON MID-CAP WELLS FARGO WILSHIRE 2010 GROWTH GROWTH INTRINSIC VALUE PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $2,478,450 $ 697,056 $1,117,134 $499,512 Changes From Operations: - Net investment income (loss) 4,376 (14,317) (8,530) 137 - Net realized gain (loss) on investments (150,916) (178,891) (147,976) 2,200 - Net change in unrealized appreciation or depreciation on investments 863,341 509,185 404,060 118,524 ---------- ---------- ---------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 716,801 315,977 247,554 120,861 Changes From Unit Transactions: Accumulation Units: - Contract purchases 341,996 93,511 34,825 122 - Contract withdrawals and transfers to annuity reserves (77,545) (41,520) (45,009) (17,067) - Contract transfers 228,861 794 (47,324) 219,356 ---------- ---------- ---------- -------- 493,312 52,785 (57,508) 202,411 Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- ---------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 493,312 52,785 (57,508) 202,411 ---------- ---------- ---------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,210,113 368,762 190,046 323,272 ---------- ---------- ---------- -------- NET ASSETS AT DECEMBER 31, 2009 3,688,563 1,065,818 1,307,180 822,784 Changes From Operations: - Net investment income (loss) 1,212 (20,291) (12,246) (7,411) - Net realized gain (loss) on investments (99,888) (17,107) (158,610) 11,938 - Net change in unrealized appreciation or depreciation on investments 289,539 317,622 296,646 75,866 ---------- ---------- ---------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 190,863 280,224 125,790 80,393 Changes From Unit Transactions: Accumulation Units: - Contract purchases 396,142 188,540 80,399 80,857 - Contract withdrawals and transfers to annuity reserves (149,164) (51,872) (102,709) (83,140) - Contract transfers 48,587 (1,989) (154,708) 34,964 ---------- ---------- ---------- -------- 295,565 134,679 (177,018) 32,681 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- ---------- -------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 295,565 134,679 (177,018) 32,681 ---------- ---------- ---------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 486,428 414,903 (51,228) 113,074 ---------- ---------- ---------- -------- NET ASSETS AT DECEMBER 31, 2010 $4,174,991 $1,480,721 $1,255,952 $935,858 ========== ========== ========== ========
N-28
LVIP LVIP LVIP LVIP WILSHIRE WILSHIRE 2020 WILSHIRE 2030 WILSHIRE 2040 CONSERVATIVE PROFILE PROFILE PROFILE PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $237,153 $ 356,008 $109,942 $ 5,123,736 Changes From Operations: - Net investment income (loss) (36) (350) (502) 191,729 - Net realized gain (loss) on investments 5,611 (6,312) (2,262) 42,928 - Net change in unrealized appreciation or depreciation on investments 72,127 122,413 32,125 1,221,092 -------- --------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 77,702 115,751 29,361 1,455,749 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,122 73,000 -- 290,781 - Contract withdrawals and transfers to annuity reserves (4,511) (66,996) (10,716) (463,652) - Contract transfers 155,474 201 -- 3,058,903 -------- --------- -------- ----------- 152,085 6,205 (10,716) 2,886,032 Annuity Reserves: - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- --------- -------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 152,085 6,205 (10,716) 2,886,032 -------- --------- -------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 229,787 121,956 18,645 4,341,781 -------- --------- -------- ----------- NET ASSETS AT DECEMBER 31, 2009 466,940 477,964 128,587 9,465,517 Changes From Operations: - Net investment income (loss) (5,107) (4,036) (1,279) 210,746 - Net realized gain (loss) on investments 3,138 26,518 (5,766) 131,404 - Net change in unrealized appreciation or depreciation on investments 47,083 19,699 18,040 586,986 -------- --------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 45,114 42,181 10,995 929,136 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- 1,813 1,666,663 - Contract withdrawals and transfers to annuity reserves (12,058) (7,494) (7,000) (631,477) - Contract transfers 1,688 (97,746) (57,943) 1,205,796 -------- --------- -------- ----------- (10,370) (105,240) (63,130) 2,240,982 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -------- --------- -------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (10,370) (105,240) (63,130) 2,240,982 -------- --------- -------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 34,744 (63,059) (52,135) 3,170,118 -------- --------- -------- ----------- NET ASSETS AT DECEMBER 31, 2010 $501,684 $ 414,905 $ 76,452 $12,635,635 ======== ========= ======== =========== LVIP LVIP WILSHIRE WILSHIRE MODERATELY LORD ABBETT MODERATE AGGRESSIVE FUNDAMENTAL MFS VIT MFS VIT PROFILE PROFILE EQUITY CORE EQUITY GROWTH SERVICE CLASS SERVICE CLASS CLASS VC SERVICE CLASS INITIAL CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $26,819,220 $11,503,260 $ -- $ 76,056 $142,578 Changes From Operations: - Net investment income (loss) 685,229 313,402 -- (266) (1,584) - Net realized gain (loss) on investments (806,168) (617,416) -- (896) (1,096) - Net change in unrealized appreciation or depreciation on investments 6,597,665 3,169,641 -- 22,934 44,059 ----------- ----------- ------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,476,726 2,865,627 -- 21,772 41,379 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,281,421 1,049,795 -- -- 7,925 - Contract withdrawals and transfers to annuity reserves (1,630,710) (615,632) -- (4,125) (27,072) - Contract transfers (768,789) (678,442) -- (2,216) (1,708) ----------- ----------- ------- -------- -------- (1,118,078) (244,279) -- (6,341) (20,855) Annuity Reserves: - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ----------- ----------- ------- -------- -------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,118,078) (244,279) -- (6,341) (20,855) ----------- ----------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,358,648 2,621,348 -- 15,431 20,524 ----------- ----------- ------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 32,177,868 14,124,608 -- 91,487 163,102 Changes From Operations: - Net investment income (loss) 391,133 181,387 (29) (659) (1,939) - Net realized gain (loss) on investments (72,840) (139,767) 184 2,405 9,122 - Net change in unrealized appreciation or depreciation on investments 3,055,287 1,683,493 4,907 9,863 12,154 ----------- ----------- ------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,373,580 1,725,113 5,062 11,609 19,337 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,745,640 2,631,449 24,567 27 -- - Contract withdrawals and transfers to annuity reserves (2,366,752) (957,632) (124) (11,673) (30,648) - Contract transfers 2,081,264 2,204,245 6,432 (51) (85) ----------- ----------- ------- -------- -------- 3,460,152 3,878,062 30,875 (11,697) (30,733) Annuity Reserves: - Transfer from accumulation units -- -- -- -- -- - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ----------- ----------- ------- -------- -------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 3,460,152 3,878,062 30,875 (11,697) (30,733) ----------- ----------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 6,833,732 5,603,175 35,937 (88) (11,396) ----------- ----------- ------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $39,011,600 $19,727,783 $35,937 $ 91,399 $151,706 =========== =========== ======= ======== ========
See accompanying notes. N-29
MFS VIT MFS VIT MFS VIT MFS VIT GROWTH TOTAL RETURN TOTAL RETURN UTILITIES SERVICE CLASS INITIAL CLASS SERVICE CLASS INITIAL CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $199,968 $1,381,280 $12,218,673 $ 656,021 Changes From Operations: - Net investment income (loss) (3,912) 31,094 205,346 24,250 - Net realized gain (loss) on investments 557 (85,804) (665,355) (39,711) - Net change in unrealized appreciation or depreciation on investments 84,989 231,495 2,535,643 175,726 -------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 81,634 176,785 2,075,634 160,265 Changes From Unit Transactions: Accumulation Units: - Contract purchases 21,591 13,250 1,407,920 42,502 - Contract withdrawals and transfers to annuity reserves (14,910) (380,926) (841,276) (115,906) - Contract transfers 22,415 (100,555) 433,166 (120,939) -------- ---------- ----------- --------- 29,096 (468,231) 999,810 (194,343) Annuity Reserves: - Annuity Payments -- (2,090) (1,731) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- (29) -- -------- ---------- ----------- --------- -- (2,090) (1,760) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 29,096 (470,321) 998,050 (194,343) -------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 110,730 (293,536) 3,073,684 (34,078) -------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2009 310,698 1,087,744 15,292,357 621,943 Changes From Operations: - Net investment income (loss) (5,272) 13,521 136,084 9,877 - Net realized gain (loss) on investments 12,928 (17,017) (182,075) 3,525 - Net change in unrealized appreciation or depreciation on investments 34,911 73,292 1,194,539 48,727 -------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 42,567 69,796 1,148,548 62,129 Changes From Unit Transactions: Accumulation Units: - Contract purchases 36,840 90 696,312 -- - Contract withdrawals and transfers to annuity reserves (47,664) (300,929) (1,380,722) (86,479) - Contract transfers 22,037 (38,396) (284,081) (13,356) -------- ---------- ----------- --------- 11,213 (339,235) (968,491) (99,835) Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments -- (1,509) (1,874) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- 17 -- -------- ---------- ----------- --------- -- (1,509) (1,857) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 11,213 (340,744) (970,348) (99,835) -------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 53,780 (270,948) 178,200 (37,706) -------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2010 $364,478 $ 816,796 $15,470,557 $ 584,237 ======== ========== =========== =========
N-30
NB AMT OPPENHEIMER MFS VIT MID-CAP NB AMT GLOBAL UTILITIES GROWTH I REGENCY I SECURITIES SERVICE CLASS CLASS CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ 8,758,111 $3,961,626 $ 4,097,055 $ -- Changes From Operations: - Net investment income (loss) 268,591 (63,184) 6,636 -- - Net realized gain (loss) on investments (916,196) (90,108) (311,929) -- - Net change in unrealized appreciation or depreciation on investments 3,086,839 1,156,351 2,014,658 -- ----------- ---------- ----------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,439,234 1,003,059 1,709,365 -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 359,802 65,061 20,803 -- - Contract withdrawals and transfers to annuity reserves (539,476) (378,494) (376,454) -- - Contract transfers (403,054) (537,276) (341,539) -- ----------- ---------- ----------- ------- (582,728) (850,709) (697,190) -- Annuity Reserves: - Annuity Payments (1,856) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments (32) -- -- -- ----------- ---------- ----------- ------- (1,888) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (584,616) (850,709) (697,190) -- ----------- ---------- ----------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,854,618 152,350 1,012,175 -- ----------- ---------- ----------- ------- NET ASSETS AT DECEMBER 31, 2009 10,612,729 4,113,976 5,109,230 -- Changes From Operations: - Net investment income (loss) 143,614 (67,272) (44,859) (257) - Net realized gain (loss) on investments (146,636) 160,576 (92,827) 409 - Net change in unrealized appreciation or depreciation on investments 1,181,973 873,824 1,169,712 9,687 ----------- ---------- ----------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,178,951 967,128 1,032,026 9,839 Changes From Unit Transactions: Accumulation Units: - Contract purchases 606,484 8,137 5,104 56,865 - Contract withdrawals and transfers to annuity reserves (907,079) (577,075) (554,358) (291) - Contract transfers (396,652) (218,517) (659,516) 960 ----------- ---------- ----------- ------- (697,247) (787,455) (1,208,770) 57,534 Annuity Reserves: - Transfer from accumulation units -- -- -- -- - Annuity Payments (2,106) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 20 -- -- -- ----------- ---------- ----------- ------- (2,086) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (699,333) (787,455) (1,208,770) 57,534 ----------- ---------- ----------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS 479,618 179,673 (176,744) 67,373 ----------- ---------- ----------- ------- NET ASSETS AT DECEMBER 31, 2010 $11,092,347 $4,293,649 $ 4,932,486 $67,373 =========== ========== =========== ======= PIMCO VIT PUTNAM VT PUTNAM VT COMMODITY GLOBAL GROWTH & REAL RETURN HEALTH CARE INCOME ADVISOR CLASS CLASS IB CLASS IB SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $105,401 $ 71,886 Changes From Operations: - Net investment income (loss) 8,054 (1,603) 734 - Net realized gain (loss) on investments 24,146 9,132 (29,306) - Net change in unrealized appreciation or depreciation on investments (5,670) 15,832 41,312 -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 26,530 23,361 12,740 Changes From Unit Transactions: Accumulation Units: - Contract purchases 52,020 11 -- - Contract withdrawals and transfers to annuity reserves (438) (1,274) (5,219) - Contract transfers 226,038 (3,963) (27,550) -------- -------- -------- 277,620 (5,226) (32,769) Annuity Reserves: - Annuity Payments -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -------- -------- -------- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 277,620 (5,226) (32,769) -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 304,150 18,135 (20,029) -------- -------- -------- NET ASSETS AT DECEMBER 31, 2009 304,150 123,536 51,857 Changes From Operations: - Net investment income (loss) 72,454 360 (49) - Net realized gain (loss) on investments 5,932 1,861 (345) - Net change in unrealized appreciation or depreciation on investments 65,839 (474) 6,906 -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 144,225 1,747 6,512 Changes From Unit Transactions: Accumulation Units: - Contract purchases 267,319 54 32 - Contract withdrawals and transfers to annuity reserves (47,254) (58,566) -- - Contract transfers 183,007 20,483 -- -------- -------- -------- 403,072 (38,029) 32 Annuity Reserves: - Transfer from accumulation units -- -- -- - Annuity Payments -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -------- -------- -------- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 403,072 (38,029) 32 -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 547,297 (36,282) 6,544 -------- -------- -------- NET ASSETS AT DECEMBER 31, 2010 $851,447 $ 87,254 $ 58,401 ======== ======== ========
