-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SsLSkY1kI4Tpgb+CAOk6uoG/jK8gLy3Od9t3HyAcaL/9B1ioDYbOKOPgKxWtRvcK 7fnYLE0O7SMhnTvdf7VofA== 0000950131-97-002338.txt : 19970402 0000950131-97-002338.hdr.sgml : 19970402 ACCESSION NUMBER: 0000950131-97-002338 CONFORMED SUBMISSION TYPE: N-4 EL/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H CENTRAL INDEX KEY: 0000847552 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 35472300 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-4 EL/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-18419 FILM NUMBER: 97572733 FILING VALUES: FORM TYPE: N-4 EL/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-05721 FILM NUMBER: 97572734 BUSINESS ADDRESS: STREET 1: 1300 S CLINTON ST STREET 2: PO BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 BUSINESS PHONE: 2194273018 MAIL ADDRESS: STREET 1: P O BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 N-4 EL/A 1 PRE-EFFECTIVE AMENDMENT NO. 1 - VA ACCOUNT H - LEGACY III As filed with the Securities and Exchange Commission on April 1, 1997 Registration No.: 333-18419 - -------------------------------------------------------------------------------- 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. 12 [X] LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H (Exact Name of Registrant) THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Name of Depositor) 1300 South Clinton Street Post Office Box 1110 Fort Wayne, Indiana 46801 - -------------------------------------------------------------------------------- (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including Area Code: (219)455-2000 JACK D. HUNTER, ESQ. 200 East Berry Street Post Office Box 1110 Fort Wayne, Indiana 46802 - -------------------------------------------------------------------------------- (Name and Address of Agent for Service) Copy to: Susan S. Krawczyk Sutherland, Asbill & Brennan, L.L.P. 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Title of securities being registered: Interests in a separate account under individual flexible premium deferred variable annuity contracts. DECLARATION PURSUANT TO RULE 24f-2 An indefinite amount of securities is being registered under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. A filing fee of $500 was paid with the initial registration statement. ------------------- 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 NATIONAL VARIABLE ANNUITY ACCOUNT H CROSS REFERENCE SHEET (PURSUANT TO RULE 495 OF REGULATION C UNDER THE SECURITIES ACT OF 1933) RELATING TO ITEMS REQUIRED BY FORM N-4 N-4 ITEM CAPTION IN PROSPECTUS (PART A) - -------- ------------------------------ 1. Cover Page 2. Special terms 3. (a) Expense Table (b) Synopsis (c) Synopsis (d) Not Applicable 4. (a) Condensed Financial Information (b) Investment Results (c) Financial Statements 5. (a) Cover Page; The Lincoln National Life Insurance Company (b) Variable Annuity Account; Investments of the Variable Annuity Account; Cover Page (c) Investments of the Variable Annuity Account; Investment Advisor; Description of the Series (d) Cover Page (e) Voting Rights (f) Not Applicable 6. (a) Charges and Other Deductions (b) Charges and Other Deductions (c) Charges and Other Deductions (d) The Contracts - Commissions (e) Charges and Other Deductions (f) Charges and Other Deductions (g) Not Applicable 7. (a) The Contracts; Investments of the Variable Annuity Account; Annuity Payouts; Voting Rights; Return Privilege (b) Investments of the Variable Annuity Account; The Contracts; Cover Page (c) The Contracts (d) The Contracts CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4 N-4 ITEM CAPTION IN PROSPECTUS (PART A) - -------- ------------------------------ 8. (a) Annuity Payouts (b) Annuity Payouts (c) Annuity Payouts (d) Annuity Payouts (e) Annuity Payouts (f) The Contracts; Annuity Payouts 9. (a) The Contracts; Annuity Payouts (b) The Contracts; Annuity Payouts 10. (a) The Contracts; Cover Page; Charges and Other Deductions (b) The Contracts; Investments of the Variable Annuity Account (c) The Contracts (d) Distribution of the Contracts 11. (a) The Contracts (b) Restrictions Under the Texas Optional Retirement Program (c) The Contracts (d) The Contracts (e) Return Privilege 12. (a) Federal Tax Status (b) Cover Page; Federal Tax Status (c) Federal Tax Status 13. Legal Proceedings 14. Table of Contents to the Statement of Additional Information (SAI) for Lincoln National Variable Annuity Account H American Legacy III CAPTION IN STATEMENT OF ADDITIONAL N-4 ITEM INFORMATION (PART B) (continued) - -------- ---------------------------------- 15. Cover Page for Part B 16. Cover Page for Part B 17. (a) Not Applicable (b) Not Applicable (c) General Information and History of The Lincoln National Life Insurance Company (Lincoln Life) CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4 CAPTION IN STATEMENT OF ADDITIONAL N-4 ITEM INFORMATION (PART B) - -------- ---------------------------------- 18. (a) Not Applicable (b) Not Applicable (c) Services (d) Not Applicable (e) Not Applicable (f) Not Applicable 19. (a) Purchase of Securities Being Offered (b) Purchase of Securities Being Offered 20. (a) Not Applicable (b) Principal Underwriters (c) Not Applicable (d) Not Applicable 21. Calculation of Investment Results 22. Annuity Payouts 23. (a) Financial Statements -- Lincoln National Variable Annuity Account H (b) Financial Statements -- The Lincoln National Life Insurance Company AMERICAN LEGACY III LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H INDIVIDUAL VARIABLE ANNUITY CONTRACTS issued by: Lincoln National Life Insurance Co. 1300 South