See accompanying notes. N-31 LINCOLN NEW YORK ACCOUNT N FOR VARIABLE ANNUITIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION THE VARIABLE ACCOUNT: Lincoln New York Separate Account N for Variable Annuities (the Variable Account) is a segregated investment account of Lincoln Life & Annuity Company of New York (the Company) and is registered as a unit investment trust with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended. The operations of the Variable Account, which commenced on March 4, 2004, are part of the operations of the Company. The Variable Account consists of fourteen products as follows: - Lincoln ChoicePlus - Lincoln ChoicePlus Access - Lincoln ChoicePlus II - Lincoln ChoicePlus II Access - Lincoln ChoicePlus II Advance - Lincoln ChoicePlus II Bonus - Lincoln ChoicePlus Assurance A Share - Lincoln ChoicePlus Assurance B Share - Lincoln ChoicePlus Assurance Bonus - Lincoln ChoicePlus Assurance C Share - Lincoln ChoicePlus Assurance L Share - Lincoln ChoicePlus Design - Lincoln ChoicePlus Assurance A Class - Lincoln ChoicePlus Assurance B Class The assets of the Variable Account are owned by the Company. The Variable Account's assets support the annuity contracts and may not be used to satisfy liabilities arising from any other business of the Company. BASIS OF PRESENTATION: The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for unit investment trusts. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts as of the date of the financial statements. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts that require use of estimates is the fair value of certain assets. INVESTMENTS: The assets of the Variable Account are divided into variable subaccounts, each of which may be invested in shares of one of one hundred eighty-four available mutual funds (the Funds) of nineteen diversified, open-ended management investment companies, each Fund with its own investment objective. The Funds are: AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF): ABVPSF Global Thematic Growth Class A Fund** ABVPSF Global Thematic Growth Class B Fund ABVPSF Growth and Income Class A Fund** ABVPSF Growth and Income Class B Fund ABVPSF International Value Class A Fund** ABVPSF International Value Class B Fund ABVPSF Large Cap Growth Class B Fund ABVPSF Small/Mid Cap Value Class A Fund** ABVPSF Small/Mid Cap Value Class B Fund American Century Variable Portfolios, Inc. (American Century VP): American Century VP Inflation Protection Class I Portfolio** American Century VP Inflation Protection Class II Portfolio American Funds Insurance Series (American Funds): American Funds Global Growth Class 1 Fund** American Funds Global Growth Class 2 Fund American Funds Global Small Capitalization Class 1 Fund** American Funds Global Small Capitalization Class 2 Fund American Funds Growth Class 1 Fund** American Funds Growth Class 2 Fund American Funds Growth-Income Class 1 Fund** American Funds Growth-Income Class 2 Fund American Funds International Class 1 Fund** American Funds International Class 2 Fund BlackRock Variable Series Funds, Inc. (BlackRock): BlackRock Global Allocation V.I. Class I Fund** BlackRock Global Allocation V.I. Class III Fund Delaware VIP Trust (Delaware VIP): Delaware VIP Diversified Income Standard Class Series** Delaware VIP Diversified Income Service Class Series Delaware VIP Emerging Markets Standard Class Series** Delaware VIP Emerging Markets Service Class Series Delaware VIP High Yield Standard Class Series Delaware VIP High Yield Service Class Series Delaware VIP Limited-Term Diversified Income Standard Class Series** Delaware VIP Limited-Term Diversified Income Service Class Series Delaware VIP REIT Standard Class Series Delaware VIP REIT Service Class Series Delaware VIP Small Cap Value Standard Class Series Delaware VIP Small Cap Value Service Class Series Delaware VIP Smid Cap Growth Standard Class Series Delaware VIP Smid Cap Growth Service Class Series Delaware VIP U.S. Growth Standard Class Series** Delaware VIP U.S. Growth Service Class Series Delaware VIP Value Standard Class Series N-32 Delaware VIP Value Service Class Series DWS Scudder VIP Funds (DWS VIP): DWS VIP Alternative Asset Allocation Plus Class A Fund** DWS VIP Alternative Asset Allocation Plus Class B Fund DWS VIP Equity 500 Index Class A Fund DWS VIP Equity 500 Index Class B Fund DWS VIP Small Cap Index Class A Fund DWS VIP Small Cap Index Class B Fund Fidelity Variable Insurance Products Fund (Fidelity VIP): Fidelity VIP Contrafund Initial Class Portfolio** Fidelity VIP Contrafund Service Class 2 Portfolio Fidelity VIP Equity-Income Initial Class Portfolio Fidelity VIP Equity-Income Service Class 2 Portfolio Fidelity VIP Growth Initial Class Portfolio Fidelity VIP Growth Service Class 2 Portfolio Fidelity VIP Mid Cap Initial Class Portfolio** Fidelity VIP Mid Cap Service Class 2 Portfolio Fidelity VIP Overseas Initial Class Portfolio Fidelity VIP Overseas Service Class 2 Portfolio Franklin Templeton Variable Insurance Products Trust (FTVIPT): FTVIPT Franklin Income Securities Class 1 Fund** FTVIPT Franklin Income Securities Class 2 Fund FTVIPT Franklin Small-Mid Cap Growth Securities Class 1 Fund** FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 Fund FTVIPT Mutual Shares Securities Class 1 Fund** FTVIPT Mutual Shares Securities Class 2 Fund FTVIPT Templeton Global Bond Securities Class 2 Fund FTVIPT Templeton Growth Securities Class 2 Fund Goldman Sachs Variable Insurance Trust (Goldman Sachs VIT): Goldman Sachs VIT Large Cap Value Service Class Fund Invesco Variable Insurance Funds (Invesco V.I.): Invesco V.I. Capital Appreciation Series I Fund Invesco V.I. Capital Appreciation Series II Fund Invesco V.I. Core Equity Series I Fund Invesco V.I. Core Equity Series II Fund Invesco V.I. International Growth Series I Fund Invesco V.I. International Growth Series II Fund Janus Aspen Series: Janus Aspen Series Balanced Service Class Portfolio Janus Aspen Series Enterprise Service Class Portfolio Janus Aspen Series Worldwide Service Class Portfolio Lincoln Variable Insurance Products Trust (LVIP)*: LVIP American Global Growth Service Class II Fund LVIP American Global Small Capitalization Service Class II Fund LVIP American Growth Service Class II Fund LVIP American Growth-Income Service Class II Fund LVIP American International Service Class II Fund LVIP Baron Growth Opportunities Standard Class Fund** LVIP Baron Growth Opportunities Service Class Fund LVIP BlackRock Inflation Protected Bond Standard Class Fund** LVIP BlackRock Inflation Protected Bond Service Class Fund LVIP Capital Growth Standard Class Fund** LVIP Capital Growth Service Class Fund LVIP Cohen & Steers Global Real Estate Standard Class Fund** LVIP Cohen & Steers Global Real Estate Service Class Fund LVIP Columbia Value Opportunities Standard Class Fund** LVIP Columbia Value Opportunities Service Class Fund LVIP Delaware Bond Standard Class Fund LVIP Delaware Bond Service Class Fund LVIP Delaware Diversified Floating Rate Standard Class Fund** LVIP Delaware Diversified Floating Rate Service Class Fund LVIP Delaware Foundation Aggressive Allocation Standard Class Fund LVIP Delaware Foundation Aggressive Allocation Service Class Fund LVIP Delaware Growth and Income Standard Class Fund** LVIP Delaware Growth and Income Service Class Fund LVIP Delaware Social Awareness Standard Class Fund LVIP Delaware Social Awareness Service Class Fund LVIP Delaware Special Opportunities Standard Class Fund** LVIP Delaware Special Opportunities Service Class Fund LVIP Global Income Standard Class Fund** LVIP Global Income Service Class Fund LVIP Janus Capital Appreciation Standard Class Fund LVIP Janus Capital Appreciation Service Class Fund LVIP JPMorgan High Yield Standard Class Fund** LVIP JPMorgan High Yield Service Class Fund LVIP MFS International Growth Standard Class Fund** LVIP MFS International Growth Service Class Fund LVIP MFS Value Standard Class Fund** LVIP MFS Value Service Class Fund LVIP Mid-Cap Value Standard Class Fund** LVIP Mid-Cap Value Service Class Fund LVIP Mondrian International Value Standard Class Fund N-33 LVIP Mondrian International Value Service Class Fund LVIP Money Market Standard Class Fund LVIP Money Market Service Class Fund LVIP SSgA Bond Index Standard Class Fund** LVIP SSgA Bond Index Service Class Fund LVIP SSgA Conservative Index Allocation Standard Class Fund** LVIP SSgA Conservative Index Allocation Service Class Fund** LVIP SSgA Conservative Structured Allocation Standard Class Fund** LVIP SSgA Conservative Structured Allocation Service Class Fund LVIP SSgA Developed International 150 Standard Class Fund** LVIP SSgA Developed International 150 Service Class Fund LVIP SSgA Emerging Markets 100 Standard Class Fund** LVIP SSgA Emerging Markets 100 Service Class Fund LVIP SSgA Global Tactical Allocation Standard Class Fund** LVIP SSgA Global Tactical Allocation Service Class Fund LVIP SSgA International Index Standard Class Fund** LVIP SSgA International Index Service Class Fund LVIP SSgA Large Cap 100 Standard Class Fund** LVIP SSgA Large Cap 100 Service Class Fund LVIP SSgA Moderate Index Allocation Standard Class Fund** LVIP SSgA Moderate Index Allocation Service Class Fund LVIP SSgA Moderate Structured Allocation Standard Class Fund** LVIP SSgA Moderate Structured Allocation Service Class Fund LVIP SSgA Moderately Aggressive Index Allocation Standard Class Fund** LVIP SSgA Moderately Aggressive Index Allocation Service Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Standard Class Fund** LVIP SSgA Moderately Aggressive Structured Allocation Service Class Fund LVIP SSgA S&P 500 Index Standard Class Fund LVIP SSgA S&P 500 Index Service Class Fund LVIP SSgA Small-Cap Index Standard Class Fund** LVIP SSgA Small-Cap Index Service Class Fund LVIP SSgA Small-Mid Cap 200 Standard Class Fund** LVIP SSgA Small-Mid Cap 200 Service Class Fund LVIP T. Rowe Price Growth Stock Standard Class Fund** LVIP T. Rowe Price Growth Stock Service Class Fund LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class Fund LVIP T. Rowe Price Structured Mid-Cap Growth Service Class Fund LVIP Templeton Growth Standard Class Fund** LVIP Templeton Growth Service Class Fund LVIP Turner Mid-Cap Growth Standard Class Fund** LVIP Turner Mid-Cap Growth Service Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund** LVIP Wells Fargo Intrinsic Value Service Class Fund LVIP Wilshire 2010 Profile Service Class Fund LVIP Wilshire 2020 Profile Service Class Fund LVIP Wilshire 2030 Profile Service Class Fund LVIP Wilshire 2040 Profile Service Class Fund LVIP Wilshire Conservative Profile Standard Class Fund** LVIP Wilshire Conservative Profile Service Class Fund LVIP Wilshire Moderate Profile Standard Class Fund** LVIP Wilshire Moderate Profile Service Class Fund LVIP Wilshire Moderately Aggressive Profile Standard Class Fund** LVIP Wilshire Moderately Aggressive Profile Service Class Fund Lord Abbett Securities Trust (Lord Abbett): Lord Abbett Fundamental Equity Class VC Fund MFS Variable Insurance Trust (MFS VIT): MFS VIT Core Equity Service Class Series MFS VIT Growth Initial Class Series MFS VIT Growth Service Class Series MFS VIT Total Return Initial Class Series MFS VIT Total Return Service Class Series MFS VIT Utilities Initial Class Series MFS VIT Utilities Service Class Series Morgan Stanley Universal Institutional Funds (Morgan Stanley UIF): Morgan Stanley UIF Capital Growth Class II Portfolio** Neuberger Berman Advisers Management Trust (NB AMT): NB AMT Mid-Cap Growth I Class Portfolio NB AMT Regency I Class Portfolio Oppenheimer Variable Account Funds (Oppenheimer): Oppenheimer Global Securities Service Class Fund/VA PIMCO Variable Insurance Trust (PIMCO VIT): PIMCO VIT Commodity Real Return Administrative Class Fund** PIMCO VIT Commodity Real Return Advisor Class Fund Putnam Variable Trust (Putnam VT): Putnam VT Global Health Care Class IB Fund Putnam VT Growth & Income Class IB Fund * - Denotes an affiliate of The Company. ** - Available fund with no money invested at December 31, 2010. N-34 As of December 31, 2009, Delaware VIP Trust was an affiliate of the Company. On January 4, 2010, Lincoln National Corporation (the parent of the Company) sold Delaware Management Holdings Inc. and its subsidiaries, including Delaware Management Company, which is the investment advisor for the Delaware VIP Trust funds. Investments in the Funds are stated at fair value as determined by the closing net asset value per share on December 31, 2010. The difference between cost and net asset value is reflected as unrealized appreciation or depreciation of investments. The Variable Account's investments in the Funds are valued in accordance with the Fair Value Measurements and Disclosure Topic of the Financial Accounting Standards Board Accounting Standards Codification (Topic). The Topic defines fair value as the price that the Variable Account would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Topic also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assessment regarding the assumptions market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The Variable Account's investments in the Funds are assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below. Level 1 - inputs to the valuation methodology are quoted prices in active markets Level 2 - inputs to the valuation methodology are observable, directly or indirectly Level 3 - inputs to the valuation methodology are unobservable and reflect assumptions on the part of the reporting entity The Variable Account's investments in the Funds are valued within the fair value hierarchy as Level 2. Net asset value is quoted by the Funds as derived by the fair value of the Funds' underlying investments. The Funds are not considered Level 1 as they are not traded in the open market; rather the Company sells and redeems shares at net asset value with the Funds. Investment transactions are accounted for on a trade-date basis. The cost of investments sold is determined by the average cost method. DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested in shares of the Funds on the payable date. Dividend income is recorded on the ex-dividend date. FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are taxed with operations of the Company, which is taxed as a "life insurance company" under the Internal Revenue Code. The Variable Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended. Under current federal income tax law, no federal income taxes are payable or receivable with respect to the Variable Account's net investment income and the net realized gain (loss) on investments. ANNUITY RESERVES: Reserves on contracts not involving life contingencies are calculated using an assumed investment rate of 3%, 4%, or 5%. Reserves on contracts involving life contingencies are calculated using a modification of the 1983a Individual Annuitant Mortality Table and an assumed investment rate of 3%, 4%, or 5%. INVESTMENT FUND CHANGES: During 2009, the following funds became available as investment options for account contract owners. Accordingly, the 2009 statements of changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2009: ABVPSF Global Thematic Growth Class A Fund ABVPSF Growth and Income Class A Fund ABVPSF International Value Class A Fund ABVPSF Small/Mid Cap Value Class A Fund American Century VP Inflation Protection Class I Fund American Class 1 Funds Global Growth Class 1 Fund American Class 1 Funds Global Small Capitalization Class 1 Fund American Class 1 Funds Growth Class 1 Fund American Class 1 Funds Growth-Income Class 1 Fund American Class 1 Funds International Class 1 Fund BlackRock Global Allocation V.I. Class I Fund BlackRock Global Allocation V.I. Class III Fund Delaware VIP Diversified Income Standard Class Series Delaware VIP Emerging Markets Standard Class Series Delaware VIP Limited-Term Diversified Income Standard Class Series Delaware VIP U.S. Growth Standard Class Series DWS VIP Alternative Asset Allocation Plus Class A Fund DWS VIP Alternative Asset Allocation Plus Class B Fund Fidelity VIP Contrafund Initial Class Portfolio Fidelity VIP Mid Cap Initial Class Portfolio FTVIPT Franklin Income Securities Class 1 Fund FTVIPT Franklin Small-Mid Cap Growth Securities Class 1 Fund FTVIPT Mutual Shares Securities Class 1 Fund LVIP Baron Growth Opportunities Standard Class Fund N-35 LVIP Capital Growth Standard Class Fund LVIP Cohen & Steers Global Real Estate Standard Class Fund LVIP Columbia Value Opportunities Standard Class Fund LVIP Delaware Growth and Income Standard Class Fund LVIP Delaware Special Opportunities Standard Class Fund LVIP Global Income Standard Class Fund LVIP Global Income Service Class Standard Class Fund LVIP Marsico International Growth Standard Class Fund LVIP MFS Value Standard Class Fund LVIP Mid-Cap Value Standard Class Fund LVIP SSgA Bond Index Standard Class Fund LVIP SSgA Developed International 150 Standard Class Fund LVIP SSgA Emerging Markets 100 Standard Class Fund LVIP SSgA International Index Standard Class Fund LVIP SSgA Large Cap 100 Standard Class Fund LVIP SSgA Small-Cap Index Standard Class Fund LVIP SSgA Small-Mid Cap 200 Standard Class Fund LVIP T. Rowe Price Growth Stock Standard Class Fund LVIP Templeton Growth Standard Class Fund LVIP Turner Mid-Cap Growth Standard Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund LVIP Wilshire Aggressive Profile Standard Class Fund LVIP Wilshire Conservative Profile Standard Class Fund LVIP Wilshire Moderate Profile Standard Class Fund LVIP Wilshire Moderately Aggressive Profile Standard Class Fund PIMCO VIT Commodity Real Return Administrative Class Fund PIMCO VIT Commodity Real Return Advisor Class Fund Also during 2009, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME ------------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Technology Class A Fund ABVPSF Global Thematic Growth Class A Fund ABVPSF Global Technology Class B Fund ABVPSF Global Thematic Growth Class B Fund Delaware VIP Capital Reserves Service Class Series Delaware VIP Limited-Term Diversified Income Service Class Series FTVIPT Templeton Global Income Securities Class 2 Fund FTVIPT Templeton Global Bond Securities Class 2 Fund Janus Aspen Series Mid Cap Growth Service Class Portfolio Janus Aspen Series Enterprise Service Class Portfolio Janus Aspen Series Worldwide Growth Service Class Portfolio Janus Aspen Series Worldwide Service Class Portfolio LVIP FI Equity-Income Standard Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund LVIP FI Equity-Income Service Class Fund LVIP Wells Fargo Intrinsic Value Service Class Fund Putnam VT Health Sciences Class IB Fund Putnam VT Global Health Care Class IB Fund