Clinton Street Fort Wayne, Indiana 46802 This Prospectus describes the individual flexible premium deferred variable an- nuity contract (contract or variable annuity contract) issued by The Lincoln National Life Insurance Company (Lincoln Life). It is for use with the follow- ing retirement plans qualified for special tax treatment (qualified plans) un- der the Internal Revenue Code of 1986, as amended (the code): 1. Public school systems and certain tax-exempt organizations [403(b)]; 2. Qualified corporate employee pension and profit-sharing trusts and qualified annuity plans; 3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh); 4. Individual retirement annuities (IRA); 5. Government deferred compensation plans (457); 6. Simplified employee pension plans (SEP); and 7. SIMPLE 401(k) and SIMPLE IRA plans. Consult your investment dealer as to the availability of this contract for SIMPLE IRA's. Section 403(b) business under number (1.) will normally be accepted only for purchase payments qualifying as 403(b) lump sum transfers or rollovers. The contract described in this Prospectus is also offered to plans established by persons who are not entitled to participate in one of the previously men- tioned plans (nonqualified contracts). A nonqualified contract can be owned jointly only by spouses. The contract offers you the accumulation of contract value and payment of peri- odic annuity benefits. These benefits may be paid on a variable or fixed basis or a combination of both. Annuity benefits start at an annuity commencement date which you select. If the contractowner dies before the annuity commence- ment date, the greater of: (1) the contract value; or (2) the enhanced guaran- teed minimum death benefit (EGMDB) or, if the EGMDB is not then in effect, the guaranteed minimum death benefit (GMDB), will be paid to the beneficiary. (See Death benefit before annuity commencement date.) The EGMDB is not available un- der contracts used for qualified plans (other than IRAs) or if the contractowner's issue age is 75 or more. The minimum initial purchase payment for the contract is: 1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or 2. $300 for a qualified plan. The minimum payment to the contract is $100 per payment ($25 if transmitted electronically), subject to a $300 annual minimum. All investments (purchase payments) for benefits on a variable basis will be placed in Lincoln National Variable Annuity Account H (variable annuity account [VAA]). The VAA is a segregated investment account of Lincoln Life, which is the depositor. Based upon your instructions, the VAA invests purchase payments (at net asset value) in Class 2 shares of one or more specified funds of the American Variable Insurance Series (series): Global Growth Fund, Growth Fund, Growth-Income Fund, International Fund, Asset Allocation Fund, High-Yield Bond Fund, Bond Fund, U.S. Government/AAA-Rated Securities Fund, and Cash Management Fund. Both the value of a contract before the annuity commencement date and the amount of payouts afterward will depend upon the investment performance of the fund(s) selected. Investments in these funds are neither insured nor guaranteed by the U.S. Government or by any other person or entity. Purchase payments for benefits on a fixed basis will be placed in the fixed side of the contract, which is part of our General Account. However, this Pro- spectus deals only with those elements of the contracts relating to the VAA, except where reference to the fixed side is made. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus details the information regarding the VAA that you should know before investing. This booklet also includes a current Prospectus of the se- ries. Both should be read carefully before investing and kept for future refer- ence. A statement of additional information (SAI), dated , 1997, concerning the VAA has been filed with the SEC and is incorporated by this reference into this Prospectus. If you would like a free copy, complete and mail the enclosed card, or call 1-800-942-5500. A table of contents for the SAI appears on the last page of this Prospectus. PRELIMINARY PROSPECTUS DATED APRIL 2, 1997. SUBJECT TO COMPLETION. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGIS- TRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURI- TIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFEC- TIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA- TION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 1 TABLE OF CONTENTS
Page - ------------------------------------------------- Special terms 3 - ------------------------------------------------- Expense tables 4 - ------------------------------------------------- Synopsis 6 - ------------------------------------------------- Condensed financial information 8 - ------------------------------------------------- Investment results 8 - ------------------------------------------------- Financial statements 8 - ------------------------------------------------- Lincoln National Life Insurance Co. 8 - ------------------------------------------------- Variable annuity account (VAA) 8 - ------------------------------------------------- Investments of the variable annuity account 8 - ------------------------------------------------- Charges and other deductions 10 - ------------------------------------------------- The contracts 11 - -------------------------------------------------