During 2009, the LVIP UBS Global Asset Allocation Standard Class Fund merged into the LVIP Delaware Foundation Aggressive Allocation Standard Class Fund and the LVIP UBS Global Asset Allocation Service Class Fund merged into the LVIP Delaware Foundation Aggressive Allocation Service Class Fund. During 2010, the following funds became available as investment options for account contract owners. Accordingly, the 2010 statements of operations and changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2010: Delaware VIP Smid Cap Growth Standard Class Series Delaware VIP Smid Cap Growth Service Class Series LVIP American Global Growth Service Class II Fund LVIP American Global Small Capitalization Service Class II Fund LVIP American Growth Service Class II Fund LVIP American Growth-Income Service Class II Fund LVIP American International Service Class II Fund LVIP BlackRock Inflation Protected Bond Standard Class Fund LVIP BlackRock Inflation Protected Bond Service Class Fund LVIP Delaware Diversified Floating Rate Standard Class Fund LVIP Delaware Diversified Floating Rate Service Class Fund LVIP JPMorgan High Yield Standard Class Fund LVIP JPMorgan High Yield Service Class Fund LVIP SSgA Conservative Index Allocation Standard Class Fund LVIP SSgA Conservative Index Allocation Service Class Fund LVIP SSgA Conservative Structured Allocation Standard Class Fund LVIP SSgA Conservative Structured Allocation Service Class Fund LVIP SSgA Moderate Index Allocation Standard Class Fund LVIP SSgA Moderate Index Allocation Service Class Fund LVIP SSgA Moderate Structured Allocation Standard Class Fund LVIP SSgA Moderate Structured Allocation Service Class Fund LVIP SSgA Moderately Aggressive Index Allocation Standard Class Fund LVIP SSgA Moderately Aggressive Index Allocation Service Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Standard Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Service Class Fund During 2010, the AIM Variable Insurance Funds, Inc. (AIM V.I.) family of funds changed its name to the Invesco Variable Insurance Funds, Inc. (Invesco V.I.) During 2010, the Delaware VIP Trend Standard Class Series merged into the Delaware VIP Smid Cap Growth Standard Class Series and the Delaware VIP Trend Service Class Series merged into the Delaware VIP Smid Cap Growth Service Class Series. N-36 Also during 2010, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME ---------------------------------------------------------------------------------------------------------------------- Goldman Sachs VIT Growth & Income Service Class Fund Goldman Sachs VIT Large Cap Value Service Class Fund LVIP Marsico International Growth Fund LVIP MFS International Growth Standard Class Fund LVIP Marsico International Growth Service Class Fund LVIP MFS International Growth Service Class Fund LVIP Wilshire Aggressive Profile Standard Class Fund LVIP SSgA Global Tactical Allocation Standard Class Fund LVIP Wilshire Aggressive Profile Service Class Fund LVIP SSgA Global Tactical Allocation Service Class Fund Lord Abbett All Value Class VC Fund Lord Abbett Fundamental Equity Class VC Fund Van Kampen Capital Growth Class II Portfolio Morgan Stanley UIF Capital Growth Class II Portfolio
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES Amounts are paid to the Company for mortality and expense guarantees at a percentage of each Fund's average daily net assets within the Variable Account. The rates are as follows for the fourteen contract types: Lincoln ChoicePlus at a daily rate of .0038356% to .0073973% (1.40% to 2.70% on an annual basis) Lincoln ChoicePlus Access at a daily rate of .0038356% to .0080822% (1.40% to 2.95% on an annual basis) Lincoln ChoicePlus II at a daily rate of .0034247% to .0073973% (1.25% to 2.70% on an annual basis) Lincoln ChoicePlus II Access at a daily rate of .0038356% to .0080822% (1.40% to 2.95% on an annual basis) Lincoln ChoicePlus II Advance at a daily rate of .0038356% to .0082192% (1.40% to 3.00% on an annual basis) Lincoln ChoicePlus II Bonus at a daily rate of .0038356% to .0079452% (1.40% to 2.90% on an annual basis) Lincoln ChoicePlus Assurance A Share at a daily rate of .0016438% to .0063014% (.60% to 2.30% on an annual basis) Lincoln ChoicePlus Assurance B Share at a daily rate of .0034247% to .0076712% (1.25% to 2.80% on an annual basis) Lincoln ChoicePlus Assurance Bonus at a daily rate of .0038356% to .0083562% (1.40% to 3.05% on an annual basis) Lincoln ChoicePlus Assurance C Share at a daily rate of .0038356% to .0087671% (1.40% to 3.20% on an annual basis) Lincoln ChoicePlus Assurance L Share at a daily rate of .0038356% to .0086301% (1.40% to 3.15% on an annual basis) Lincoln ChoicePlus Design at a daily rate of .0030137% to .0084932% (1.10% to 3.10% on an annual basis) Lincoln ChoicePlus Assurance A Class at a daily rate of .0016438% to .0063014% (.60% to 2.30% on an annual basis) Lincoln ChoicePlus Assurance B Class at a daily rate of .0034247% to .0076712% (1.25% to 2.80% on an annual basis) Contract charges and surrender charges for the years ended December 31, 2010 and 2009, were $4,793,658 and $4,418,858, respectively. For the Assurance A Share and Assurance A Class products, a front-end load or sales charge is applied as a percentage (5.75% maximum) to all gross purchase payments. For the years ending December 31, 2010 and 2009, sales charges amounted to $279,687 and $119,310, respectively. The Company is responsible for all sales, general and administrative expenses applicable to the Variable Account. N-37 3. FINANCIAL HIGHLIGHTS A summary of the fee rates, unit values, units outstanding, net assets and total return and investment income ratios for variable annuity contracts as of and for each year or period in the five years ended December 31, 2010, follows:
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- ABVPSF GLOBAL THEMATIC GROWTH CLASS B 2010 1.25% 2.80% $ 4.74 $18.80 161,329 $ 1,698,177 15.31% 17.05% 2.08% 2009 1.25% 2.80% 4.07 16.11 207,358 1,734,910 48.91% 51.24% 0.00% 2008 1.25% 2.80% 2.70 10.69 255,641 1,422,126 -48.92% -48.11% 0.00% 2007 1.25% 2.80% 5.23 20.68 266,476 2,573,685 17.64% 18.35% 0.00% 2006 1.30% 1.90% 4.43 17.52 247,607 1,725,587 6.34% 6.98% 0.00% ABVPSF GROWTH AND INCOME CLASS B 2010 0.75% 2.80% 8.40 14.31 625,404 7,283,147 9.69% 11.95% 0.00% 2009 0.75% 2.80% 8.01 12.89 644,282 6,786,606 17.32% 18.97% 3.58% 2008 1.15% 2.55% 6.73 10.89 725,854 6,545,593 -42.19% -41.37% 1.74% 2007 1.15% 2.55% 12.00 18.65 750,307 11,609,683 2.32% 3.56% 1.18% 2006 1.25% 2.45% 11.73 18.08 712,281 10,766,591 14.15% 15.53% 1.17% ABVPSF INTERNATIONAL VALUE CLASS B 2010 0.65% 2.80% 7.14 7.81 1,086,316 8,263,725 1.42% 3.62% 2.78% 2009 0.65% 2.80% 6.91 7.58 1,078,067 8,023,441 30.97% 33.49% 1.12% 2008 0.65% 2.55% 5.48 5.71 1,116,025 6,298,328 -54.46% -53.82% 0.90% 2007 1.15% 2.55% 12.24 12.38 746,451 9,175,572 3.52% 4.27% 0.87% 2006 7/20/06 1.25% 1.95% 11.82 11.87 110,355 1,306,888 4.12% 22.59% 0.00% ABVPSF LARGE CAP GROWTH CLASS B 2010 1.40% 1.70% 5.88 13.68 86,073 758,632 7.98% 8.31% 0.26% 2009 1.40% 1.70% 5.44 12.66 110,946 870,301 34.79% 35.20% 0.00% 2008 1.40% 1.70% 4.04 9.38 137,530 802,609 -40.84% -40.66% 0.00% 2007 1.25% 1.70% 6.82 15.84 241,648 2,177,105 11.70% 12.20% 0.00% 2006 1.25% 1.70% 6.10 14.17 284,267 2,256,152 -2.32% -1.88% 0.00% ABVPSF SMALL/MID CAP VALUE CLASS B 2010 0.65% 2.55% 11.45 24.50 517,546 9,003,067 23.41% 25.76% 0.27% 2009 0.65% 2.55% 9.13 19.67 452,129 6,441,402 39.06% 41.75% 0.77% 2008 0.65% 2.65% 7.01 14.01 354,669 3,564,791 -37.37% -36.48% 0.43% 2007 1.15% 2.55% 11.85 22.15 254,035 4,218,747 -0.43% 0.27% 0.69% 2006 1.25% 2.35% 11.90 22.17 167,934 3,056,392 12.05% 12.78% 0.23% AMERICAN CENTURY VP INFLATION PROTECTION CLASS II 2010 0.75% 2.85% 10.82 12.46 2,050,930 24,348,757 2.20% 4.31% 1.65% 2009 0.75% 2.80% 10.66 12.01 1,943,884 22,593,535 7.36% 9.41% 1.73% 2008 0.75% 2.65% 9.93 11.03 1,548,195 16,622,077 -4.17% -2.72% 4.85% 2007 1.15% 2.65% 10.36 11.35 1,348,687 15,006,630 6.64% 8.15% 4.56% 2006 1.25% 2.65% 9.75 10.49 1,333,328 13,804,770 -0.83% 0.32% 3.34% AMERICAN FUNDS GLOBAL GROWTH CLASS 2 2010 0.65% 2.85% 11.20 16.19 1,148,727 17,543,478 8.66% 11.02% 1.51% 2009 0.65% 2.80% 10.12 14.67 1,134,636 15,847,735 38.38% 41.24% 1.46% 2008 0.75% 2.80% 7.60 10.44 1,129,386 11,336,240 -40.00% -39.09% 2.01% 2007 1.15% 2.65% 14.95 17.16 918,991 15,312,533 12.07% 13.42% 2.96% 2006 1.25% 2.45% 13.48 15.13 622,543 9,204,327 18.16% 18.93% 0.87% AMERICAN FUNDS GLOBAL SMALL CAPITALIZATION CLASS 2 2010 0.65% 2.85% 11.17 29.92 750,489 16,495,780 19.04% 21.62% 1.66% 2009 0.65% 2.80% 9.21 24.84 736,037 14,036,268 56.84% 60.24% 0.30% 2008 0.65% 2.80% 6.29 15.65 637,442 7,813,603 -54.81% -54.03% 0.00% 2007 1.10% 2.80% 17.12 34.21 563,595 15,255,455 18.43% 19.92% 3.04% 2006 1.25% 2.50% 14.49 28.62 437,693 9,674,755 21.17% 22.51% 0.47% AMERICAN FUNDS GROWTH CLASS 2 2010 0.65% 2.85% 9.66 19.20 6,193,558 93,251,626 15.41% 17.79% 0.73% 2009 0.75% 2.80% 8.27 16.44 6,474,620 84,571,379 35.56% 38.37% 0.65% 2008 0.75% 2.80% 6.03 11.98 6,816,758 65,510,396 -45.52% -44.61% 0.86% 2007 1.15% 2.80% 10.95 21.73 6,154,509 106,899,235 9.41% 10.95% 0.84% 2006 1.25% 2.65% 9.90 19.65 5,195,894 80,438,587 7.55% 8.85% 0.91%
N-38
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- AMERICAN FUNDS GROWTH-INCOME CLASS 2 2010 0.65% 2.85% $ 9.25 $16.28 6,432,388 $83,560,147 8.29% 10.70% 1.55% 2009 0.65% 2.85% 8.38 14.85 6,408,583 76,909,875 27.55% 30.39% 1.56% 2008 0.65% 2.85% 6.95 11.50 6,931,147 65,081,606 -39.48% -38.56% 1.79% 2007 1.15% 2.65% 12.05 18.79 6,307,570 98,075,890 2.30% 3.74% 1.63% 2006 1.25% 2.65% 11.82 18.18 5,223,829 79,559,863 12.41% 13.77% 1.77% AMERICAN FUNDS INTERNATIONAL CLASS 2 2010 0.75% 2.85% 10.75 23.75 2,478,687 44,063,816 4.27% 6.27% 2.05% 2009 0.90% 2.80% 10.11 22.51 2,522,984 43,087,776 39.12% 41.80% 1.54% 2008 0.90% 2.80% 7.28 15.99 2,656,473 32,607,236 -43.72% -42.76% 2.05% 2007 1.10% 2.80% 13.28 28.07 2,417,904 51,430,195 16.88% 18.53% 1.65% 2006 1.25% 2.65% 11.25 23.76 2,039,633 36,443,544 16.10% 17.50% 1.86% BLACKROCK GLOBAL ALLOCATION V.I. CLASS III 2010 0.75% 2.85% 12.31 12.64 1,106,687 13,806,109 7.00% 8.78% 2.17% 2009 7/14/09 0.90% 2.55% 11.50 11.62 166,801 1,928,875 0.14% 14.29% 2.55% DELAWARE VIP DIVERSIFIED INCOME SERVICE CLASS 2010 0.65% 2.85% 12.70 15.09 3,102,682 44,404,564 4.84% 7.06% 3.98% 2009 0.75% 2.85% 12.11 14.16 2,234,856 30,370,661 23.10% 25.71% 5.50% 2008 0.75% 2.85% 9.96 11.32 1,774,133 19,410,248 -7.25% -5.99% 3.65% 2007 1.15% 2.50% 10.74 12.06 1,602,126 18,806,780 4.76% 6.08% 2.62% 2006 1.25% 2.50% 10.27 11.37 1,077,327 12,025,261 5.02% 6.23% 1.25% DELAWARE VIP EMERGING MARKETS SERVICE CLASS 2010 0.75% 2.80% 11.80 39.71 836,850 17,597,531 14.95% 17.33% 0.60% 2009 0.75% 2.80% 10.10 34.15 796,327 14,713,375 72.77% 76.34% 0.89% 2008 0.75% 2.80% 5.75 19.54 841,109 8,985,568 -53.02% -52.24% 1.32% 2007 1.15% 2.80% 20.03 41.11 715,425 16,791,906 35.16% 36.79% 1.33% 2006 1.25% 2.45% 14.89 30.18 523,453 9,627,921 24.12% 25.24% 0.91% DELAWARE VIP HIGH YIELD STANDARD CLASS 2010 1.40% 2.15% 13.80 17.64 37,087 651,513 12.87% 13.72% 7.83% 2009 1.40% 2.15% 12.23 15.51 42,659 659,241 45.81% 46.90% 7.84% 2008 1.40% 2.15% 8.39 10.56 59,710 628,708 -25.79% -25.23% 9.89% 2007 1.40% 2.15% 11.30 14.12 113,806 1,606,000 0.61% 1.37% 6.74% 2006 1.40% 2.15% 11.23 13.93 122,300 1,702,644 10.05% 10.88% 6.66% DELAWARE VIP HIGH YIELD SERVICE CLASS 2010 0.75% 2.80% 12.99 21.99 942,467 16,394,024 11.74% 14.05% 7.47% 2009 0.75% 2.80% 11.46 19.45 892,462 14,029,082 44.98% 47.54% 7.20% 2008 0.75% 2.50% 8.01 13.29 799,471 8,670,568 -26.29% -25.29% 8.38% 2007 1.15% 2.50% 11.15 17.87 804,971 12,037,208 0.01% 1.27% 6.14% 2006 1.25% 2.50% 11.16 17.71 706,679 10,723,799 9.48% 10.80% 6.16% DELAWARE VIP LIMITED-TERM DIVERSIFIED INCOME SERVICE CLASS 2010 0.65% 2.85% 10.87 11.90 1,133,102 13,156,486 1.42% 3.62% 2.02% 2009 0.65% 2.80% 11.14 11.49 526,246 5,958,645 10.40% 11.88% 3.37% 2008 0.65% 1.95% 10.09 10.33 181,814 1,854,976 -2.57% -1.93% 4.40% 2007 1.30% 1.95% 10.36 10.53 50,939 531,398 2.22% 2.89% 4.56% 2006 1.25% 1.95% 10.16 10.24 55,920 571,124 2.47% 2.98% 4.33% DELAWARE VIP REIT STANDARD CLASS 2010 1.40% 2.15% 10.83 25.31 31,541 790,420 24.29% 25.22% 2.78% 2009 1.40% 2.15% 8.72 20.21 39,856 798,797 20.68% 21.60% 4.80% 2008 1.40% 2.15% 7.22 16.62 45,860 756,320 -36.45% -35.97% 2.50% 2007 1.40% 2.15% 11.36 25.95 65,083 1,685,829 -15.77% -15.14% 1.55% 2006 1.40% 2.15% 13.49 30.58 105,365 3,218,141 29.81% 30.79% 1.87% DELAWARE VIP REIT SERVICE CLASS 2010 1.25% 2.70% 10.31 22.12 583,548 10,340,763 23.30% 25.04% 2.68% 2009 1.25% 2.65% 8.33 17.76 609,191 8,788,159 20.01% 21.71% 4.37% 2008 1.25% 2.65% 7.02 14.65 669,511 8,055,493 -36.98% -36.09% 2.13% 2007 1.25% 2.65% 11.20 23.02 759,282 14,473,638 -16.26% -15.24% 1.10% 2006 1.25% 2.45% 13.38 27.27 755,788 17,301,594 29.12% 30.68% 1.54%
N-39
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- DELAWARE VIP SMALL CAP VALUE STANDARD CLASS 2010 1.40% 2.15% $12.81 $26.62 34,047 $ 896,644 29.46% 30.43% 0.64% 2009 1.40% 2.15% 9.90 20.41 46,578 934,628 29.02% 30.00% 1.00% 2008 1.40% 2.15% 7.67 15.70 56,909 880,274 -31.37% -30.85% 0.87% 2007 1.40% 2.15% 11.18 22.70 92,807 2,092,893 -8.61% -7.92% 0.57% 2006 1.40% 2.15% 12.23 24.66 133,429 3,285,327 13.71% 14.57% 0.25% DELAWARE VIP SMALL CAP VALUE SERVICE CLASS 2010 0.75% 2.85% 11.62 25.96 938,813 18,102,120 28.28% 30.93% 0.46% 2009 0.75% 2.80% 8.93 20.01 931,387 14,527,468 27.93% 30.58% 0.67% 2008 0.75% 2.80% 7.43 15.46 974,434 11,838,703 -32.00% -30.94% 0.47% 2007 1.25% 2.80% 10.96 22.48 877,484 16,093,929 -9.28% -8.00% 0.25% 2006 1.25% 2.65% 12.13 24.53 707,392 14,272,750 13.13% 14.45% 0.02% DELAWARE VIP SMID CAP GROWTH STANDARD CLASS 2010 10/8/10 1.40% 1.40% 11.83 11.83 41,057 485,534 13.41% 13.41% 0.00% DELAWARE VIP SMID CAP GROWTH SERVICE CLASS 2010 10/8/10 1.15% 2.80% 9.41 20.62 414,054 6,424,434 12.98% 13.40% 0.00% DELAWARE VIP TREND STANDARD CLASS 2009 1.40% 2.15% 8.75 10.11 56,266 492,868 51.43% 52.58% 0.00% 2008 1.40% 2.15% 5.73 6.68 70,014 401,917 -47.87% -47.48% 0.00% 2007 1.40% 2.15% 10.92 10.92 120,331 1,314,699 9.21% 9.21% 0.00% 2006 1.40% 1.40% 10.00 10.00 172,576 1,725,117 6.10% 6.10% 0.00% DELAWARE VIP TREND SERVICE CLASS 2009 1.15% 2.80% 7.00 15.33 344,720 3,989,233 50.56% 52.63% 0.00% 2008 1.15% 2.50% 4.61 10.09 377,620 2,895,182 -48.18% -47.46% 0.00% 2007 1.15% 2.50% 8.81 19.29 383,460 5,679,592 7.78% 9.09% 0.00% 2006 1.25% 2.45% 8.11 17.75 393,256 5,587,281 4.73% 6.00% 0.00% DELAWARE VIP U.S. GROWTH SERVICE CLASS 2010 0.65% 2.35% 9.97 13.85 208,823 2,445,380 10.90% 12.84% 0.00% 2009 0.65% 2.45% 8.97 12.39 176,677 1,955,508 39.48% 41.86% 0.00% 2008 0.75% 2.45% 6.49 8.81 181,397 1,437,444 -44.24% -43.57% 0.00% 2007 1.25% 2.45% 11.65 15.66 156,638 2,262,095 9.66% 10.98% 0.00% 2006 1.25% 2.45% 11.14 14.16 161,058 2,125,204 -0.41% 0.79% 0.00% DELAWARE VIP VALUE STANDARD CLASS 2010 1.40% 1.40% 13.14 13.14 14,051 184,583 14.02% 14.02% 2.87% 2009 1.40% 2.15% 9.00 11.52 23,001 263,719 15.45% 16.32% 2.86% 2008 1.40% 2.15% 7.79 9.90 32,025 316,031 -34.84% -34.35% 3.24% 2007 1.40% 2.35% 15.09 15.09 41,279 607,986 -4.08% -4.08% 1.81% 2006 1.40% 1.40% 15.73 15.73 53,950 848,542 22.38% 22.38% 1.49% DELAWARE VIP VALUE SERVICE CLASS 2010 1.15% 2.80% 9.32 15.80 592,966 7,602,371 12.14% 14.01% 2.22% 2009 1.15% 2.80% 8.18 13.92 609,144 6,955,676 14.91% 16.31% 2.93% 2008 1.15% 2.35% 7.03 12.02 644,275 6,481,523 -35.12% -34.33% 2.70% 2007 1.15% 2.40% 11.82 18.39 662,680 10,287,813 -5.25% -4.20% 1.27% 2006 1.25% 2.35% 12.47 19.26 505,269 8,327,048 20.92% 22.26% 1.23% DWS VIP ALTERNATIVE ASSET ALLOCATION PLUS CLASS B 2010 1.25% 2.80% 12.67 12.75 303,424 3,839,499 10.31% 10.76% 0.41% 2009 9/2/09 1.25% 1.65% 11.48 11.51 4,328 49,770 1.77% 7.04% 0.00% DWS VIP EQUITY 500 INDEX CLASS A 2010 1.25% 2.35% 8.54 15.12 200,440 2,341,674 12.04% 13.28% 1.98% 2009 1.25% 2.35% 7.57 13.39 296,615 2,899,686 23.39% 24.76% 2.91% 2008 1.25% 2.35% 6.09 10.77 366,999 2,872,840 -38.61% -37.93% 2.52% 2007 1.25% 2.35% 9.86 17.42 461,475 5,665,995 3.06% 3.99% 1.55% 2006 1.25% 2.15% 9.52 16.81 537,865 6,258,091 13.06% 14.09% 1.17% DWS VIP EQUITY 500 INDEX CLASS B 2010 1.25% 2.50% 9.96 13.83 238,458 3,086,837 11.69% 13.09% 1.71% 2009 1.25% 2.50% 8.90 12.24 293,217 3,362,104 22.92% 24.46% 2.68% 2008 1.25% 2.50% 7.29 9.84 343,991 3,199,057 -38.89% -38.12% 2.22% 2007 1.25% 2.50% 11.96 15.92 401,406 6,007,428 2.54% 3.73% 1.23% 2006 1.25% 2.40% 11.66 15.36 385,552 5,699,773 12.51% 13.75% 0.85%
N-40