Page - ------------------------------------------------------------------------ Annuity payouts 15 - ------------------------------------------------------------------------ Federal tax status 16 - ------------------------------------------------------------------------ Voting rights 18 - ------------------------------------------------------------------------ Distribution of the contracts 18 - ------------------------------------------------------------------------ Return privilege 18 - ------------------------------------------------------------------------ State regulation 19 - ------------------------------------------------------------------------ Restrictions under the Texas Optional Retirement Program 19 - ------------------------------------------------------------------------ Records and reports 19 - ------------------------------------------------------------------------ Other information 19 - ------------------------------------------------------------------------ Statement of additional information table of contents for Variable Annuity Account H American Legacy III 19 - ------------------------------------------------------------------------
2 SPECIAL TERMS (Throughout this Prospectus, in order to make the following documents more un- derstandable to you, we have italicized the special terms.) Account or variable annuity account (VAA) -- The segregated investment ac- count, Account H, into which Lincoln Life sets aside and invests the assets for the variable side of contract offered in this Prospectus. Accumulation unit -- A measure used to calculate contract value for the vari- able side of the contract before the annuity commencement date. See The con- tracts. Advisor or investment advisor -- Capital Research and Management Co. (CRMC), which provides investment management services to the series. See Investment advisor. Annuitant -- The person upon whose life the annuity benefit payments made af- ter the annuity commencement date will be based. Annuity commencement date -- The valuation date when the funds are withdrawn or converted into annuity units or fixed dollar payout for payment of annuity benefits under the annuity payout option selected. For purposes of determining whether an event occurs before or after the annuity commencement date, the an- nuity commencement date is deemed to begin at close of business on the valua- tion date. Annuity payout option -- An optional form of payout of the annuity available within the contract. See Annuity payouts. Annuity payout -- An amount paid at regular intervals after the annuity com- mencement 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 af- ter the annuity commencement date. See Annuity payouts. Beneficiary -- The person whom you designate to receive the death benefit, if any, in case of the contractowner's death. Cash surrender value -- Upon surrender, the contract value less any applicable charges, fees and taxes. Code -- The Internal Revenue Code of 1986, as amended. Contract (variable annuity contract) -- The agreement between you and us pro- viding a variable annuity. Contractowner (you, your, owner) -- The person who has the ability to exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the owner is also the annuitant. Contract value -- At a given time, the total value of all accumulation units for a contract plus the value of the fixed side of the contract. Contract year -- Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit -- The amount payable to your designated beneficiary if the owner dies before the annuity commencement date. See The contracts. Depositor -- Lincoln National Life Insurance Co. Enhanced guaranteed minimum death benefit (EGMDB) -- The EGMDB is the greater of: (1) contract value as of the day on which Lincoln Life approves the pay- ment of a death benefit claim; or (2) the highest contract value on any policy anniversary date (including the inception date) from the time the EGMDB takes effect up to and including the contractowner's age 75. The highest contract value so determined is then increased by purchase payments and decreased by partial withdrawals, partial annuitizations, and any premium taxes made, ef- fected or incurred subsequent to the anniversary date on which the highest contract value is obtained. Flexible premium deferred contract -- An annuity contract with an initial pur- chase payment, allowing additional purchase payments to be made, and with an- nuity payouts beginning at a future date. Fund -- Any of the underlying investment options available in the series in which your purchase payments are invested. Guaranteed minimum death benefit (GMDB) -- The GMDB is equal to the sum of all purchase payments minus any withdrawals, partial annuitizations and premium taxes incurred. See Death benefit before the annuity commencement date. Home office -- The headquarters of Lincoln National Life Insurance Co., lo- cated at 1300 South Clinton Street, Fort Wayne, Indiana 46802. Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co. Purchase payments -- Amounts paid into the contract. Series -- American Variable Insurance Series (series), the funds in which pur- chase payments are invested. Statement of additional information (SAI) -- A document required by the SEC to be provided upon request to a prospective purchaser of a contract, you. This free document gives more information about Lincoln Life, the VAA and the vari- able annuity contract. Subaccount or American Legacy III subaccount -- That portion of the VAA that reflects investments in accumulation and annuity units of a class of a partic- ular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Surrender -- A contract right that allows you to terminate your contract and receive your cash surrender value. See The contracts. 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 (valua- tion date) and ending at the close of such trading on the next valuation date. Withdrawal -- A contract right that allows you to obtain a portion of your cash surrender value. 3 EXPENSE TABLES CONTRACTOWNER TRANSACTION EXPENSES: The maximum contingent deferred sales charge (as a percentage of purchase payments surrendered/withdrawn): 6% The contingent deferred sales charge percentage is reduced over time. The later a redemption occurs, the lower the contingent deferred sales charge with re- spect tothat surrender or withdrawal. See Contingent deferred sales charges. (Note: This charge may be waived in certain cases. See Contingent deferred sales charges.) - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY III SUBACCOUNTS: (as a percentage of average account value for each subaccount):
For each subaccount* For each subaccount* with EGMDB without EGMDB Mortality and expense risk fees 1.30% 1.15% Administrative charge .10% .10% ----- ----- Total annual expenses for American Legacy III subaccounts 1.40% 1.25%
ANNUAL EXPENSES OF THE FUNDS FOR THE YEAR ENDED NOVEMBER 30, 1996: (as a percentage of each fund's average net assets):
Management 12b-1 Other Total fees + fees + expenses = expenses - ----------------------------------------------------------------------- 1. Global Growth** .69% .25% .06% 1.00% - ----------------------------------------------------------------------- 2. Growth .42 .25 .02 .69 - ----------------------------------------------------------------------- 3. International .61 .25 .08 .94 - ----------------------------------------------------------------------- 4. Growth-Income .39 .25 .02 .66 - ----------------------------------------------------------------------- 5. Asset Allocation .47 .25 .02 .74 - ----------------------------------------------------------------------- 6. High-Yield Bond .50 .25 .03 .78 - ----------------------------------------------------------------------- 7. Bond .51 .25 .01 .77 - ----------------------------------------------------------------------- 8. U.S. Govt./AAA-Rated Securities .51 .25 .02 .78 - ----------------------------------------------------------------------- 9. Cash Management .45 .25 .02 .72 - -----------------------------------------------------------------------
*The VAA is divided into separately-named subaccounts, nine of which are available under the contracts. Each subaccount, in turn, invests purchase payments in shares of a class of its respective fund. **These expenses are estimated for the current fiscal year. 4 EXAMPLES (reflecting expenses both of the American Legacy III subaccounts and of the funds) If you surrender your contract at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 year 3 years - -------------------------------------------------------------------------------------------- 1. Global Growth* $84 $125 - -------------------------------------------------------------------------------------------- 2. Growth 81 115 - -------------------------------------------------------------------------------------------- 3. International 84 123 - -------------------------------------------------------------------------------------------- 4. Growth-Income 81 115 - -------------------------------------------------------------------------------------------- 5. Asset Allocation 82 117 - -------------------------------------------------------------------------------------------- 6. High-Yield Bond 82 117 - -------------------------------------------------------------------------------------------- 7. Bond 82 118 - -------------------------------------------------------------------------------------------- 8. U.S. Govt./AAA-Rated Securities 82 118 - -------------------------------------------------------------------------------------------- 9. Cash Management 82 116 - -------------------------------------------------------------------------------------------- If you do not surrender your contract, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return: 1 year 3 years - -------------------------------------------------------------------------------------------- 1. Global Growth* $24 $75 - -------------------------------------------------------------------------------------------- 2. Growth 21 65 - -------------------------------------------------------------------------------------------- 3. International 24 73 - -------------------------------------------------------------------------------------------- 4. Growth-Income 21 65 - -------------------------------------------------------------------------------------------- 5. Asset Allocation 22 67 - -------------------------------------------------------------------------------------------- 6. High-Yield Bond 22 67 - -------------------------------------------------------------------------------------------- 7. Bond 22 68 - -------------------------------------------------------------------------------------------- 8. U.S. Govt./AAA-Rate Securities 22 68 - -------------------------------------------------------------------------------------------- 9. Cash Management 22 66 - --------------------------------------------------------------------------------------------