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- DWS VIP SMALL CAP INDEX CLASS A 2010 1.25% 2.35% $11.60 $21.28 30,668 $ 592,306 23.47% 24.82% 0.97% 2009 1.25% 2.35% 9.39 17.11 43,175 663,838 23.64% 25.00% 1.87% 2008 1.25% 2.35% 7.60 13.73 54,740 674,464 -35.66% -34.94% 1.65% 2007 1.25% 2.35% 17.94 21.18 70,714 1,331,470 -3.55% -3.12% 0.89% 2006 1.25% 1.70% 18.60 21.94 88,917 1,723,028 15.51% 16.03% 0.65% DWS VIP SMALL CAP INDEX CLASS B 2010 1.25% 2.55% 11.79 18.06 119,903 1,946,989 23.43% 24.54% 0.64% 2009 1.25% 2.15% 9.52 14.52 145,827 1,868,669 23.58% 24.70% 1.63% 2008 1.25% 2.80% 7.41 11.65 174,996 1,833,481 -36.14% -35.14% 1.40% 2007 1.25% 2.80% 11.90 17.98 198,271 3,271,806 -4.05% -3.38% 0.59% 2006 1.25% 1.95% 12.38 18.63 159,270 2,736,835 14.93% 15.73% 0.32% FIDELITY VIP CONTRAFUND SERVICE CLASS 2 2010 0.65% 2.85% 10.32 17.94 2,771,410 40,250,191 13.64% 16.17% 1.05% 2009 0.65% 2.85% 8.91 15.59 2,662,898 34,236,601 31.66% 34.60% 1.20% 2008 0.65% 2.85% 7.04 11.69 2,681,682 26,189,519 -44.28% -43.32% 0.89% 2007 1.10% 2.80% 13.90 20.73 2,079,333 36,955,326 14.41% 15.85% 0.90% 2006 1.25% 2.50% 12.26 17.96 1,439,907 22,724,482 9.33% 10.05% 1.10% FIDELITY VIP EQUITY-INCOME INITIAL CLASS 2010 1.40% 2.35% 9.90 11.97 49,458 589,945 12.48% 13.55% 1.65% 2009 1.40% 2.35% 8.80 10.54 62,920 661,398 27.18% 28.40% 2.23% 2008 1.40% 2.35% 8.21 8.21 81,512 667,683 -43.45% -43.45% 2.09% 2007 1.40% 1.40% 14.51 14.51 120,210 1,744,766 0.12% 0.12% 1.65% 2006 1.40% 1.40% 14.50 14.50 140,772 2,040,786 18.52% 18.52% 3.28% FIDELITY VIP EQUITY-INCOME SERVICE CLASS 2 2010 1.25% 2.50% 9.38 15.00 147,513 2,043,346 12.08% 13.49% 1.54% 2009 1.25% 2.50% 8.66 13.27 179,710 2,192,506 26.74% 28.27% 2.00% 2008 1.25% 2.45% 6.83 10.38 216,604 2,067,281 -44.20% -43.52% 2.32% 2007 1.25% 2.45% 12.25 18.44 224,248 3,808,352 -1.18% 0.01% 1.50% 2006 1.25% 2.45% 12.39 18.51 253,442 4,277,123 17.03% 18.44% 2.95% FIDELITY VIP GROWTH INITIAL CLASS 2010 1.40% 1.40% 7.79 7.79 27,910 217,326 22.45% 22.45% 0.26% 2009 1.40% 2.15% 6.36 8.95 35,005 223,539 25.56% 26.50% 0.44% 2008 1.40% 2.15% 5.03 7.13 38,421 193,967 -48.29% -47.90% 0.57% 2007 1.40% 2.15% 9.65 9.65 70,056 677,742 25.20% 25.20% 0.83% 2006 1.40% 1.40% 7.71 7.71 82,129 632,974 5.36% 5.36% 0.42% FIDELITY VIP GROWTH SERVICE CLASS 2 2010 0.75% 2.55% 6.58 14.72 274,884 3,089,942 20.87% 22.93% 0.03% 2009 0.75% 2.45% 5.40 12.07 263,703 2,462,291 25.12% 26.51% 0.20% 2008 1.15% 2.25% 4.29 9.59 302,246 2,237,876 -48.33% -47.91% 0.60% 2007 1.15% 1.95% 8.28 18.49 301,473 4,348,313 24.28% 25.09% 0.36% 2006 1.25% 1.90% 6.65 14.83 244,783 2,894,690 4.78% 5.25% 0.15% FIDELITY VIP MID CAP SERVICE CLASS 2 2010 0.65% 2.80% 12.22 15.32 1,492,380 22,285,551 25.02% 27.61% 0.13% 2009 0.75% 2.80% 9.59 12.06 1,489,715 17,620,587 35.89% 38.70% 0.49% 2008 0.75% 2.80% 7.18 8.74 1,388,995 11,957,576 -41.28% -40.30% 0.24% 2007 1.15% 2.80% 14.39 14.64 962,202 13,951,114 13.11% 13.85% 0.51% 2006 1.30% 1.95% 12.74 12.86 553,398 7,076,892 10.29% 10.95% 0.09% FIDELITY VIP OVERSEAS INITIAL CLASS 2010 1.40% 1.40% 10.99 10.99 9,204 101,129 11.55% 11.55% 1.39% 2009 1.40% 1.40% 9.85 9.85 10,064 99,119 24.77% 24.77% 1.91% 2008 1.40% 1.40% 7.89 7.89 15,030 118,640 -44.59% -44.59% 2.36% 2007 1.40% 1.40% 14.24 14.24 21,890 311,796 15.68% 15.68% 3.80% 2006 1.40% 1.40% 12.31 12.31 31,920 393,029 16.44% 16.44% 0.91% FIDELITY VIP OVERSEAS SERVICE CLASS 2 2010 1.15% 2.50% 9.67 19.36 258,604 4,156,534 10.05% 11.54% 1.14% 2009 1.15% 2.50% 8.71 17.43 294,153 4,350,399 23.16% 24.78% 1.92% 2008 1.15% 2.45% 7.01 14.03 324,270 3,816,208 -45.32% -44.60% 2.48% 2007 1.15% 2.45% 12.73 25.45 324,398 6,909,696 14.22% 15.60% 2.99% 2006 1.25% 2.45% 11.06 22.09 282,744 5,470,236 14.92% 16.31% 0.68%
N-41
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- FTVIPT FRANKLIN INCOME SECURITIES CLASS 2 2010 0.65% 2.85% $10.97 $11.93 2,212,406 $25,815,263 9.51% 11.95% 6.44% 2009 0.65% 2.85% 9.82 10.72 2,120,385 22,357,290 31.79% 34.58% 8.12% 2008 0.75% 2.85% 7.65 8.01 2,047,115 16,199,724 -31.50% -30.43% 5.54% 2007 1.10% 2.65% 11.40 11.52 1,530,443 17,518,324 1.75% 2.42% 3.05% 2006 6/12/06 1.30% 1.95% 11.20 11.25 361,772 4,058,043 2.94% 12.62% 0.30% FTVIPT FRANKLIN SMALL-MID CAP GROWTH SECURITIES CLASS 2 2010 0.65% 2.80% 8.42 20.74 629,793 9,300,368 24.10% 26.80% 0.00% 2009 0.65% 2.80% 6.70 16.51 680,642 7,975,242 39.61% 42.66% 0.00% 2008 0.65% 2.80% 4.75 11.68 653,596 5,415,804 -43.89% -43.21% 0.00% 2007 1.25% 2.50% 8.39 20.65 543,045 7,876,469 8.55% 9.86% 0.00% 2006 1.25% 2.45% 7.67 18.86 401,966 5,063,038 6.06% 7.34% 0.00% FTVIPT MUTUAL SHARES SECURITIES CLASS 2 2010 0.65% 2.80% 9.02 9.80 1,887,560 18,048,001 8.13% 10.47% 1.63% 2009 0.65% 2.80% 8.19 8.93 1,674,952 14,663,495 22.57% 25.23% 1.97% 2008 0.65% 2.80% 6.95 7.17 1,526,955 10,807,864 -38.63% -37.83% 3.26% 2007 1.15% 2.45% 11.41 11.54 1,121,020 12,853,330 1.50% 2.21% 1.34% 2006 6/7/06 1.25% 1.95% 11.25 11.29 298,033 3,357,415 3.32% 14.10% 0.00% FTVIPT TEMPLETON GLOBAL BOND SECURITIES CLASS 2 2010 0.65% 2.80% 15.40 16.79 1,042,826 17,080,105 11.29% 13.71% 1.40% 2009 0.65% 2.80% 13.84 14.85 1,148,034 16,699,762 15.41% 17.90% 14.48% 2008 0.65% 2.80% 11.99 12.67 1,043,672 13,020,428 3.27% 4.99% 3.68% 2007 1.15% 2.80% 11.65 12.08 591,791 7,076,938 8.10% 9.62% 2.53% 2006 1.25% 2.65% 10.91 11.01 252,285 2,762,547 10.65% 11.31% 2.89% FTVIPT TEMPLETON GROWTH SECURITIES CLASS 2 2010 1.25% 2.55% 9.59 15.75 388,040 5,102,032 4.70% 6.06% 1.36% 2009 1.25% 2.55% 9.16 14.90 445,634 5,522,806 27.80% 29.47% 3.19% 2008 1.25% 2.55% 7.17 11.55 522,721 5,040,454 -43.78% -43.04% 1.82% 2007 1.25% 2.55% 12.80 20.35 588,977 10,005,432 -0.08% 1.08% 1.38% 2006 1.25% 2.40% 12.81 20.20 522,713 8,917,851 18.92% 20.30% 1.31% GOLDMAN SACHS VIT LARGE CAP VALUE SERVICE CLASS 2010 0.65% 2.20% 13.13 13.39 64,486 857,331 9.08% 10.06% 1.30% 2009 5/19/09 0.75% 1.65% 12.04 12.16 9,804 119,035 0.99% 21.16% 4.21% INVESCO V.I. CAPITAL APPRECIATION SERIES I 2010 1.40% 2.10% 4.19 4.86 36,269 177,636 13.60% 13.88% 0.78% 2009 1.40% 1.65% 3.69 4.27 44,985 179,686 19.10% 19.40% 0.62% 2008 1.40% 1.65% 3.10 3.57 53,514 181,176 -43.44% -43.29% 0.00% 2007 1.40% 1.65% 5.47 6.30 67,058 405,234 10.18% 10.46% 0.00% 2006 4/28/06 1.40% 1.65% 4.97 5.71 116,072 647,668 -1.38% -1.22% 0.06% INVESCO V.I. CAPITAL APPRECIATION SERIES II 2010 1.40% 1.70% 9.47 13.11 6,814 69,484 13.27% 13.61% 0.54% 2009 1.25% 1.70% 8.36 11.56 9,168 86,254 18.69% 19.22% 0.28% 2008 1.25% 1.70% 7.04 9.73 10,047 80,198 -43.60% -43.34% 0.00% 2007 1.25% 1.70% 12.48 17.23 10,820 153,703 9.85% 10.35% 0.00% 2006 4/28/06 1.25% 1.70% 11.36 15.67 17,186 229,910 -1.59% -1.29% 0.00% INVESCO V.I. CORE EQUITY SERIES I 2010 1.40% 1.65% 7.50 8.13 52,914 419,992 7.76% 8.03% 0.94% 2009 1.40% 2.15% 6.96 10.76 72,234 533,456 25.57% 26.51% 1.73% 2008 1.40% 2.15% 5.52 8.57 95,576 560,729 -31.63% -31.11% 1.90% 2007 1.40% 2.15% 8.03 8.64 126,614 1,079,752 6.35% 6.61% 0.97% 2006 4/28/06 1.40% 1.65% 7.55 8.10 177,097 1,414,490 7.96% 8.14% 0.52% INVESCO V.I. CORE EQUITY SERIES II 2010 1.40% 1.60% 11.63 15.30 666 9,230 7.53% 7.74% 0.45% 2009 1.40% 1.60% 10.79 14.23 1,430 16,483 25.96% 26.21% 0.94% 2008 1.40% 1.60% 8.55 11.29 4,155 36,379 -31.44% -31.30% 1.93% 2007 1.40% 1.60% 12.45 16.47 4,100 52,247 6.16% 6.38% 1.02% 2006 4/28/06 1.40% 1.60% 11.70 15.52 3,781 45,400 7.83% 7.97% 0.54%
N-42
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- INVESCO V.I. INTERNATIONAL GROWTH SERIES I 2010 1.40% 1.40% $12.72 $12.72 9,649 $ 122,723 11.30% 11.30% 2.33% 2009 1.40% 1.40% 11.43 11.43 10,020 114,506 33.36% 33.36% 1.21% 2008 1.40% 1.65% 7.52 8.57 21,030 178,491 -41.36% -41.21% 0.41% 2007 1.40% 1.65% 12.83 14.58 35,278 511,337 12.84% 13.12% 0.35% 2006 1.40% 1.65% 12.88 12.88 47,940 615,202 26.45% 26.45% 0.98% INVESCO V.I. INTERNATIONAL GROWTH SERIES II 2010 1.40% 1.70% 18.95 22.94 10,304 219,863 10.71% 11.04% 1.81% 2009 1.40% 1.70% 17.11 20.70 10,720 205,627 32.63% 33.04% 1.41% 2008 1.40% 1.70% 12.90 15.59 11,997 171,182 -41.55% -41.37% 0.40% 2007 1.35% 1.70% 22.07 26.65 16,233 396,637 12.52% 12.91% 0.37% 2006 1.35% 1.70% 19.62 23.66 17,638 382,627 25.72% 26.10% 1.02% JANUS ASPEN SERIES BALANCED SERVICE CLASS 2010 1.35% 1.70% 15.70 16.40 40,823 653,622 6.30% 6.67% 2.46% 2009 1.35% 1.70% 14.77 15.42 49,333 742,768 23.47% 23.90% 2.53% 2008 1.25% 1.70% 11.96 12.47 75,551 924,265 -17.48% -17.10% 2.48% 2007 1.25% 1.70% 14.47 15.10 70,061 1,030,575 8.43% 8.92% 2.15% 2006 1.25% 1.70% 13.33 13.91 82,347 1,116,877 8.55% 9.04% 1.90% JANUS ASPEN SERIES ENTERPRISE SERVICE CLASS 2010 1.25% 1.70% 17.92 22.99 31,864 663,530 23.41% 23.96% 0.00% 2009 1.25% 1.70% 14.52 18.61 46,217 765,293 42.01% 42.65% 0.00% 2008 1.25% 1.70% 10.22 13.09 51,127 592,797 -44.80% -44.56% 0.06% 2007 1.25% 1.70% 18.52 23.69 60,422 1,261,161 19.69% 20.23% 0.07% 2006 1.25% 1.70% 15.48 19.77 62,813 1,093,216 11.40% 11.90% 0.00% JANUS ASPEN SERIES WORLDWIDE SERVICE CLASS 2010 1.40% 1.60% 13.71 14.00 1,495 20,304 13.69% 13.86% 0.46% 2009 1.45% 1.60% 12.05 12.31 1,419 17,207 35.23% 35.43% 1.21% 2008 1.45% 1.60% 8.90 9.11 1,834 16,488 -45.69% -45.60% 0.96% 2007 1.45% 1.60% 16.37 16.77 2,474 41,084 7.63% 7.79% 0.57% 2006 1.45% 1.60% 15.20 15.58 2,473 38,141 16.07% 16.23% 1.64% LVIP AMERICAN GLOBAL GROWTH SERVICE CLASS II 2010 11/29/10 1.30% 1.90% 12.34 12.38 10,447 129,265 1.13% 5.76% 0.00% LVIP AMERICAN GLOBAL SMALL CAPITALIZATION SERVICE CLASS II 2010 11/23/10 1.30% 1.90% 12.73 12.77 5,921 75,551 1.82% 5.45% 0.00% LVIP AMERICAN GROWTH SERVICE CLASS II 2010 11/19/10 1.30% 1.90% 12.46 12.50 31,890 397,998 1.80% 6.38% 0.00% LVIP AMERICAN GROWTH-INCOME SERVICE CLASS II 2010 11/22/10 1.30% 1.90% 12.14 12.18 30,537 371,435 0.85% 4.53% 0.00% LVIP AMERICAN INTERNATIONAL SERVICE CLASS II 2010 12/2/10 1.30% 1.90% 12.24 12.27 10,767 132,078 1.02% 1.95% 0.00% LVIP BARON GROWTH OPPORTUNITIES SERVICE CLASS 2010 0.75% 2.80% 10.37 11.14 672,638 7,321,779 22.90% 25.44% 0.00% 2009 0.75% 2.80% 8.50 8.92 595,873 5,229,059 34.84% 37.28% 0.00% 2008 0.75% 2.55% 6.32 6.53 568,879 3,672,296 -40.67% -39.89% 0.00% 2007 1.25% 2.55% 10.75 10.86 326,226 3,521,020 1.42% 2.08% 0.00% 2006 6/22/06 1.30% 1.95% 10.60 10.64 15,481 164,253 0.79% 14.03% 0.00% LVIP BLACKROCK INFLATION PROTECTED BOND SERVICE CLASS 2010 11/18/10 1.30% 2.60% 10.04 10.12 114,500 1,156,079 -2.28% 1.08% 0.91% LVIP CAPITAL GROWTH SERVICE CLASS 2010 0.65% 2.55% 9.17 9.82 182,917 1,759,064 15.68% 17.92% 0.00% 2009 0.65% 2.70% 7.95 8.31 108,531 886,634 31.27% 33.52% 0.07% 2008 0.75% 2.45% 6.05 6.17 90,952 558,156 -43.14% -42.46% 0.00% 2007 7/11/07 1.25% 2.45% 10.65 10.73 61,679 660,009 -0.91% 9.07% 0.00% LVIP COHEN & STEERS GLOBAL REAL ESTATE SERVICE CLASS 2010 0.90% 2.80% 7.02 7.52 730,226 5,337,719 14.42% 16.61% 0.00% 2009 0.90% 2.80% 6.17 6.40 647,497 4,093,020 33.96% 35.92% 0.00% 2008 1.15% 2.60% 4.65 4.71 489,716 2,289,889 -43.30% -42.84% 1.35% 2007 6/6/07 1.15% 1.95% 8.20 8.24 193,702 1,591,943 -16.26% -4.06% 0.58%
N-43
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- LVIP COLUMBIA VALUE OPPORTUNITIES SERVICE CLASS 2010 1.30% 2.55% $ 8.83 $ 9.19 87,323 $ 790,627 21.50% 22.84% 0.00% 2009 1.30% 2.40% 7.37 7.46 58,275 431,485 22.01% 22.63% 0.36% 2008 1.40% 1.90% 6.06 6.09 56,185 340,393 -35.21% -35.05% 0.26% 2007 7/11/07 1.30% 1.65% 9.36 9.38 14,899 139,493 -7.59% -2.38% 0.83% LVIP CORE SERVICE CLASS 2006 1.30% 1.90% 11.45 11.52 21,327 244,225 11.75% 12.19% 0.74% LVIP DELAWARE BOND STANDARD CLASS 2010 1.25% 2.65% 11.91 18.43 790,437 12,528,566 5.65% 7.14% 3.17% 2009 1.25% 2.65% 11.28 17.23 939,493 14,140,359 15.79% 17.42% 4.00% 2008 1.25% 2.65% 9.74 14.70 1,155,221 14,987,636 -5.46% -4.13% 4.02% 2007 1.25% 2.65% 10.38 15.35 1,662,099 22,254,222 3.00% 4.14% 4.82% 2006 1.25% 2.35% 10.08 14.76 1,812,483 23,405,615 2.28% 3.41% 4.43% LVIP DELAWARE BOND SERVICE CLASS 2010 0.65% 2.80% 11.62 13.36 3,666,301 46,866,116 5.13% 7.42% 2.95% 2009 0.65% 2.80% 11.18 12.53 3,621,392 43,880,347 15.50% 17.71% 4.59% 2008 0.65% 2.55% 9.68 10.72 3,005,756 31,297,680 -5.70% -4.46% 4.60% 2007 1.25% 2.55% 10.29 11.23 2,689,617 29,591,599 2.63% 3.86% 4.88% 2006 1.25% 2.45% 10.02 10.82 2,432,417 25,953,247 1.92% 3.10% 4.52% LVIP DELAWARE DIVERSIFIED FLOATING RATE SERVICE CLASS 2010 11/23/10 1.30% 2.55% 9.98 10.06 79,582 798,262 -0.05% 0.03% 0.44% LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION STANDARD CLASS 2010 1.25% 2.45% 11.27 16.08 24,404 368,235 9.77% 11.09% 2.54% 2009 1.25% 2.45% 10.26 14.53 32,353 438,586 28.79% 30.35% 1.67% 2008 1.25% 2.45% 7.97 11.19 37,992 395,662 -34.84% -34.05% 6.34% 2007 1.25% 2.45% 15.49 17.02 43,064 681,725 4.58% 5.05% 1.68% 2006 1.25% 1.70% 14.82 16.26 45,161 684,302 12.58% 13.09% 1.46% LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION SERVICE CLASS 2010 1.25% 2.85% 10.87 14.88 264,021 3,524,951 9.05% 10.81% 2.47% 2009 1.25% 2.85% 9.96 13.44 283,186 3,425,915 27.96% 29.96% 1.47% 2008 1.30% 2.85% 7.87 10.35 294,315 2,777,935 -35.07% -34.25% 7.85% 2007 1.30% 2.55% 12.36 15.74 182,399 2,741,873 4.12% 4.74% 1.57% 2006 1.30% 1.90% 11.86 15.04 122,353 1,794,675 12.19% 12.75% 2.11% LVIP DELAWARE GROWTH AND INCOME SERVICE CLASS 2010 0.75% 2.55% 9.32 10.33 149,036 1,509,371 9.71% 11.70% 0.68% 2009 0.75% 2.55% 8.75 9.30 128,534 1,178,088 21.36% 22.63% 0.96% 2008 1.30% 2.35% 7.31 7.58 93,226 699,617 -37.49% -36.82% 1.09% 2007 1.30% 2.35% 11.82 12.00 65,174 776,638 3.86% 4.49% 1.11% 2006 1.30% 1.90% 11.42 11.49 42,082 480,883 10.18% 10.64% 1.24% LVIP DELAWARE SOCIAL AWARENESS STANDARD CLASS 2010 1.25% 2.10% 14.07 16.93 52,379 815,938 9.69% 10.18% 0.59% 2009 1.25% 1.70% 12.83 15.41 62,558 887,698 27.81% 28.39% 0.70% 2008 1.25% 1.70% 10.04 12.05 66,181 737,175 -35.52% -35.23% 0.84% 2007 1.25% 1.70% 15.57 18.67 79,036 1,366,209 1.23% 1.69% 0.84% 2006 1.25% 2.45% 15.38 18.42 86,556 1,467,851 10.42% 10.91% 0.88% LVIP DELAWARE SOCIAL AWARENESS SERVICE CLASS 2010 0.75% 2.55% 9.47 15.21 162,869 2,248,485 8.60% 10.35% 0.25% 2009 0.75% 2.45% 8.58 13.86 193,793 2,474,240 26.41% 28.57% 0.36% 2008 0.75% 2.45% 7.49 10.85 217,703 2,187,066 -36.23% -35.45% 0.58% 2007 1.25% 2.45% 11.74 16.82 206,066 3,349,982 0.22% 1.38% 0.64% 2006 1.30% 2.45% 11.72 16.60 212,422 3,435,147 9.32% 10.58% 0.67% LVIP DELAWARE SPECIAL OPPORTUNITIES SERVICE CLASS 2010 1.25% 2.55% 9.19 9.43 141,879 1,310,134 27.66% 28.56% 0.39% 2009 1.25% 2.50% 7.21 7.33 166,672 1,208,196 27.54% 28.37% 0.93% 2008 1.25% 1.90% 5.65 5.71 63,135 358,094 -38.05% -37.64% 1.06% 2007 7/16/07 1.25% 1.90% 9.13 9.16 28,868 263,794 -9.30% 0.42% 0.69% LVIP GLOBAL INCOME SERVICE CLASS 2010 0.75% 2.85% 11.27 11.66 655,511 7,511,475 6.40% 8.61% 3.82% 2009 7/10/09 0.75% 2.80% 10.60 10.73 127,526 1,359,469 -2.16% 5.43% 2.66%
N-44
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- LVIP GROWTH SERVICE CLASS 2006 1/6/06 1.30% 1.90% $11.23 $11.33 4,050 $ 45,555 0.27% 12.75% 0.00% LVIP GROWTH OPPORTUNITIES SERVICE CLASS 2006 1.30% 1.90% 12.38 12.43 39,513 488,316 8.15% 8.47% 0.00% LVIP JANUS CAPITAL APPRECIATION STANDARD CLASS 2010 1.25% 1.70% 12.74 15.66 8,961 121,493 9.47% 9.96% 0.70% 2009 1.25% 1.70% 11.64 14.29 10,258 125,584 36.19% 36.80% 0.77% 2008 1.25% 1.70% 8.55 10.48 13,433 121,269 -41.82% -41.56% 0.67% 2007 1.25% 1.70% 14.69 18.00 14,679 228,839 18.39% 18.92% 0.26% 2006 1.25% 1.70% 12.41 15.19 18,044 239,491 7.82% 8.31% 0.19% LVIP JANUS CAPITAL APPRECIATION SERVICE CLASS 2010 1.15% 2.80% 10.76 14.38 131,778 1,721,907 8.01% 9.81% 0.54% 2009 1.15% 2.80% 10.37 13.17 117,578 1,450,153 35.57% 36.59% 0.89% 2008 1.15% 1.90% 7.59 9.66 103,965 953,011 -42.08% -41.64% 0.56% 2007 1.15% 1.90% 13.42 16.59 64,821 1,023,651 17.85% 18.56% 0.08% 2006 1.30% 1.90% 13.83 14.00 27,853 380,140 7.56% 7.94% 0.00% LVIP JPMORGAN HIGH YIELD SERVICE CLASS 2010 11/19/10 1.30% 1.90% 10.78 10.83 12,833 138,587 0.54% 0.76% 1.01% LVIP MFS INTERNATIONAL GROWTH SERVICE CLASS 2010 0.65% 2.70% 7.95 8.53 359,169 2,972,670 9.82% 11.98% 0.57% 2009 0.75% 2.70% 7.33 7.62 271,562 2,021,186 32.50% 34.50% 0.72% 2008 0.75% 2.25% 5.56 5.63 229,810 1,282,862 -50.03% -49.63% 1.08% 2007 6/8/07 1.10% 1.90% 11.13 11.18 81,977 913,932 -5.48% 22.98% 0.80% LVIP MFS VALUE SERVICE CLASS 2010 0.65% 2.80% 8.04 8.69 942,376 7,930,493 8.24% 10.59% 1.19% 2009 0.65% 2.80% 7.50 7.86 597,763 4,580,700 17.75% 19.89% 1.44% 2008 0.65% 2.45% 6.42 6.51 370,870 2,393,206 -33.76% -33.20% 1.26% 2007 6/26/07 1.10% 1.95% 9.69 9.74 103,062 1,000,521 -3.80% 5.03% 0.91% LVIP MID-CAP VALUE SERVICE CLASS 2010 0.75% 2.85% 8.19 8.77 349,617 2,979,731 20.18% 22.48% 0.01% 2009 0.90% 2.80% 6.97 7.11 268,417 1,882,270 39.34% 40.46% 0.31% 2008 1.15% 1.95% 5.00 5.06 219,819 1,103,680 -42.00% -41.53% 0.11% 2007 6/6/07 1.15% 1.95% 8.62 8.66 108,268 934,705 -13.49% 1.46% 0.28% LVIP MONDRIAN INTERNATIONAL VALUE STANDARD CLASS 2010 1.25% 2.45% 11.16 20.35 91,896 1,789,661 -0.01% 1.19% 2.98% 2009 1.25% 2.45% 11.16 20.18 117,151 2,267,726 18.29% 19.73% 3.31% 2008 1.25% 2.45% 9.44 16.92 133,119 2,154,235 -38.19% -37.44% 4.74% 2007 1.25% 2.45% 24.39 27.14 156,638 4,042,481 9.61% 10.10% 2.00% 2006 1.25% 1.70% 22.22 24.73 158,474 3,753,593 27.82% 28.39% 2.96% LVIP MONDRIAN INTERNATIONAL VALUE SERVICE CLASS 2010 0.75% 2.80% 10.55 18.25 477,244 7,448,268 -0.61% 0.94% 3.01% 2009 1.25% 2.80% 10.55 18.10 525,340 8,335,441 17.58% 19.42% 3.13% 2008 1.25% 2.80% 9.34 15.17 541,088 7,326,395 -38.37% -37.60% 4.75% 2007 1.25% 2.50% 15.15 24.34 535,964 11,895,716 8.46% 9.83% 1.86% 2006 1.25% 2.50% 13.98 22.18 465,653 9,644,132 26.55% 28.01% 2.83% LVIP MONEY MARKET STANDARD CLASS 2010 1.25% 2.45% 10.02 11.13 351,694 3,791,835 -2.39% -1.20% 0.05% 2009 1.25% 2.45% 10.27 11.28 586,054 6,399,225 -2.13% -0.94% 0.32% 2008 1.25% 2.45% 10.49 11.40 920,631 10,085,363 -0.13% 1.07% 2.22% 2007 1.25% 2.45% 10.51 11.30 567,676 6,288,607 2.41% 3.66% 4.85% 2006 1.25% 2.45% 10.20 10.92 635,790 6,753,083 2.44% 3.38% 4.57% LVIP MONEY MARKET SERVICE CLASS 2010 0.75% 2.80% 9.72 10.60 1,453,345 14,882,422 -2.72% -0.71% 0.04% 2009 0.75% 2.80% 9.99 10.73 1,649,506 17,180,141 -2.68% -0.67% 0.09% 2008 0.75% 2.80% 10.34 10.85 2,317,934 24,490,806 -0.38% 0.82% 1.98% 2007 1.25% 2.45% 10.33 10.75 1,538,687 16,222,762 2.17% 3.35% 4.58% 2006 1.30% 2.45% 10.08 10.40 1,041,596 10,633,856 1.89% 3.07% 4.42%