* These expenses are estimated amounts for the current fiscal year. All of the figures provided under the subheading Annual expenses of the funds and part of the data used to produce the figures in the examples were supplied by the underlying portfolio company (series) through the VAA's principal under- writer, American Funds Distributors, Inc. We have not independently verified this information. These examples are provided to assist you in understanding the various costs and expenses that you will bear directly or indirectly depending on whether or not the EGMDB is in effect. These examples reflect expenses both of the VAA for the American Legacy III subaccounts and of the nine funds. These examples re- flect expenses assuming that the EGMDB is in effect. If the EGMDB is NOT in ef- fect, these expenses will be lower. For more complete descriptions of the various costs and expenses involved, see Charges and other deductions in this Prospectus, and Fund Organization and Man- agement in the Prospectus for the series. Premium taxes may also be applicable, although they do not appear in the examples. In addition, we reserve the right to impose a charge on transfers between subaccounts as well as to and from the fixed account, although we do not currently do so. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. These examples are unaudited. 5 SYNOPSIS WHAT TYPE OF CONTRACT AM I BUYING? It is an individual annuity contract issued by Lincoln Life. It may provide for a fixed annuity and/or a variable annuity. This Prospectus is intended to provide disclosure only about the variable por- tion of the contract. See The contracts. WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account established under Indiana insurance law, and registered with the SEC as a unit investment trust. The assets of the VAA are allocated to one or more subaccounts, according to your investment choice. Those assets are not charge- able with liabilities arising out of any other business which Lincoln Life may conduct. See Variable annuity account. WHAT ARE MY INVESTMENT CHOICES? Through its various subaccounts, the VAA uses your purchase payments to purchase series shares, at your direction, in one or more of the following investment funds of the series: Global Growth, Growth, International, Growth-Income, Asset Allocation, High-Yield Bond, Bond, U.S. Government/AAA-Rated Securities, and Cash Management. In turn, each fund holds a portfolio of securities consistent with its own particular investment poli- cy. See Investments of the variable annuity account and Description of the se- ries. WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los Ange- les, California. CRMC is a long-established investment management organiza- tion, and is registered as an investment advisor with the SEC. See Investments of the variable annuity account and Investment advisor. HOW DOES THE CONTRACT WORK? Once we approve your application, you will be is- sued your individual annuity contract. During the accumulation period, while you are paying in, your purchase payments will buy accumulation units under the contract. Should you decide to annuitize (that is, change your contract to a payout mode rather than an accumulation mode), your accumulation units will be converted to annuity units. Your periodic annuity payout will be based upon the number of annuity units to which you became entitled at the time you de- cided to annuitize and the value of each unit on the valuation date. See The contracts. WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? Should you decide to withdraw contract value before your purchase payments have been in your contract for a certain minimum period, you will incur a contingent deferred sales charge of anywhere from 1% to 6%, depending upon how many full contract years those pay- ments have been in the contract. (Note: This sales charge is not assessed up- on: (1) the first four withdrawals of contract value during a contract year to the extent that the sum of the percentages of the contract value withdrawn by the withdrawals does not exceed 10% (for this purpose, the percentages are based on the contract value at the time of the current withdrawal; also, this 10% withdrawal exception does not apply to a surrender of a contract); (2) au- tomatic withdrawals in total not in excess of 10% of the contract value during a contract year, made by non-trustee contractowners who are at least 59 1/2; (3) electing an annuity payout option available within this contract; (4) upon the death of the owner; (5) 90 days of continuous confinement of the owner af- ter the contract effective date in an accredited nursing home or equivalent health care facility; (6) the occurrence after the contract effective date of a terminal illness of the owner that results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; (7) where total and permanent disability occurs after the contract effective date and before the contractowner's 65th birthday; or (8) when the surviving spouse assumes ownership of the contract as a result of the death of the original owner (in such case, the CDSC would be waived on the contract value as of the date which the surviving spouse assumed contract ownership); however, this does not apply if the spouses were joint owners. If a joint owner exists on a contract, both the owner and joint owner must meet one of the exceptions for waiver of the contingent deferred sales charge.) If your state assesses a premium tax with respect to your contract, then at the time the tax is incurred (or at such other time as we may choose), we will deduct those amounts from purchase payments or contract value, as applicable. We assess annual charges in the aggregate amount of 1.40% against the daily net asset value of the VAA, including that portion of the account attributable to your purchase payments. These charges consist of 0.10% as an administrative charge and 1.30% as a mortality and expense risk charge. If the EGMDB is not in effect, the mortality and expense risk charge is 1.15%, resulting in an ag- gregate charge against the VAA of 1.25%. For a complete discussion of the charges associated with the contract, see Charges and other deductions. The series pays a fee to its investment advisor, CRMC, based upon the average daily net asset value of each fund in the series. See Investments of the vari- able annuity account--Investment advisor. The class of shares of each series available under the contracts also bears expenses pursuant to a 12b-1 plan. In addition, there are other expenses associated with the daily operation of the series. These are more fully described in the Prospectus for the series. HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum and maximum pay- ments stated on the first page of the Prospectus, the amount and frequency of your payments are completely flexible. See The contracts--Purchase payments. HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you elect an annuity payout option. Once you have done so, your periodic payout will be based upon a number of factors. If you participate in the VAA, the changing values of the funds in which 6 you have invested will be one factor. See Annuity payouts. REMEMBER THAT PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN, AND TAKE A RISK OF ANY DROP, IN THE VALUE OF THE SECURITIES IN THE FUNDS' PORTFOLIOS. WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? If the EGMDB is in effect, the bene- ficiary whom you designate will receive either the EGMDB or the then current value of the contract, whichever is greater. If the EGMDB is not in effect, the beneficiary will receive either the GMDB or the then current value of the con- tract, whichever is greater. Your beneficiary will have certain options for how the money is to be paid out. See Death benefit before the annuity commencement date. MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes; however, there are limits on how often you may do so. See The contracts-Transfers between subaccounts on or before the annuity commencement date and Transfers following the annuity commencement date. MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE CON- TRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in the contract. See The contracts--Transfers to and from the General Account on or before the annuity commencement date. MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract re- quirements and to restrictions imposed under certain qualified retirement plans for which the contract is purchased. See Surrenders and withdrawals. If you surrender the contract or make a withdrawal, certain charges may be as- sessed, as discussed above and under Charges and other deductions. In addition, the Internal Revenue Service (IRS) may assess a 10% premature withdrawal pen- alty tax. A surrender or a withdrawal may be subject to 20% withholding. See Federal tax status and withholding. DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within ten days (or a longer pe- riod if required by law) of the date you first receive the contract you return it, postage prepaid to the home office of Lincoln Life, it will be canceled. However, except in some states, during this period, you assume the risk of a market drop with respect to purchase payments which you allocate to the vari- able side of the contract. See Return privilege. 7 CONDENSED FINANCIAL INFORMATION 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 in- dices 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 re- turns include the reinvestment of all distributions, which are reflected in changes in unit value. See the SAI for further information. FINANCIAL STATEMENTS The financial statements for Lincoln Life are located in the SAI. If you would like a free copy of the SAI, complete and mail the enclosed card, or call 1- 800-942-5500. LINCOLN NATIONAL LIFE INSURANCE CO. Lincoln Life was founded in 1905 and is organized under Indiana law. We are one of the largest stock life insurance companies in the United States. We are owned by Lincoln National Corp. (LNC) which is also organized under Indiana law. LNC's primary businesses are insurance and financial services. VARIABLE ANNUITY ACCOUNT (VAA) On February 7, 1989, the VAA was established as an insurance company separate account under Indiana 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 SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated investment account, meaning that its assets may not be charged with liabili- ties 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 ac- cordance 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 Life. The VAA is used to support annuity contracts other than the contract described in this Prospectus. The VAA satisfies the definition of 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 in- vestment risk for all amounts placed in the VAA. 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 of the se- ries. 