N-45
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- LVIP SSgA BOND INDEX SERVICE CLASS 2010 0.90% 2.85% $10.83 $11.36 2,753,241 $30,602,415 2.79% 4.76% 2.14% 2009 0.90% 2.80% 10.58 10.79 1,344,495 14,412,752 1.64% 2.97% 2.16% 2008 7/7/08 1.25% 2.55% 10.41 10.48 393,102 4,112,314 2.70% 6.05% 0.76% LVIP SSgA CONSERVATIVE STRUCTURED ALLOCATION SERVICE CLASS 2010 12/8/10 1.30% 1.30% 10.41 10.41 4,856 50,557 1.08% 1.08% 0.00% LVIP SSgA DEVELOPED INTERNATIONAL 150 SERVICE CLASS 2010 1.25% 2.80% 9.08 9.45 501,816 4,677,746 4.05% 5.67% 1.25% 2009 1.25% 2.80% 8.76 8.94 251,863 2,236,344 40.69% 42.53% 1.71% 2008 7/16/08 1.25% 2.55% 6.23 6.27 90,944 569,302 -33.94% 20.38% 1.96% LVIP SSgA EMERGING MARKETS 100 SERVICE CLASS 2010 0.90% 2.80% 13.73 14.41 511,545 7,217,769 23.93% 26.79% 1.17% 2009 0.90% 2.80% 11.12 11.34 342,441 3,859,425 84.71% 87.12% 1.53% 2008 7/16/08 1.25% 2.55% 6.02 6.06 74,056 448,279 -39.37% 21.11% 1.23% LVIP SSgA GLOBAL TACTICAL ALLOCATION SERVICE CLASS 2010 1.30% 2.20% 10.66 11.06 309,603 3,349,785 6.38% 7.08% 0.79% 2009 1.30% 1.95% 10.02 10.32 322,166 3,278,800 27.95% 28.78% 6.47% 2008 1.30% 1.95% 7.83 8.02 325,144 2,576,159 -41.77% -41.38% 0.33% 2007 1.25% 1.95% 13.47 13.69 184,558 2,503,334 8.66% 9.37% 0.72% 2006 1.25% 1.90% 12.39 12.52 114,279 1,423,209 14.07% 14.81% 0.59% LVIP SSgA INTERNATIONAL INDEX SERVICE CLASS 2010 0.90% 2.80% 8.18 8.59 817,811 6,865,472 3.83% 5.82% 1.49% 2009 0.90% 2.80% 7.91 8.07 375,412 3,010,040 24.32% 25.95% 1.82% 2008 7/7/08 1.25% 2.55% 6.36 6.41 107,278 686,271 -33.64% 18.08% 1.41% LVIP SSgA LARGE CAP 100 SERVICE CLASS 2010 1.10% 2.80% 10.51 10.93 1,082,247 11,676,876 15.62% 17.42% 1.30% 2009 1.25% 2.80% 9.13 9.31 511,442 4,730,638 31.56% 33.28% 1.48% 2008 7/16/08 1.25% 2.55% 6.94 6.99 165,085 1,150,990 -30.68% 11.67% 0.58% LVIP SSgA MODERATE INDEX ALLOCATION SERVICE CLASS 2010 12/7/10 1.25% 1.65% 10.65 10.67 48,688 519,247 0.81% 1.34% 0.00% LVIP SSgA MODERATE STRUCTURED ALLOCATION SERVICE CLASS 2010 12/6/10 1.30% 1.90% 10.54 10.57 84,035 886,695 0.91% 1.45% 0.00% LVIP SSgA MODERATELY AGGRESSIVE INDEX ALLOCATION SERVICE CLASS 2010 12/20/10 1.30% 1.55% 10.79 10.80 18,233 196,856 0.32% 1.01% 0.00% LVIP SSgA MODERATELY AGGRESSIVE STRUCTURED ALLOCATION SERVICE CLASS 2010 11/24/10 1.30% 1.90% 10.84 10.86 78,770 854,596 1.02% 3.08% 0.00% LVIP SSgA S&P 500 INDEX STANDARD CLASS 2010 1.40% 2.35% 9.48 9.99 48,434 463,460 12.06% 13.13% 2.00% 2009 1.40% 2.35% 8.53 8.83 18,571 161,394 23.43% 24.36% 0.61% 2008 1.40% 2.15% 7.10 7.10 32,633 230,929 -38.07% -38.07% 4.78% 2007 8/29/07 1.40% 1.40% 11.47 11.47 11,896 136,420 0.43% 0.43% 1.08% LVIP SSgA S&P 500 INDEX SERVICE CLASS 2010 0.90% 2.80% 8.81 9.94 1,808,456 17,453,770 11.29% 13.42% 1.07% 2009 0.90% 2.80% 8.28 8.79 1,133,198 9,790,077 22.61% 24.34% 1.33% 2008 1.15% 2.55% 6.91 7.06 761,531 5,327,198 -38.53% -38.16% 5.05% 2007 4/27/07 1.30% 1.90% 11.25 11.42 158,805 1,798,089 -2.95% 1.07% 1.52% LVIP SSgA SMALL-CAP INDEX SERVICE CLASS 2010 0.90% 2.85% 8.70 9.32 645,999 5,842,260 22.40% 24.74% 0.34% 2009 0.90% 2.80% 7.15 7.42 465,259 3,409,090 22.48% 24.27% 0.56% 2008 1.15% 2.60% 5.90 5.97 315,131 1,868,880 -35.38% -34.89% 1.26% 2007 6/6/07 1.15% 1.90% 9.13 9.17 57,359 524,655 -10.18% 1.20% 0.62% LVIP SSgA SMALL-MID CAP 200 SERVICE CLASS 2010 1.25% 2.80% 13.09 13.61 243,536 3,270,464 23.92% 25.85% 1.91% 2009 1.25% 2.80% 10.60 10.81 134,130 1,440,616 47.48% 49.42% 1.98% 2008 7/16/08 1.25% 2.55% 7.19 7.24 37,800 273,108 -32.73% 25.69% 0.76%
N-46
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- LVIP T. ROWE PRICE GROWTH STOCK SERVICE CLASS 2010 0.75% 2.80% $ 8.73 $ 9.40 238,999 $ 2,168,082 13.22% 15.57% 0.00% 2009 0.75% 2.80% 7.90 8.14 172,515 1,366,963 40.04% 41.66% 0.00% 2008 0.75% 1.90% 5.64 5.69 118,843 672,060 -43.08% -42.74% 0.00% 2007 8/7/07 1.30% 1.90% 9.91 9.94 8,694 86,268 -4.44% 1.29% 0.19% LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH STANDARD CLASS 2010 1.40% 2.35% 12.99 20.16 6,068 109,984 25.39% 26.58% 0.00% 2009 1.40% 2.35% 10.36 15.96 7,809 114,153 42.94% 44.31% 0.11% 2008 1.40% 2.35% 7.25 11.08 6,888 68,297 -44.11% -43.57% 0.00% 2007 1.40% 2.35% 16.04 19.68 7,894 137,685 11.67% 12.01% 0.00% 2006 1.40% 1.70% 14.36 17.60 5,539 86,560 7.43% 7.76% 0.00% LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH SERVICE CLASS 2010 0.90% 2.80% 11.59 18.38 164,256 2,677,560 24.53% 26.91% 0.00% 2009 0.90% 2.80% 9.97 14.55 144,139 1,925,598 43.22% 44.37% 0.00% 2008 1.10% 1.90% 6.90 10.10 98,002 930,708 -44.00% -43.54% 0.00% 2007 1.10% 1.90% 13.24 17.94 74,170 1,248,970 11.17% 11.84% 0.00% 2006 1.30% 1.90% 15.84 16.04 32,798 486,207 7.16% 7.52% 0.00% LVIP TEMPLETON GROWTH SERVICE CLASS 2010 0.65% 2.80% 7.54 8.12 531,857 4,174,991 3.37% 5.51% 1.72% 2009 0.75% 2.80% 7.35 7.70 490,915 3,688,563 24.60% 26.85% 1.82% 2008 0.75% 2.50% 5.96 6.02 414,443 2,478,450 -39.07% -38.70% 2.15% 2007 6/5/07 1.30% 1.90% 9.78 9.81 225,785 2,210,571 -3.38% 3.58% 2.46% LVIP TURNER MID-CAP GROWTH SERVICE CLASS 2010 1.15% 2.85% 9.50 10.08 150,691 1,480,721 23.43% 25.49% 0.00% 2009 1.15% 2.80% 7.80 8.03 135,348 1,065,818 45.19% 46.36% 0.00% 2008 1.15% 1.95% 5.37 5.49 128,783 697,056 -50.41% -50.01% 0.00% 2007 6/8/07 1.15% 1.95% 10.82 10.98 74,933 815,779 -1.77% 10.12% 0.00% LVIP WELLS FARGO INTRINSIC VALUE SERVICE CLASS 2010 0.75% 2.80% 9.30 10.14 127,314 1,255,952 14.39% 16.30% 0.72% 2009 1.15% 2.80% 8.14 8.73 153,112 1,307,180 20.01% 21.58% 0.96% 2008 1.15% 2.45% 6.88 7.19 157,959 1,117,134 -39.97% -39.25% 1.64% 2007 1.25% 2.45% 11.54 11.83 99,520 1,163,327 1.83% 2.79% 1.28% 2006 1.25% 2.20% 11.39 11.51 50,474 576,465 8.90% 9.61% 1.41% LVIP WILSHIRE 2010 PROFILE SERVICE CLASS 2010 1.30% 2.55% 10.07 10.53 90,394 935,858 8.39% 9.75% 0.86% 2009 1.30% 2.55% 9.36 9.60 86,639 822,784 21.34% 22.49% 1.73% 2008 1.30% 2.25% 7.71 7.71 64,209 499,512 -25.79% -25.79% 1.70% 2007 10/17/07 2.25% 2.25% 10.40 10.40 28,852 299,939 0.06% 0.06% 0.32% LVIP WILSHIRE 2020 PROFILE SERVICE CLASS 2010 1.25% 2.55% 9.68 10.14 50,353 501,684 8.95% 10.36% 0.66% 2009 1.25% 2.55% 9.03 9.18 51,484 466,940 22.99% 23.73% 1.78% 2008 1.30% 1.90% 7.39 7.39 32,242 237,153 -28.19% -28.19% 1.55% 2007 6/26/07 1.55% 1.55% 10.29 10.29 865 8,896 1.76% 1.76% 0.33% LVIP WILSHIRE 2030 PROFILE SERVICE CLASS 2010 1.30% 1.90% 9.69 9.90 42,279 414,905 10.15% 10.81% 0.56% 2009 1.30% 1.90% 8.80 8.94 53,848 477,964 25.25% 26.00% 1.46% 2008 1.30% 1.90% 7.09 7.09 50,346 356,008 -31.85% -31.85% 0.81% 2007 12/14/07 1.30% 1.30% 10.41 10.41 737 7,671 0.86% 0.86% 0.00% LVIP WILSHIRE 2040 PROFILE SERVICE CLASS 2010 1.65% 1.90% 9.17 9.25 8,284 76,452 11.25% 11.53% 0.40% 2009 1.60% 1.90% 8.24 8.31 15,520 128,587 28.17% 28.56% 1.27% 2008 1.60% 1.90% 6.46 6.46 17,041 109,942 -36.77% -36.77% 0.11% 2007 12/11/07 1.65% 1.65% 10.21 10.21 484 4,951 -0.69% -0.69% 0.00% LVIP WILSHIRE CONSERVATIVE PROFILE SERVICE CLASS 2010 0.75% 2.85% 11.56 12.64 1,028,388 12,635,635 7.14% 8.86% 3.66% 2009 1.25% 2.85% 10.79 11.61 833,593 9,465,517 21.05% 23.00% 4.42% 2008 1.25% 2.85% 8.93 9.44 550,326 5,123,736 -20.90% -19.66% 2.06% 2007 1.25% 2.80% 11.56 11.74 373,405 4,342,379 5.48% 6.12% 1.90% 2006 1.30% 1.90% 10.97 11.06 229,373 2,522,673 7.12% 7.66% 1.67%
N-47
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- LVIP WILSHIRE MODERATE PROFILE SERVICE CLASS 2010 0.75% 2.85% $11.16 $12.54 3,194,946 $39,011,600 8.54% 10.68% 2.80% 2009 0.90% 2.85% 10.57 11.37 2,881,089 32,177,868 24.14% 26.27% 4.05% 2008 1.15% 2.85% 8.39 9.01 3,014,242 26,819,220 -28.87% -27.65% 1.74% 2007 1.15% 2.85% 12.07 12.47 2,497,429 30,859,220 6.31% 7.65% 1.31% 2006 1.25% 2.50% 11.46 11.57 1,656,668 19,091,944 9.66% 10.32% 0.84% LVIP WILSHIRE MODERATELY AGGRESSIVE PROFILE SERVICE CLASS 2010 0.75% 2.80% 10.37 12.01 1,687,929 19,727,783 9.33% 11.42% 2.83% 2009 0.90% 2.80% 10.08 10.80 1,332,778 14,124,608 25.16% 27.05% 4.24% 2008 1.30% 2.80% 8.05 8.50 1,371,009 11,503,260 -35.42% -34.44% 0.79% 2007 1.25% 2.80% 12.57 12.98 1,154,194 14,836,003 6.84% 8.18% 1.52% 2006 1.25% 2.50% 11.88 11.99 701,596 8,377,196 11.71% 12.38% 0.99% LORD ABBETT FUNDAMENTAL EQUITY CLASS VC 2010 5/21/10 0.75% 0.90% 15.83 15.88 2,264 35,937 14.45% 18.64% 0.36% MFS VIT CORE EQUITY SERVICE CLASS 2010 1.40% 2.35% 10.72 15.99 6,602 91,399 14.15% 15.24% 0.91% 2009 1.40% 2.35% 9.39 13.90 7,687 91,487 29.17% 30.40% 1.31% 2008 1.40% 2.35% 7.27 10.68 8,254 76,056 -40.74% -40.17% 0.42% 2007 1.25% 2.35% 12.27 17.89 9,937 155,994 8.30% 9.49% 0.10% 2006 1.25% 2.35% 12.56 16.40 12,844 181,962 11.59% 12.09% 0.17% MFS VIT GROWTH INITIAL CLASS 2010 1.40% 1.40% 7.29 7.29 20,823 151,706 13.73% 13.73% 0.12% 2009 1.40% 2.15% 6.41 11.45 24,920 163,102 34.75% 35.76% 0.30% 2008 1.40% 2.15% 4.72 8.50 29,618 142,578 -38.75% -38.29% 0.23% 2007 1.40% 2.15% 7.65 7.65 42,747 331,875 19.49% 19.49% 0.00% 2006 1.40% 1.40% 6.40 6.40 61,149 391,285 6.39% 6.39% 0.00% MFS VIT GROWTH SERVICE CLASS 2010 1.30% 2.55% 9.66 18.37 23,294 364,478 12.13% 13.54% 0.00% 2009 1.30% 2.55% 12.26 16.23 22,342 310,698 34.75% 35.48% 0.03% 2008 1.25% 1.90% 9.22 12.01 17,947 199,968 -38.60% -38.32% 0.00% 2007 1.25% 1.70% 6.61 19.54 21,690 375,989 18.84% 19.38% 0.00% 2006 1.25% 1.70% 5.56 16.42 36,408 546,371 5.80% 6.17% 0.00% MFS VIT TOTAL RETURN INITIAL CLASS 2010 1.40% 1.40% 14.53 14.53 56,209 816,796 8.40% 8.40% 2.89% 2009 1.40% 2.15% 9.94 13.41 81,281 1,087,744 15.52% 16.39% 3.96% 2008 1.40% 2.15% 8.60 11.52 120,074 1,381,280 -23.79% -23.22% 3.22% 2007 1.40% 2.35% 15.00 15.00 165,761 2,475,169 2.77% 2.77% 2.64% 2006 1.40% 1.40% 14.60 14.60 203,443 2,969,465 10.34% 10.34% 2.46% MFS VIT TOTAL RETURN SERVICE CLASS 2010 0.65% 2.85% 10.14 14.10 1,198,487 15,470,557 6.55% 8.81% 2.53% 2009 0.75% 2.85% 9.39 13.04 1,267,316 15,292,357 14.42% 16.84% 3.18% 2008 0.75% 2.85% 8.33 11.25 1,166,594 12,218,673 -24.47% -23.29% 2.86% 2007 1.25% 2.80% 11.13 14.72 1,244,701 17,178,371 1.42% 2.64% 2.24% 2006 1.25% 2.45% 10.98 14.39 1,024,207 13,943,010 8.92% 10.24% 1.99% MFS VIT UTILITIES INITIAL CLASS 2010 1.40% 1.40% 18.08 18.08 32,317 584,237 12.23% 12.23% 3.18% 2009 1.40% 1.40% 16.11 16.11 38,609 621,943 31.37% 31.37% 5.40% 2008 1.40% 1.40% 12.26 12.26 53,498 656,021 -38.54% -38.54% 1.61% 2007 1.40% 1.40% 19.95 19.95 71,980 1,436,071 26.12% 26.12% 0.96% 2006 1.40% 1.40% 15.82 15.82 114,177 1,806,179 29.44% 29.44% 2.01% MFS VIT UTILITIES SERVICE CLASS 2010 0.75% 2.80% 11.99 32.20 557,635 11,092,347 10.49% 12.66% 3.02% 2009 0.75% 2.70% 11.66 28.82 593,173 10,612,729 29.46% 31.35% 4.56% 2008 1.15% 2.60% 8.88 22.04 634,382 8,758,111 -39.38% -38.52% 1.30% 2007 1.15% 2.55% 17.60 36.01 540,313 12,897,539 24.85% 25.97% 0.73% 2006 1.25% 2.15% 14.03 28.69 405,976 7,935,472 28.50% 29.33% 1.78%
N-48
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------------------------------------------------------------------------------------------------------------------------------- NB AMT MID-CAP GROWTH I CLASS 2010 1.25% 2.55% $12.83 $20.05 257,458 $4,293,649 25.85% 27.49% 0.00% 2009 1.25% 2.55% 10.16 15.78 312,161 4,113,976 28.29% 29.96% 0.00% 2008 1.25% 2.55% 8.21 12.19 388,501 3,961,626 -44.80% -44.07% 0.00% 2007 1.25% 2.55% 14.91 21.87 426,933 7,875,625 19.56% 21.01% 0.00% 2006 1.25% 2.45% 12.49 18.14 437,587 6,801,153 12.03% 13.27% 0.00% NB AMT REGENCY I CLASS 2010 1.25% 2.70% 10.63 19.71 302,631 4,932,486 23.01% 24.62% 0.69% 2009 1.25% 2.55% 8.61 15.87 384,586 5,109,230 42.87% 44.74% 1.78% 2008 1.25% 2.65% 6.31 11.00 443,184 4,097,055 -47.19% -46.49% 1.19% 2007 1.25% 2.55% 11.97 20.64 484,103 8,453,793 0.75% 2.02% 0.43% 2006 1.25% 2.50% 11.89 20.30 500,622 8,887,907 8.47% 9.79% 0.42% OPPENHEIMER GLOBAL SECURITIES SERVICE CLASS 2010 5/21/10 0.75% 1.30% 17.45 17.65 3,824 67,373 1.60% 21.26% 0.00% PIMCO VIT COMMODITY REAL RETURN ADVISOR CLASS 2010 0.65% 1.95% 15.21 15.46 55,655 851,447 21.91% 23.10% 15.39% 2009 7/1/09 0.90% 1.90% 12.48 12.56 24,322 304,150 12.38% 22.53% 6.29% PUTNAM VT GLOBAL HEALTH CARE CLASS IB 2010 1.40% 1.70% 11.34 13.44 7,408 87,254 0.74% 1.04% 1.97% 2009 1.35% 1.70% 11.25 13.33 10,108 123,536 23.88% 24.25% 0.00% 2008 1.40% 1.70% 9.08 10.75 11,152 105,401 -18.47% -18.23% 0.00% 2007 1.40% 1.70% 11.14 13.17 13,837 159,491 -2.28% -1.98% 0.89% 2006 1.40% 1.70% 11.40 13.46 15,830 189,090 1.06% 1.36% 0.35% PUTNAM VT GROWTH & INCOME CLASS IB 2010 1.40% 1.70% 11.14 14.03 4,509 58,401 12.45% 12.79% 1.52% 2009 1.40% 1.70% 9.90 12.47 4,506 51,857 27.62% 28.00% 2.98% 2008 1.40% 1.70% 7.76 9.76 8,118 71,886 -39.74% -39.55% 2.16% 2007 1.40% 1.70% 12.88 16.18 8,889 130,029 -7.62% -7.34% 1.32% 2006 1.40% 1.70% 13.94 17.49 7,028 114,877 13.96% 14.30% 1.50%
(1) Reflects less than a full year of activity. Funds were first received in this option on the commencement date noted or the option was inactive at the date funds were received. (2) These amounts represent the annualized minimum and maximum contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying funds have been excluded. (3) As the unit value is presented as a range of minimum to maximum values, for only those subaccounts which existed for the entire year, some individual contract unit values may not be within the ranges presented as a result of partial year activity. (4) These amounts represent the total return, including changes in value of mutual funds, and reflect deductions for all items included in the fee rate. The total return does not include contract charges deducted directly from policy account values. The total return is not annualized. As the total return is presented as a range of minimum to maximum values, for only those subaccounts which existed for the entire year, some individual contract total returns may not be within the ranges presented as a result of partial year activity. (5) These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense guarantee charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. Investment income ratios are not annualized. Note: Fee rate, unit value and total return minimum and maximum are the same where there is only one active contract level charge for the subaccount. N-49 4. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2010:
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES --------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 416,105 $ 700,219 ABVPSF Growth and Income Class B 689,307 1,032,759 ABVPSF International Value Class B 1,236,510 1,145,311 ABVPSF Large Cap Growth Class B 28,405 206,782 ABVPSF Small/Mid Cap Value Class B 3,829,795 2,959,479 American Century VP Inflation Protection Class II 8,045,361 6,829,406 American Funds Global Growth Class 2 2,095,631 2,013,451 American Funds Global Small Capitalization Class 2 4,169,874 4,368,623 American Funds Growth Class 2 7,803,091 13,170,937 American Funds Growth-Income Class 2 9,632,346 10,226,362 American Funds International Class 2 3,519,393 4,694,897 BlackRock Global Allocation V.I. Class III 11,013,079 319,232 Delaware VIP Diversified Income Service Class 18,562,014 5,604,309 Delaware VIP Emerging Markets Service Class 3,666,018 3,363,717 Delaware VIP High Yield Standard Class 111,743 162,700 Delaware VIP High Yield Service Class 3,877,990 2,455,193 Delaware VIP Limited-Term Diversified Income Service Class 10,538,244 3,423,714 Delaware VIP REIT Standard Class 33,066 209,431 Delaware VIP REIT Service Class 3,893,213 4,295,259 Delaware VIP Small Cap Value Standard Class 88,778 368,033 Delaware VIP Small Cap Value Service Class 1,781,444 2,554,975 Delaware VIP Smid Cap Growth Standard Class 450,406 25,153 Delaware VIP Smid Cap Growth Service Class 6,035,343 329,533 Delaware VIP Trend Standard Class 46,436 604,274 Delaware VIP Trend Service Class 1,384,741 5,990,004 Delaware VIP U.S. Growth Service Class 597,405 381,445 Delaware VIP Value Standard Class 6,599 105,975 Delaware VIP Value Service Class 921,158 1,127,783 DWS VIP Alternative Asset Allocation Plus Class B 3,741,361 95,191 DWS VIP Equity 500 Index Class A 91,604 948,785 DWS VIP Equity 500 Index Class B 207,963 830,463 DWS VIP Small Cap Index Class A 35,034 261,622 DWS VIP Small Cap Index Class B 222,258 575,096 Fidelity VIP Contrafund Service Class 2 3,828,887 3,235,330 Fidelity VIP Equity-Income Initial Class 24,209 168,372 Fidelity VIP Equity-Income Service Class 2 84,057 485,457 Fidelity VIP Growth Initial Class 1,026 52,156 Fidelity VIP Growth Service Class 2 1,068,098 1,033,415 Fidelity VIP Mid Cap Service Class 2 4,079,457 4,267,725 Fidelity VIP Overseas Initial Class 6,533 13,884 Fidelity VIP Overseas Service Class 2 419,075 1,081,953 FTVIPT Franklin Income Securities Class 2 9,609,782 7,370,756 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 529,953 1,262,024 FTVIPT Mutual Shares Securities Class 2 3,273,845 1,393,007 FTVIPT Templeton Global Bond Securities Class 2 2,893,139 4,474,470 FTVIPT Templeton Growth Securities Class 2 183,921 921,722 Goldman Sachs VIT Large Cap Value Service Class 691,881 25,002 Invesco V.I. Capital Appreciation Series I 42,489 68,259 Invesco V.I. Capital Appreciation Series II 456 28,174 Invesco V.I. Core Equity Series I 7,272 155,733 Invesco V.I. Core Equity Series II 3,337 10,722 Invesco V.I. International Growth Series I 2,873 6,015 Invesco V.I. International Growth Series II 4,760 11,308 Janus Aspen Series Balanced Service Class 20,137 143,057 Janus Aspen Series Enterprise Service Class 3,667 258,423 Janus Aspen Series Worldwide Service Class 5,766 5,640 LVIP American Global Growth Service Class II 126,405 21 LVIP American Global Small Capitalization Service Class II 73,373 20
N-50
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES --------------------------------------------------------------------------------------------- LVIP American Growth Service Class II $ 388,114 $ 121 LVIP American Growth-Income Service Class II 343,220 89 LVIP American International Service Class II 118,002 -- LVIP Baron Growth Opportunities Service Class 1,251,831 624,039 LVIP BlackRock Inflation Protected Bond Service Class 1,182,100 745 LVIP Capital Growth Service Class 726,601 116,164 LVIP Cohen & Steers Global Real Estate Service Class 1,335,848 835,116 LVIP Columbia Value Opportunities Service Class 277,311 66,938 LVIP Delaware Bond Standard Class 1,399,467 3,527,526 LVIP Delaware Bond Service Class 20,589,549 19,075,800 LVIP Delaware Diversified Floating Rate Service Class 801,779 1,995 LVIP Delaware Foundation Aggressive Allocation Standard Class 9,797 113,046 LVIP Delaware Foundation Aggressive Allocation Service Class 105,024 307,945 LVIP Delaware Growth and Income Service Class 748,970 545,956 LVIP Delaware Social Awareness Standard Class 29,940 184,762 LVIP Delaware Social Awareness Service Class 100,043 552,668 LVIP Delaware Special Opportunities Service Class 1,773,954 1,862,503 LVIP Global Income Service Class 6,630,068 641,203 LVIP Janus Capital Appreciation Standard Class 28,622 79,783 LVIP Janus Capital Appreciation Service Class 385,143 276,450 LVIP JPMorgan High Yield Service Class 138,253 33 LVIP MFS International Growth Service Class 994,934 371,235 LVIP MFS Value Service Class 3,463,147 820,750 LVIP Mid-Cap Value Service Class 823,922 273,411 LVIP Mondrian International Value Standard Class 152,783 575,560 LVIP Mondrian International Value Service Class 880,057 1,648,168 LVIP Money Market Standard Class 1,889,067 4,148,483 LVIP Money Market Service Class 17,622,224 20,215,113 LVIP SSgA Bond Index Service Class 18,522,706 2,867,890 LVIP SSgA Conservative Structured Allocation Service Class 50,000 21 LVIP SSgA Developed International 150 Service Class 2,589,708 463,053 LVIP SSgA Emerging Markets 100 Service Class 4,068,325 1,918,235 LVIP SSgA Global Tactical Allocation Service Class 411,170 579,686 LVIP SSgA International Index Service Class 4,054,437 700,949 LVIP SSgA Large Cap 100 Service Class 6,743,938 1,239,163 LVIP SSgA Moderate Index Allocation Service Class 540,384 26,357 LVIP SSgA Moderate Structured Allocation Service Class 670,433 406 LVIP SSgA Moderately Aggressive Index Allocation Service Class 195,780 55 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 846,286 278 LVIP SSgA S&P 500 Index Standard Class 302,263 46,787 LVIP SSgA S&P 500 Index Service Class 7,831,412 2,161,352 LVIP SSgA Small-Cap Index Service Class 2,141,359 839,120 LVIP SSgA Small-Mid Cap 200 Service Class 1,643,229 393,273 LVIP T. Rowe Price Growth Stock Service Class 833,602 341,621 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 30,200 65,240 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 451,352 294,787 LVIP Templeton Growth Service Class 768,218 471,419 LVIP Turner Mid-Cap Growth Service Class 291,939 177,532 LVIP Wells Fargo Intrinsic Value Service Class 918,258 1,107,526 LVIP Wilshire 2010 Profile Service Class 123,154 97,877 LVIP Wilshire 2020 Profile Service Class 4,604 20,079 LVIP Wilshire 2030 Profile Service Class 2,287 111,566 LVIP Wilshire 2040 Profile Service Class 23,802 88,213 LVIP Wilshire Conservative Profile Service Class 3,878,165 1,426,291 LVIP Wilshire Moderate Profile Service Class 8,826,396 4,987,259 LVIP Wilshire Moderately Aggressive Profile Service Class 6,296,475 2,236,850 Lord Abbett Fundamental Equity Class VC 32,590 1,743 MFS VIT Core Equity Service Class 879 13,235 MFS VIT Growth Initial Class 720 33,392 MFS VIT Growth Service Class 60,462 54,519 MFS VIT Total Return Initial Class 31,512 358,746
N-51
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES --------------------------------------------------------------------------------------------- MFS VIT Total Return Service Class $ 1,343,841 $ 2,178,134 MFS VIT Utilities Initial Class 21,160 111,120 MFS VIT Utilities Service Class 1,069,475 1,685,618 NB AMT Mid-Cap Growth I Class 189,122 1,043,839 NB AMT Regency I Class 53,861 1,306,886 Oppenheimer Global Securities Service Class 68,628 11,349 PIMCO VIT Commodity Real Return Advisor Class 858,565 370,075 Putnam VT Global Health Care Class IB 22,198 96,617 Putnam VT Growth & Income Class IB 806 822
5. INVESTMENTS The following is a summary of investments owned at December 31, 2010:
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES -------------------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B 89,429 $18.99 $ 1,698,257 $ 1,442,307 ABVPSF Growth and Income Class B 428,189 17.01 7,283,502 8,670,293 ABVPSF International Value Class B 559,377 14.77 8,261,994 10,730,823 ABVPSF Large Cap Growth Class B 28,016 27.08 758,665 644,802 ABVPSF Small/Mid Cap Value Class B 533,473 16.87 8,999,689 7,643,072 American Century VP Inflation Protection Class II 2,195,679 11.09 24,350,080 23,450,602 American Funds Global Growth Class 2 816,867 21.48 17,546,307 16,636,292 American Funds Global Small Capitalization Class 2 772,522 21.35 16,493,338 14,991,871 American Funds Growth Class 2 1,716,189 54.34 93,257,705 91,144,834 American Funds Growth-Income Class 2 2,439,821 34.25 83,563,887 86,538,454 American Funds International Class 2 2,450,899 17.98 44,067,160 43,935,148 BlackRock Global Allocation V.I. Class III 915,735 14.49 13,269,006 12,556,389 Delaware VIP Diversified Income Service Class 3,957,604 11.22 44,404,319 41,015,009 Delaware VIP Emerging Markets Service Class 795,055 22.13 17,594,572 14,820,194 Delaware VIP High Yield Standard Class 107,871 6.04 651,538 564,124 Delaware VIP High Yield Service Class 2,723,392 6.02 16,394,820 14,725,469 Delaware VIP Limited-Term Diversified Income Service Class 1,302,535 10.09 13,142,579 12,983,565 Delaware VIP REIT Standard Class 82,511 9.58 790,451 1,036,801 Delaware VIP REIT Service Class 1,079,537 9.58 10,341,968 12,517,962 Delaware VIP Small Cap Value Standard Class 28,056 31.96 896,679 683,023 Delaware VIP Small Cap Value Service Class 567,673 31.89 18,103,106 15,673,163 Delaware VIP Smid Cap Growth Standard Class 21,852 22.22 485,553 426,771 Delaware VIP Smid Cap Growth Service Class 296,754 21.65 6,424,734 5,736,885 Delaware VIP U.S. Growth Service Class 303,428 8.05 2,442,593 2,089,868 Delaware VIP Value Standard Class 11,194 16.49 184,590 175,962 Delaware VIP Value Service Class 461,610 16.47 7,602,719 8,266,133 DWS VIP Alternative Asset Allocation Plus Class B 277,163 13.84 3,835,933 3,701,179 DWS VIP Equity 500 Index Class A 177,809 13.17 2,341,751 2,110,949 DWS VIP Equity 500 Index Class B 234,394 13.17 3,086,973 2,950,031 DWS VIP Small Cap Index Class A 47,732 12.41 592,350 600,713 DWS VIP Small Cap Index Class B 157,023 12.40 1,947,082 2,023,304 Fidelity VIP Contrafund Service Class 2 1,713,602 23.49 40,252,502 43,623,495 Fidelity VIP Equity-Income Initial Class 31,018 19.02 589,968 681,392 Fidelity VIP Equity-Income Service Class 2 108,983 18.75 2,043,434 2,344,221 Fidelity VIP Growth Initial Class 5,860 37.09 217,334 198,666 Fidelity VIP Growth Service Class 2 84,153 36.72 3,090,082 2,743,243 Fidelity VIP Mid Cap Service Class 2 693,332 32.13 22,276,765 19,523,353 Fidelity VIP Overseas Initial Class 6,031 16.77 101,133 92,877 Fidelity VIP Overseas Service Class 2 250,104 16.62 4,156,724 4,384,250 FTVIPT Franklin Income Securities Class 2 1,742,016 14.82 25,816,671 26,044,832 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 432,012 21.53 9,301,210 8,121,129 FTVIPT Mutual Shares Securities Class 2 1,131,318 15.95 18,044,525 19,396,781 FTVIPT Templeton Global Bond Securities Class 2 876,392 19.49 17,080,880 14,667,414
N-52
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES -------------------------------------------------------------------------------------------------------------------- FTVIPT Templeton Growth Securities Class 2 463,421 $11.01 $ 5,102,270 $ 6,051,303 Goldman Sachs VIT Large Cap Value Service Class 83,242 10.23 851,564 785,275 Invesco V.I. Capital Appreciation Series I 7,624 23.30 177,644 187,030 Invesco V.I. Capital Appreciation Series II 3,032 22.92 69,487 78,779 Invesco V.I. Core Equity Series I 15,539 27.03 420,009 388,923 Invesco V.I. Core Equity Series II 344 26.82 9,230 8,570 Invesco V.I. International Growth Series I 4,278 28.69 122,728 73,144 Invesco V.I. International Growth Series II 7,756 28.35 219,872 156,774 Janus Aspen Series Balanced Service Class 22,218 29.42 653,650 562,601 Janus Aspen Series Enterprise Service Class 17,681 37.53 663,558 438,140 Janus Aspen Series Worldwide Service Class 681 29.80 20,305 17,641 LVIP American Global Growth Service Class II 10,372 12.46 129,270 126,386 LVIP American Global Small Capitalization Service Class II 5,879 12.85 75,554 73,354 LVIP American Growth Service Class II 31,639 12.58 398,015 388,000 LVIP American Growth-Income Service Class II 28,256 12.26 346,451 343,133 LVIP American International Service Class II 9,662 12.36 119,376 118,002 LVIP Baron Growth Opportunities Service Class 241,445 30.27 7,308,535 6,405,498 LVIP BlackRock Inflation Protected Bond Service Class 114,152 10.13 1,156,131 1,181,328 LVIP Capital Growth Service Class 68,684 25.56 1,755,505 1,578,996 LVIP Cohen & Steers Global Real Estate Service Class 717,268 7.44 5,332,887 4,721,693 LVIP Columbia Value Opportunities Service Class 75,115 10.53 790,665 741,294 LVIP Delaware Bond Standard Class 914,874 13.70 12,529,193 11,828,267 LVIP Delaware Bond Service Class 3,416,415 13.70 46,794,640 45,493,110 LVIP Delaware Diversified Floating Rate Service Class 79,149 10.09 798,300 799,782 LVIP Delaware Foundation Aggressive Allocation Standard Class 29,755 12.38 368,250 406,703 LVIP Delaware Foundation Aggressive Allocation Service Class 284,950 12.37 3,525,111 3,703,801 LVIP Delaware Growth and Income Service Class 52,179 28.93 1,509,438 1,510,050 LVIP Delaware Social Awareness Standard Class 26,689 30.57 815,972 736,816 LVIP Delaware Social Awareness Service Class 73,669 30.52 2,248,592 2,133,504 LVIP Delaware Special Opportunities Service Class 33,349 39.29 1,310,200 1,152,599 LVIP Global Income Service Class 647,091 11.59 7,499,141 7,367,499 LVIP Janus Capital Appreciation Standard Class 5,650 21.50 121,498 93,357 LVIP Janus Capital Appreciation Service Class 80,659 21.35 1,721,992 1,559,604 LVIP JPMorgan High Yield Service Class 13,365 10.37 138,593 138,220 LVIP MFS International Growth Service Class 236,535 12.52 2,960,478 2,984,020 LVIP MFS Value Service Class 347,009 22.80 7,912,157 7,216,203 LVIP Mid-Cap Value Service Class 210,131 14.18 2,979,875 2,526,331 LVIP Mondrian International Value Standard Class 115,863 15.45 1,789,738 1,958,904 LVIP Mondrian International Value Service Class 482,392 15.44 7,448,614 8,246,945 LVIP Money Market Standard Class 379,205 10.00 3,792,053 3,792,053 LVIP Money Market Service Class 1,488,314 10.00 14,883,139 14,883,138 LVIP SSgA Bond Index Service Class 2,785,769 10.98 30,584,962 30,161,835 LVIP SSgA Conservative Structured Allocation Service Class 4,832 10.46 50,559 49,979 LVIP SSgA Developed International 150 Service Class 546,892 8.55 4,678,116 4,108,337 LVIP SSgA Emerging Markets 100 Service Class 517,056 13.96 7,218,618 5,669,390 LVIP SSgA Global Tactical Allocation Service Class 324,764 10.32 3,349,939 3,683,686 LVIP SSgA International Index Service Class 865,540 7.93 6,867,192 6,130,477 LVIP SSgA Large Cap 100 Service Class 1,129,548 10.34 11,679,523 9,866,282 LVIP SSgA Moderate Index Allocation Service Class 48,421 10.72 519,266 514,171 LVIP SSgA Moderate Structured Allocation Service Class 63,817 10.63 678,121 670,030 LVIP SSgA Moderately Aggressive Index Allocation Service Class 18,122 10.86 196,864 195,725 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 78,242 10.92 854,634 846,011 LVIP SSgA S&P 500 Index Standard Class 52,579 8.82 463,488 424,738 LVIP SSgA S&P 500 Index Service Class 1,980,138 8.82 17,464,819 15,407,914 LVIP SSgA Small-Cap Index Service Class 326,534 17.91 5,847,565 4,792,966 LVIP SSgA Small-Mid Cap 200 Service Class 254,448 12.86 3,271,689 2,562,130 LVIP T. Rowe Price Growth Stock Service Class 122,168 17.65 2,156,749 1,793,104 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 7,622 14.43 109,989 82,730 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 188,238 14.17 2,667,528 2,096,066 LVIP Templeton Growth Service Class 163,656 25.51 4,175,204 4,379,150 LVIP Turner Mid-Cap Growth Service Class 132,474 11.18 1,480,791 1,318,051
N-53
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES -------------------------------------------------------------------------------------------------------------------- LVIP Wells Fargo Intrinsic Value Service Class 94,097 $13.35 $ 1,256,011 $ 1,304,081 LVIP Wilshire 2010 Profile Service Class 88,652 10.56 935,903 865,255 LVIP Wilshire 2020 Profile Service Class 49,081 10.22 501,708 441,565 LVIP Wilshire 2030 Profile Service Class 40,847 10.16 414,923 394,099 LVIP Wilshire 2040 Profile Service Class 7,890 9.69 76,456 70,020 LVIP Wilshire Conservative Profile Service Class 1,050,131 12.03 12,636,232 11,660,410 LVIP Wilshire Moderate Profile Service Class 3,271,565 11.93 39,013,416 37,090,863 LVIP Wilshire Moderately Aggressive Profile Service Class 1,727,254 11.42 19,728,692 19,282,659 Lord Abbett Fundamental Equity Class VC 2,035 17.66 35,938 31,031 MFS VIT Core Equity Service Class 5,863 15.59 91,403 72,030 MFS VIT Growth Initial Class 6,145 24.69 151,712 99,671 MFS VIT Growth Service Class 15,018 24.27 364,494 269,070 MFS VIT Total Return Initial Class 43,657 18.71 816,827 805,929 MFS VIT Total Return Service Class 837,191 18.48 15,471,287 15,631,540 MFS VIT Utilities Initial Class 23,121 25.27 584,259 502,228 MFS VIT Utilities Service Class 444,634 24.95 11,093,620 10,820,794 NB AMT Mid-Cap Growth I Class 156,596 27.42 4,293,855 3,090,372 NB AMT Regency I Class 321,140 15.36 4,932,709 4,571,011 Oppenheimer Global Securities Service Class 2,243 30.04 67,375 57,688 PIMCO VIT Commodity Real Return Advisor Class 93,983 9.06 851,486 791,317 Putnam VT Global Health Care Class IB 7,129 12.24 87,258 84,150 Putnam VT Growth & Income Class IB 3,599 16.23 58,404 74,302
6. CHANGES IN UNITS OUTSTANDING The change in units outstanding for the year ended December 31, 2010, is as follows:
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B 41,886 (87,915) (46,029) ABVPSF Growth and Income Class B 103,649 (122,527) (18,878) ABVPSF International Value Class B 260,167 (251,918) 8,249 ABVPSF Large Cap Growth Class B 3,399 (28,272) (24,873) ABVPSF Small/Mid Cap Value Class B 281,779 (216,362) 65,417 American Century VP Inflation Protection Class II 1,146,380 (1,039,334) 107,046 American Funds Global Growth Class 2 207,929 (193,838) 14,091 American Funds Global Small Capitalization Class 2 297,035 (282,583) 14,452 American Funds Growth Class 2 1,168,806 (1,449,868) (281,062) American Funds Growth-Income Class 2 1,305,548 (1,281,743) 23,805 American Funds International Class 2 458,041 (502,338) (44,297) BlackRock Global Allocation V.I. Class III 1,157,334 (217,448) 939,886 Delaware VIP Diversified Income Service Class 1,715,128 (847,302) 867,826 Delaware VIP Emerging Markets Service Class 332,076 (291,553) 40,523 Delaware VIP High Yield Standard Class 3,698 (9,270) (5,572) Delaware VIP High Yield Service Class 276,844 (226,839) 50,005 Delaware VIP Limited-Term Diversified Income Service Class 1,342,297 (735,441) 606,856 Delaware VIP REIT Standard Class 501 (8,816) (8,315) Delaware VIP REIT Service Class 286,287 (311,930) (25,643) Delaware VIP Small Cap Value Standard Class 3,605 (16,136) (12,531) Delaware VIP Small Cap Value Service Class 231,345 (223,919) 7,426 Delaware VIP Smid Cap Growth Standard Class 43,132 (2,075) 41,057 Delaware VIP Smid Cap Growth Service Class 442,660 (28,606) 414,054 Delaware VIP Trend Standard Class 3,309 (59,575) (56,266) Delaware VIP Trend Service Class 105,563 (450,283) (344,720) Delaware VIP U.S. Growth Service Class 85,848 (53,702) 32,146 Delaware VIP Value Standard Class 74 (9,024) (8,950) Delaware VIP Value Service Class 97,400 (113,578) (16,178) DWS VIP Alternative Asset Allocation Plus Class B 331,758 (32,662) 299,096 DWS VIP Equity 500 Index Class A 6,940 (103,115) (96,175) DWS VIP Equity 500 Index Class B 18,504 (73,263) (54,759)
N-54
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- DWS VIP Small Cap Index Class A 2,000 (14,507) (12,507) DWS VIP Small Cap Index Class B 18,775 (44,699) (25,924) Fidelity VIP Contrafund Service Class 2 574,702 (466,190) 108,512 Fidelity VIP Equity-Income Initial Class 1,453 (14,915) (13,462) Fidelity VIP Equity-Income Service Class 2 5,330 (37,527) (32,197) Fidelity VIP Growth Initial Class -- (7,095) (7,095) Fidelity VIP Growth Service Class 2 135,465 (124,284) 11,181 Fidelity VIP Mid Cap Service Class 2 539,629 (536,964) 2,665 Fidelity VIP Overseas Initial Class 521 (1,381) (860) Fidelity VIP Overseas Service Class 2 42,955 (78,504) (35,549) FTVIPT Franklin Income Securities Class 2 872,316 (780,295) 92,021 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 83,180 (134,029) (50,849) FTVIPT Mutual Shares Securities Class 2 511,291 (298,683) 212,608 FTVIPT Templeton Global Bond Securities Class 2 209,488 (314,696) (105,208) FTVIPT Templeton Growth Securities Class 2 17,063 (74,657) (57,594) Goldman Sachs VIT Large Cap Value Service Class 64,338 (9,656) 54,682 Invesco V.I. Capital Appreciation Series I 12,241 (20,957) (8,716) Invesco V.I. Capital Appreciation Series II 3 (2,357) (2,354) Invesco V.I. Core Equity Series I 459 (19,779) (19,320) Invesco V.I. Core Equity Series II 280 (1,044) (764) Invesco V.I. International Growth Series I 27 (398) (371) Invesco V.I. International Growth Series II 69 (485) (416) Janus Aspen Series Balanced Service Class 892 (9,402) (8,510) Janus Aspen Series Enterprise Service Class 258 (14,611) (14,353) Janus Aspen Series Worldwide Service Class 548 (472) 76 LVIP American Global Growth Service Class II 10,447 -- 10,447 LVIP American Global Small Capitalization Service Class II 5,921 -- 5,921 LVIP American Growth Service Class II 31,890 -- 31,890 LVIP American Growth-Income Service Class II 30,537 -- 30,537 LVIP American International Service Class II 10,767 -- 10,767 LVIP Baron Growth Opportunities Service Class 206,889 (130,124) 76,765 LVIP BlackRock Inflation Protected Bond Service Class 114,627 (127) 114,500 LVIP Capital Growth Service Class 107,263 (32,877) 74,386 LVIP Cohen & Steers Global Real Estate Service Class 283,890 (201,161) 82,729 LVIP Columbia Value Opportunities Service Class 45,621 (16,573) 29,048 LVIP Delaware Bond Standard Class 69,049 (218,105) (149,056) LVIP Delaware Bond Service Class 2,187,806 (2,142,897) 44,909 LVIP Delaware Diversified Floating Rate Service Class 79,775 (193) 79,582 LVIP Delaware Foundation Aggressive Allocation Standard Class 42 (7,991) (7,949) LVIP Delaware Foundation Aggressive Allocation Service Class 4,390 (23,555) (19,165) LVIP Delaware Growth and Income Service Class 83,715 (63,213) 20,502 LVIP Delaware Social Awareness Standard Class 2,965 (13,144) (10,179) LVIP Delaware Social Awareness Service Class 16,763 (47,687) (30,924) LVIP Delaware Special Opportunities Service Class 235,196 (259,989) (24,793) LVIP Global Income Service Class 727,911 (199,926) 527,985 LVIP Janus Capital Appreciation Standard Class 2,132 (3,429) (1,297) LVIP Janus Capital Appreciation Service Class 49,133 (34,933) 14,200 LVIP JPMorgan High Yield Service Class 12,833 -- 12,833 LVIP MFS International Growth Service Class 170,338 (82,731) 87,607 LVIP MFS Value Service Class 556,080 (211,467) 344,613 LVIP Mid-Cap Value Service Class 144,508 (63,308) 81,200 LVIP Mondrian International Value Standard Class 6,032 (31,287) (25,255) LVIP Mondrian International Value Service Class 81,942 (130,038) (48,096) LVIP Money Market Standard Class 168,808 (403,168) (234,360) LVIP Money Market Service Class 2,052,644 (2,248,805) (196,161) LVIP SSgA Bond Index Service Class 2,308,993 (900,247) 1,408,746 LVIP SSgA Conservative Structured Allocation Service Class 4,856 -- 4,856 LVIP SSgA Developed International 150 Service Class 407,477 (157,524) 249,953 LVIP SSgA Emerging Markets 100 Service Class 439,421 (270,317) 169,104 LVIP SSgA Global Tactical Allocation Service Class 56,200 (68,763) (12,563) LVIP SSgA International Index Service Class 745,792 (303,393) 442,399 LVIP SSgA Large Cap 100 Service Class 899,855 (329,050) 570,805
N-55
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- LVIP SSgA Moderate Index Allocation Service Class 51,140 (2,452) 48,688 LVIP SSgA Moderate Structured Allocation Service Class 84,035 -- 84,035 LVIP SSgA Moderately Aggressive Index Allocation Service Class 18,233 -- 18,233 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 78,770 -- 78,770 LVIP SSgA S&P 500 Index Standard Class 67,278 (37,415) 29,863 LVIP SSgA S&P 500 Index Service Class 1,345,112 (669,854) 675,258 LVIP SSgA Small-Cap Index Service Class 433,004 (252,264) 180,740 LVIP SSgA Small-Mid Cap 200 Service Class 197,654 (88,248) 109,406 LVIP T. Rowe Price Growth Stock Service Class 130,093 (63,609) 66,484 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 1,918 (3,659) (1,741) LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 53,900 (33,783) 20,117 LVIP Templeton Growth Service Class 125,695 (84,753) 40,942 LVIP Turner Mid-Cap Growth Service Class 44,283 (28,940) 15,343 LVIP Wells Fargo Intrinsic Value Service Class 104,708 (130,506) (25,798) LVIP Wilshire 2010 Profile Service Class 19,736 (15,981) 3,755 LVIP Wilshire 2020 Profile Service Class 905 (2,036) (1,131) LVIP Wilshire 2030 Profile Service Class -- (11,569) (11,569) LVIP Wilshire 2040 Profile Service Class 2,981 (10,217) (7,236) LVIP Wilshire Conservative Profile Service Class 370,299 (175,504) 194,795 LVIP Wilshire Moderate Profile Service Class 1,035,440 (721,583) 313,857 LVIP Wilshire Moderately Aggressive Profile Service Class 622,269 (267,118) 355,151 Lord Abbett Fundamental Equity Class VC 2,376 (112) 2,264 MFS VIT Core Equity Service Class 10 (1,095) (1,085) MFS VIT Growth Initial Class 94 (4,191) (4,097) MFS VIT Growth Service Class 4,803 (3,851) 952 MFS VIT Total Return Initial Class 427 (25,499) (25,072) MFS VIT Total Return Service Class 145,359 (214,188) (68,829) MFS VIT Utilities Initial Class 242 (6,534) (6,292) MFS VIT Utilities Service Class 84,403 (119,941) (35,538) NB AMT Mid-Cap Growth I Class 17,217 (71,920) (54,703) NB AMT Regency I Class 5,279 (87,234) (81,955) Oppenheimer Global Securities Service Class 4,535 (711) 3,824 PIMCO VIT Commodity Real Return Advisor Class 69,058 (37,725) 31,333 Putnam VT Global Health Care Class IB 1,817 (4,517) (2,700) Putnam VT Growth & Income Class IB 3 -- 3
The change in units outstanding for the year ended December 31, 2009, is as follows:
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- Invesco V.I. Capital Appreciation Series I 1,680 (10,209) (8,529) Invesco V.I. Capital Appreciation Series II -- (879) (879) Invesco V.I. Core Equity Series I 3,246 (26,588) (23,342) Invesco V.I. Core Equity Series II 167 (2,892) (2,725) Invesco V.I. International Growth Series I 32 (11,042) (11,010) Invesco V.I. International Growth Series II 206 (1,483) (1,277) ABVPSF Global Thematic Growth Class B 58,472 (106,755) (48,283) ABVPSF Growth and Income Class B 70,570 (152,142) (81,572) ABVPSF International Value Class B 249,802 (287,760) (37,958) ABVPSF Large Cap Growth Class B 3,449 (30,033) (26,584) ABVPSF Small/Mid Cap Value Class B 167,670 (70,210) 97,460 American Century VP Inflation Protection Class II 1,226,751 (831,062) 395,689 American Funds Global Growth Class 2 194,094 (188,844) 5,250 American Funds Global Small Capitalization Class 2 250,788 (152,193) 98,595 American Funds Growth Class 2 967,377 (1,309,515) (342,138) American Funds Growth-Income Class 2 763,798 (1,286,362) (522,564) American Funds International Class 2 339,180 (472,669) (133,489) BlackRock Global Allocation V.I. Class III 188,927 (22,126) 166,801 Delaware VIP Diversified Income Service Class 872,611 (411,888) 460,723 Delaware VIP Emerging Markets Service Class 196,909 (241,691) (44,782) Delaware VIP High Yield Standard Class 3,293 (20,344) (17,051) Delaware VIP High Yield Service Class 365,552 (272,561) 92,991
N-56
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- Delaware VIP Limited-Term Diversified Income Service Class 552,504 (208,072) 344,432 Delaware VIP REIT Standard Class 1,690 (7,694) (6,004) Delaware VIP REIT Service Class 109,827 (170,147) (60,320) Delaware VIP Small Cap Value Standard Class 1,238 (11,569) (10,331) Delaware VIP Small Cap Value Service Class 126,071 (169,118) (43,047) Delaware VIP Trend Standard Class 3,321 (17,069) (13,748) Delaware VIP Trend Service Class 40,960 (73,860) (32,900) Delaware VIP U.S. Growth Service Class 34,830 (39,550) (4,720) Delaware VIP Value Standard Class 8,670 (17,694) (9,024) Delaware VIP Value Service Class 115,194 (150,325) (35,131) DWS VIP Alternative Asset Allocation Plus Class B 6,562 (2,234) 4,328 DWS VIP Equity 500 Index Class A 6,158 (76,542) (70,384) DWS VIP Equity 500 Index Class B 21,616 (72,390) (50,774) DWS VIP Small Cap Index Class A 826 (12,391) (11,565) DWS VIP Small Cap Index Class B 9,907 (39,076) (29,169) Fidelity VIP Contrafund Service Class 2 403,711 (422,495) (18,784) Fidelity VIP Equity-Income Initial Class 1,927 (20,519) (18,592) Fidelity VIP Equity-Income Service Class 2 18,387 (55,281) (36,894) Fidelity VIP Growth Initial Class 660 (4,076) (3,416) Fidelity VIP Growth Service Class 2 44,917 (83,460) (38,543) Fidelity VIP Mid Cap Service Class 2 405,925 (305,205) 100,720 Fidelity VIP Overseas Initial Class 62 (5,028) (4,966) Fidelity VIP Overseas Service Class 2 34,722 (64,839) (30,117) FTVIPT Franklin Income Securities Class 2 560,608 (487,338) 73,270 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 123,715 (96,669) 27,046 FTVIPT Mutual Shares Securities Class 2 367,319 (219,322) 147,997 FTVIPT Templeton Global Bond Securities Class 2 453,209 (348,847) 104,362 FTVIPT Templeton Growth Securities Class 2 22,657 (99,744) (77,087) Goldman Sachs VIT Large Cap Value Service Class 10,750 (946) 9,804 Janus Aspen Series Balanced Service Class 3,886 (30,104) (26,218) Janus Aspen Series Enterprise Service Class 800 (5,710) (4,910) Janus Aspen Series Worldwide Service Class 35 (450) (415) LVIP Baron Growth Opportunities Service Class 147,490 (120,496) 26,994 LVIP Capital Growth Service Class 48,931 (31,352) 17,579 LVIP Cohen & Steers Global Real Estate Service Class 299,656 (141,875) 157,781 LVIP Columbia Value Opportunities Service Class 23,125 (21,035) 2,090 LVIP Delaware Bond Standard Class 64,866 (280,594) (215,728) LVIP Delaware Bond Service Class 1,280,799 (665,163) 615,636 LVIP Delaware Foundation Aggressive Allocation Standard Class 347 (5,986) (5,639) LVIP Delaware Foundation Aggressive Allocation Service Class 33,711 (44,840) (11,129) LVIP Delaware Growth and Income Service Class 48,343 (13,035) 35,308 LVIP Delaware Social Awareness Standard Class 1,863 (5,486) (3,623) LVIP Delaware Social Awareness Service Class 13,528 (37,438) (23,910) LVIP Delaware Special Opportunities Service Class 133,423 (29,886) 103,537 LVIP Global Income Service Class 163,631 (36,105) 127,526 LVIP Janus Capital Appreciation Standard Class 5,136 (8,311) (3,175) LVIP Janus Capital Appreciation Service Class 41,167 (27,554) 13,613 LVIP MFS International Growth Service Class 98,027 (56,275) 41,752 LVIP MFS Value Service Class 337,013 (110,120) 226,893 LVIP Mid-Cap Value Service Class 94,044 (45,446) 48,598 LVIP Mondrian International Value Standard Class 7,518 (23,486) (15,968) LVIP Mondrian International Value Service Class 84,062 (99,810) (15,748) LVIP Money Market Standard Class 324,348 (658,925) (334,577) LVIP Money Market Service Class 1,225,237 (1,893,665) (668,428) LVIP SSgA Bond Index Service Class 1,260,544 (309,151) 951,393 LVIP SSgA Developed International 150 Service Class 257,968 (97,049) 160,919 LVIP SSgA Emerging Markets 100 Service Class 358,083 (89,698) 268,385 LVIP SSgA International Index Service Class 372,558 (104,424) 268,134 LVIP SSgA Large Cap 100 Service Class 483,727 (137,370) 346,357 LVIP SSgA S&P 500 Index Standard Class 25,882 (39,944) (14,062) LVIP SSgA S&P 500 Index Service Class 736,690 (365,023) 371,667 LVIP SSgA Small-Cap Index Service Class 298,782 (148,654) 150,128
N-57
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------------------- LVIP SSgA Small-Mid Cap 200 Service Class 138,566 (42,236) 96,330 LVIP T. Rowe Price Growth Stock Service Class 89,912 (36,240) 53,672 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 3,265 (2,344) 921 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 70,286 (24,149) 46,137 LVIP Templeton Growth Service Class 140,383 (63,911) 76,472 LVIP Turner Mid-Cap Growth Service Class 50,482 (43,917) 6,565 LVIP Wells Fargo Intrinsic Value Service Class 44,130 (48,977) (4,847) LVIP Wilshire 2010 Profile Service Class 32,176 (9,746) 22,430 LVIP Wilshire 2020 Profile Service Class 30,916 (11,674) 19,242 LVIP Wilshire 2030 Profile Service Class 11,450 (7,948) 3,502 LVIP Wilshire 2040 Profile Service Class -- (1,521) (1,521) LVIP SSgA Global Tactical Allocation Service Class 36,473 (39,451) (2,978) LVIP Wilshire Conservative Profile Service Class 427,899 (144,632) 283,267 LVIP Wilshire Moderate Profile Service Class 528,710 (661,863) (133,153) LVIP Wilshire Moderately Aggressive Profile Service Class 271,101 (309,332) (38,231) MFS VIT Core Equity Service Class 71 (638) (567) MFS VIT Growth Initial Class 1,442 (6,140) (4,698) MFS VIT Growth Service Class 7,792 (3,397) 4,395 MFS VIT Total Return Initial Class 1,131 (39,924) (38,793) MFS VIT Total Return Service Class 328,354 (227,632) 100,722 MFS VIT Utilities Initial Class 3,115 (18,004) (14,889) MFS VIT Utilities Service Class 134,205 (175,414) (41,209) NB AMT Mid-Cap Growth I Class 17,079 (93,419) (76,340) NB AMT Regency I Class 26,050 (84,648) (58,598) PIMCO VIT Commodity Real Return Advisor Class 25,019 (697) 24,322 Putnam VT Global Health Care Class IB 3,929 (4,973) (1,044) Putnam VT Growth & Income Class IB -- (3,612) (3,612)