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 series is required to redeem fund shares at net asset value upon our request. We reserve the right to add, delete or substitute funds. INVESTMENT ADVISOR The investment advisor for the series is CRMC, 333 South Hope Street, Los An- geles, California 90071. CRMC is one of the nation's largest and oldest in- vestment management organizations. As compensation for its services to the se- ries, the investment advisor receives a fee from the series which is accrued daily and paid monthly. This fee is based on the net assets of each fund, as defined under Purchase and Redemption of Shares, in the Prospectus for the se- ries. DESCRIPTION OF THE SERIES The series was organized as a Massachusetts business trust in 1983 and is reg- istered as a diversified, open-end management investment company under the 1940 Act. Diversified means not owning too great a percentage of the securi- ties of any one company. An open-end company is one which, in this case, per- mits Lincoln Life to sell its shares back to the series when you make a with- drawal, surrender the contract or transfer from one fund to another. Manage- ment investment company is the legal term for a mutual fund. These definitions are very general. The precise legal definitions for these terms are contained in the 1940 Act. The series has nine separate portfolios of funds. Fund as sets are segregated and a shareholder's interest is limited to those funds in which the share- holder owns shares. The series has adopted a plan pursuant to Rule 18f-3 under the 1940 Act to permit the series to establish a multiple class distribution system for all of its portfolios. The series' Board of Trustees may at any time establish additional funds or classes, which may or may not be available to the VAA. Under the multi-class system adopted by the series, shares of each multi-class fund represent an equal pro 8 rata interest in that fund and, generally, have identical voting, dividend, liquidation, and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except that: (1) each class has a different designation; (2) each class of shares bears its class expenses; (3) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its distribution arrangement; and (4) each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class. Expenses currently designated as class expenses by the series' Board of Trustees under the plan pursuant to Rule 18f-3 include, for example, service fees paid under a 12b-1 plan to cover servicing fees paid to dealers selling the contracts. Each fund has two classes of shares, designated as Class 1 shares and Class 2 shares. Class 1 and 2 differ primarily in that Class 2 (but not Class 1) shares are subject to a 12b-1 plan. Only Class 2 shares are available under the contracts. Following are brief summaries of the investment objectives and policies of the funds. Each fund is subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund. More detailed information may be obtained from the current Prospectus for the series which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE THEIR STATED OBJECTIVES. 1. Global Growth Fund--The investment objective is to achieve long-term growth of capital by investing in securities of issuers domiciled around the world. The fund will invest primarily in common stocks but may invest in other securities such as preferred stock, debt securities and securities convertible into common stock. PLEASE NOTE: THIS FUND IS NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR INVESTMENT DEALER FOR CURRENT INFORMA- TION ABOUT THE GLOBAL GROWTH FUND'S AVAILABILITY. 2. Growth Fund--This fund seeks to provide growth of capital. Whatever current income is generated by the fund is likely to be incidental to the objective of capital growth. Ordinarily, accomplishment of the fund's objective of capital growth will be sought by investing primarily in common stocks or securities with common stock characteristics. 3. International Fund--The investment objective is long-term growth of capital by investing primarily in securities of issuers domiciled outside the United States. 4. Growth-Income Fund--The investment objective is growth of capital and in- come. In the selection of securities for investment, the possibilities of appreciation and potential dividends are given more weight than current yield. Ordinarily, the assets of the Growth-Income Fund consist principally of a diversified group of common stocks, but other types of securities may be held when deemed advisable including preferred stocks and corporate bonds, including convertible bonds. 5. Asset Allocation Fund--This fund seeks total return (including income and capital gains) and preservation of capital over the long-term by investing in a diversified portfolio of securities. These securities can include com- mon stocks and other equity-type securities (such as convertible bonds and preferred stocks), bonds and other intermediate and long-term fixed-income securities and money market instruments (debt securities maturing in one year or less). 6. High-Yield Bond Fund--The investment objective is a fully managed, diversi- fied bond portfolio. It seeks high current income and secondarily seeks capital appreciation. This fund will generally be invested substantially in intermediate and long-term corporate obligations, with emphasis on higher yielding, higher risk, lower rated or unrated securities. 7. Bond Fund--This fund seeks a high level of current income as is consistent with the preservation of capital by investing in a broad variety of fixed income securities including: marketable corporate debt securities, loan participations, U.S. Government Securities, mortgage-related securities, other asset-backed securities and cash or money market instruments. 