N-58 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of Lincoln Life & Annuity Company of New York and Contract Owners of Lincoln New York Account N for Variable Annuities We have audited the accompanying statements of assets and liabilities of Lincoln New York Account N for Variable Annuities ("Variable Account"), comprised of the subaccounts described in Note 1, as of December 31, 2010, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, or for those sub-accounts operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Variable Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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. Our procedures included confirmation of investments owned as of December 31, 2010, by correspondence with the fund companies, or their transfer agents, as applicable. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting Lincoln New York Account N for Variable Annuities at December 31, 2010, and the results of their operations and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 6, 2011 N-59 Lincoln New York Account N for Variable Annuities PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) List of Financial Statements 1. Part A The Table of Condensed Financial Information is included in Part A of this Registration Statement. (Not Applicable) 2. Part B The following financial statements for the Variable Account are included in Part B of this Registration Statement. Statement of Assets and Liabilities - December 31, 2010 Statement of Operations - Year ended December 31, 2010 Statements of Changes in Net Assets - Years ended December 31, 2010 and 2009 Notes to Financial Statements - December 31, 2010 Report of Independent Registered Public Accounting Firm 3. Part B The following financial statements for Lincoln Life & Annuity Company of New York are included in Part B of this Registration Statement. Balance Sheets - December 31, 2010 and 2009 Statements of Income - Years ended December 31, 2010, 2009, and 2008 Statements of Shareholder's Equity - Years ended December 31, 2010, 2009, and 2008 Statements of Cash Flows - Years ended December 31, 2010, 2009, and 2008 Notes to Financial Statements - December 31, 2010 Report of Independent Registered Public Accounting Firm (b) List of Exhibits (1) (a) Resolution of Board of Directors and Memorandum authorizing establishment of the Variable Account are incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-93875) filed on December 30, 1999. (b) Amendment to that Certain Memorandum incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-93875) filed on December 30, 1999. (2) Not Applicable. (3) (a) Principal Underwriting Agreement between Lincoln Financial Distributors, Inc. and Lincoln Life & Annuity Company of New York incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-145531) filed on November 16, 2007. (b) Broker-Dealer Selling Group Agreement The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York and Lincoln Financial Distributors, Inc. incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-170897) filed on April 7, 2011. (4) (a) Annuity Contract (300700-CP Signature B Share) (To Be Filed by Amendment) (b) Annuity Contract (30070-CP Signature L Share) (To Be Filed by Amendment) (c) Persistency Credit Rider (32154B-NY) incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-83718) filed on May 24, 2002. (d) IRA Contract Amendment incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-93875) filed on April 15, 2003. (e) Roth IRA Endorsement incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-93875) filed on April 15, 2003. (f) DCA Fixed Account Allocations (NYCPALGV) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-83718) filed on April 21, 2004. (g) DCA Fixed Account Allocations (NYCPAGV 5/03) incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-93875) filed on April 20, 2004. (h) Guaranteed Income Later Rider (4LATER 2/06) incorporated herein by reference to Post-Effective Amendment No. 23 (File No. 333-36316) filed on April 4, 2006. (i) Allocation Amendment (AR503 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (j) Variable Annuity Rider (32793 7/06 NY LSSA) incorporated herein by reference to Post-Effective Amendment No. 15 (File No. 333-93875) filed on December 21, 2006. (k) Section 403(b) Annuity Endorsement (32481NY-I-12/08) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-141763) filed on April 7, 2009. (l) Variable Annuity Death Benefit Rider (DB-3 1/06) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on April 13, 2007. (m) Variable Annuity Guaranteed Income Benefit Rider (LINC 2.0) (AR-529 8/10 NY) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-145531) filed on October 28, 2010. (n) Guaranteed Income Benefit Rider (GIB v4) AR-528 8/10 NY) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-145531) filed on October 28, 2010. (o) Contract Benefit Data (CBD 8/10 NY) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-145531) filed on October 28, 2010. (p) Variable Annuity Payment Option Rider (i4LA-NQ 8/10 NY Rev 09-02) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-145531) filed on October 28, 2010. (q) Variable Annuity Payment Option Rider (i4LA-Q 8/10 NY Rev 09-02) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-145531) filed on October 28, 2010. (5) Application (To Be Filed by Amendment) (6) Articles of Incorporation and By-laws of Lincoln Life & Annuity Company of New York incorporated herein by reference to Post-Effective Amendment No. 17 on Form N-6 to Registration Statement on Form S-6 (File No. 033-77496) filed on April 2, 2007. (7) (a) Automatic Indemnity Reinsurance Agreement dated December 31, 2007, Amended and Restated as of January 1, 2010 between Lincoln Life & Annuity Company of New York and Lincoln National Reinsurance Company (Barbados) Limited incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-141758) filed on April 7, 2010. (b) Novation Agreement effective as of January 1, 2010 by and among Lincoln National Reinsurance Company (Barbados) Limited, Lincoln Life & Annuity Company of New York and The Lincoln National Life Insurance Company incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-141758) filed on April 7, 2010. (8) (a) Accounting and Financial Services Administration Agreement dated October 1, 2007 among Mellon Bank, N.A., The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-147673) filed on November 28, 2007. (b) Fund Participation Agreements and Amendments between Lincoln Life & Annuity Company of New York and: (i) AllianceBernstein Variable Products Series Funds incorporated herein by reference to Post-Effective Amendment No. 7 on Form N-6 (File No. 333-155333) filed on April 1, 2010. (ii) BlackRock Variable Series Funds, Inc. incorporated herein by reference to Post-Effective Amendment No. 14 on Form N-6 (File No. 333-155333) filed on April 1, 2011. (iii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 7 on Form N-6 (File No. 333-155333) filed on April 1, 2010. (iv) DWS Variable Series II (f/k/a Scudder/Kemper Investments) incorporated herein by reference to Post-Effective Amendment No. 7 on Form N-6 (File No. 333-155333) filed on April 1, 2010. (v) Fidelity Variable Insurance Products Fund incorporated herein by reference to Post-Effective Amendment No. 7 on Form N-6 (File No. 333-155333) filed on April 1, 2010. (vi) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 14 on Form N-6 (File No. 333-155333) filed on April 1, 2011. B-2 (vii) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 14 on Form N-6 (File No. 333-155333) filed on April 1, 2011. (viii) MFS Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 2 on Form N-6 (File No. 333-141769) filed on April 2, 2008. (ix) PIMCO Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 14 on Form N-6 (File No. 333-155333) filed on April 1, 2011. (c) Rule 22c-2 Agreements between Lincoln Life & Annuity Company of New York and: (i) BlackRock Variable Series Fund, Inc. incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-68842) filed on June 22, 2009. (ii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-145531) filed on April 9, 2009. (iii) Fidelity Variable Insurance Products Fund incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (iv) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-149449) filed on November 26, 2008. (v) Lincoln Variable Insurance Products Trust incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-149449) filed on November 26, 2008. (vi) MFS Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (9) Opinion and Consent of Mary Jo Ardington, Associate General Counsel of The Lincoln National Life Insurance Company, as to legality of securities being issued (10) (a) Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (b) Power of Attorney - Principal Officers and Directors of Lincoln Life & Annuity Company of New York (11) Not Applicable (12) Not Applicable (13) Organizational Chart of The Lincoln National Insurance Holding Company incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-145531) filed on August 26, 2010. Item 25. Directors and Officers of the Depositor The following list contains the officers and directors of Lincoln Life & Annuity Company of New York who are engaged directly or indirectly in activities relating to Lincoln New York Account N for Variable Annuities as well as the contracts. The list also shows Lincoln Life & Annuity Company of New York's executive officers. B-3
Name Positions and Offices with Depositor --------------------------------- -------------------------------------------------------------------- Charles C. Cornelio**** Executive Vice President, Chief Administrative Officer and Director Randal J. Freitag*** Executive Vice President, Chief Financial Officer and Director Frederick J. Crawford*** Executive Vice President and Director C. Phillip Elam, II**** Senior Vice President and Chief Investment Officer Dennis R. Glass*** President and Director George W. Henderson, III Director Granville Capital 300 N. Greene Street Greensboro, NC 27401 Mark E. Konen**** Senior Vice President and Director M. Leanne Lachman Director 870 United Nations, Plaza, #19-E New York, NY 10017 Louis G. Marcoccia Director Senior Vice President Syracuse University Crouse-Hinds Hall, Suite 620 900 S. Crouse Ave. Syracuse, NY 13244 Patrick S. Pittard Director 20 Cates Ridge Atlanta, GA 30327 Robert O. Sheppard* Second Vice President, General Counsel and Secretary Rise' C.M. Taylor** Vice President and Treasurer
* Principal business address is 100 Madison Street, Suite 1860, Syracuse, NY 13202 ** Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802 *** Principal business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087 **** Principal business address is 100 N. Greene Street, Greensboro, NC 27401 Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant See Exhibit 13: Organizational Chart of the Lincoln National Insurance Holding Company System. Item 27. Number of Contractowners As of February 28, 2011 there were 7,590 contract owners under Account N. Item 28. Indemnification (a) Brief description of indemnification provisions. In general, Article VII of the By-Laws of Lincoln Life & Annuity Company of New York provides that Lincoln New York will indemnify certain persons against expenses, judgments and certain other specified costs incurred by any such person if he/she is made a party or is threatened to be made a party to a suit or proceeding because he/she was a director, officer, or employee of Lincoln New York, as long as he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of, or act opposed to the best interests of, Lincoln New York. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officers, and employees of Lincoln New York in connection with suits by, or in the right of, Lincoln New York. Please refer to Article VII of the By-Laws of Lincoln New York (Exhibit no. 6 hereto) for the full text of the indemnification provisions. Indemnification is permitted by, and is subject to the requirements of, New York law. (b) Undertaking pursuant to Rule 484 of Regulation C under the Securities Act of 1933: B-4 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 28(a) above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 29. Principal Underwriter (a) Lincoln Financial Distributors, Inc. ("LFD") currently serves as Principal Underwriter for: Lincoln National Variable Annuity Fund A (Group & Individual); Lincoln National Variable Annuity Account C; Lincoln National Flexible Premium Variable Life Account D; Lincoln National Variable Annuity Account E; Lincoln National Flexible Premium Variable Life Account F; Lincoln National Flexible Premium Variable Life Account G; Lincoln National Variable Annuity Account H; Lincoln Life & Annuity Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life Account J; Lincoln Life Flexible Premium Variable Life Account K; Lincoln National Variable Annuity Account L; Lincoln Life & Annuity Variable Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M; Lincoln Life & Annuity Flexible Premium Variable Life Account M; Lincoln Life Variable Annuity Account N; Lincoln New York Account N for Variable Annuities; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible Premium Variable Life Account R; LLANY Separate Account R for Flexible Premium Variable Life Insurance; Lincoln Life Flexible Premium Variable Life Account S; LLANY Separate Account S for Flexible Premium Variable Life Insurance; Lincoln Life Variable Annuity Account T; Lincoln Life Variable Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account Y and Lincoln Life & Annuity Flexible Premium Variable Life Account Y. (b) Officers and Directors of Lincoln Financial Distributors, Inc.:
Name Positions and Offices with Underwriter ------------------------ ------------------------------------------------ Wilford H. Fuller* President, Chief Executive Officer and Director David M. Kittredge* Senior Vice President Anant Bhalla* Vice President and Treasurer Patrick J. Caulfield** Vice President and Chief Compliance Officer Joel Schwartz* Vice President and Director Keith J. Ryan*** Vice President and Chief Financial Officer Patricia A. Insley* Director Thomas P. O'Neill* Vice President and Director Linda E. Woodward*** Secretary
* Principal Business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor PA 19087 ** Principal Business address is 350 Church Street, Hartford, CT 06103 *** Principal Business address is 1300 S. Clinton Street, Ft. Wayne, IN 46802 (c) N/A Item 30. Location of Accounts and Records All accounts, books, and other documents, required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by The Lincoln National Life Insurance Company ("Lincoln Life"), 1300 South Clinton Street, Fort Wayne, Indiana 46802 pursuant to an administrative services agreement with Lincoln Life & Annuity Company of New York. Lincoln Life has entered into an agreement with Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258, to provide accounting services for the VAA. Item 31. Management Services Not Applicable. B-5 Item 32. Undertakings (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) Registrant undertakes that it will include either (1) as part of any application to purchase a Certificate or an Individual Contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or a similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to Lincoln New York at the address or phone number listed in the Prospectus. (d) Lincoln New York hereby represents that the fees and charges deducted under the contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Lincoln New York. (e) Registrant hereby represents that it is relying on the American Council of Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to Contracts used in connection with retirement plans meeting the requirements of Section 403(b) of the Internal Revenue Code, and represents further that it will comply with the provisions of paragraphs (1) through (4) set forth in that no-action letter. SIGNATURES (a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has caused this Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf, in the City of Fort Wayne, and State of Indiana on this 8th day of April, 2011. Lincoln New York Account N for Variable Annuities (Registrant) Lincoln ChoicePlusSM Signature By: /s/Delson R. Campbell ------------------------------------ Delson R. Campbell Assistant Vice President, Lincoln Life & Annuity Company of New York (Title) LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK (Depositor) By: /s/Brian A. Kroll ------------------------------------ Brian A. Kroll Assistant Vice President, Lincoln Life & Annuity Company of New York (Title)
(b) As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in their capacities indicated on April 8, 2011. B-6 Signature Title * President ------------------------------ (Principal Executive Officer) Dennis R. Glass * Executive Vice President, Chief Administrative Officer and Direc- ------------------------------ tor Charles C. Cornelio * Executive Vice President and Director ------------------------------ Frederick J. Crawford * Senior Vice President and Chief Investment Officer ------------------------------ C. Phillip Elam II * Executive Vice President, Chief Financial Officer and Director ------------------------------ (Principal Financial Officer) Randal J. Freitag * Director ------------------------------ George W. Henderson, III * Director ------------------------------ Mark E. Konen * Director ------------------------------ M. Leanne Lachman * Director ------------------------------ Louis G. Marcoccia * Director ------------------------------ Patrick S. Pittard *By:/s/Delson R. Campbell Pursuant to a Power of Attorney --------------------------- Delson R. Campbell
B-7