8. U.S. Government/AAA-Rated Securities Fund--This fund seeks a high level of current income consistent with prudent investment risk and preservation of capital by investing primarily in a combination of securities guaranteed by the U.S. Government and other debt securities rated AAA or Aaa. 9. Cash Management Fund--The investment objective is high yield while preserv- ing capital by investing in a diversified selection of money market instru- ments. SALE OF FUND SHARES BY THE SERIES 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/ with- drawal 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. The 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 Lincoln Life, 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 the series sells shares in any of its funds both to variable annuity and to variable life insurance separate 9 accounts, it is said to engage in mixed funding. When the series sells shares in any of its funds to separate accounts of unaffiliated life insurance compa- nies, it is said to engage in shared funding. The series currently engages in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interests of various contractowners participating in a fund could conflict. The series' Board of Trustees will monitor for the existence of any material con- flicts, and determine what action, if any, should be taken. See the Prospectus for the series. REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS All dividend and capital gain distributions of the funds are automatically re- invested 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 additions, deletions and substi- tutions for the series and/or any funds within the series in which the VAA par- ticipates. (We may substitute shares of other funds for shares already pur- chased, or to be purchased in the future, under the contract. This substitution might 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 man- agement, for the purposes of the contract.) No substitution of the shares attributable to your account may take place without notice to you and before approval of the SEC, in accordance with the 1940 Act. 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. More particularly, our administra- tive services include: processing applications for and issuing the contracts, processing purchases and redemptions of fund shares as required (including dol- lar cost averaging, cross-reinvestment, and automatic withdrawal services), maintaining records, administering annuity payouts, furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values), reconciling and depositing cash receipts, providing con- tract confirmations, providing toll-free inquiry services and furnishing tele- phone fund transfer services. The risks we assume include: the risk that the actual life-span of persons receiving annuity payouts under contract guarantees will exceed the assumptions reflected in our guaranteed rates (these rates are incorporated in the contract and cannot be changed); the risk that death bene- fits paid under the EGMDB, will exceed the actual contract value; the risk that more owners than expected will qualify for waivers of the contingent deferred sales charge; and the risk that our costs in providing the services will exceed our revenues from contract charges (which cannot be changed by us). The amount of a charge may not necessarily correspond to the costs associated with provid- ing the services or benefits indicated by the designation of the charge. For example, the contingent deferred sales load collected may not fully cover all of the sales and distribution expenses actually incurred by us. DEDUCTIONS FROM THE VAA FOR AMERICAN LEGACY III We deduct from the VAA an amount, computed daily, which is equal to an annual rate of 1.40% (1.25% for contracts without the EGMDB) of the daily net asset value. The charge consists of a 0.10% administrative charge and a 1.30% (1.15% for contracts without the EGMDB) mortality and expense risk charge. CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge applies (except as described below) to sur- renders and withdrawals of other purchase payments that have been invested for the periods indicated as follows:
Number of complete contract years that a purchase payment has been invested - ------------------------------------------------------ Less than At least 2 years 2 3 4 5 6 7+ Contingent deferred sales charge as a percentage of the surrendered or withdrawn purchase payments 6% 5 4 3 2 1 0
A contingent deferred sales charge does not apply to: 1. A surrender or withdrawal of purchase payments that have been invested at least seven full contract years. 2. The first four withdrawals of contract value during a contract year to the extent that the sum of the percentages of the contract value withdrawn by the withdrawals does not exceed 10% of contract value (for this purpose, the percentages are based on the contract value at the time of the current with- drawal; also, this 10% withdrawal exception does not apply to a surrender of a contract); 3. Automatic withdrawals in total not in excess of 10% of the contract value during a contract year, made by non-trustee contractowners who are at least 59 1/2; 4. Electing an annuity payment option available within the contract; 5. A surrender of a contract or withdrawal of contract value as a result of the permanent and total disabil- 10 ity of the owner as defined in Section 22(e)(3) of the code, subsequent to the effective date of the contract and before the 65th birthday of the owner; 6. When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (in such case, the contingent deferred sales charge would be waived on the value of the contract as of the date which the surviving spouse assumed the contract ownership); however, this does not ap- ply if the spouses were joint owners; 7. A surrender of a contract as a result of 90 days of continuous confinement of the contractowner in an accredited nursing home or equivalent health care facility; 8. A surrender of a contract as a result of terminal illness of the contractowner that results in a life expectancy of less than one year as de- termined by a qualified professional medical practitioner; 9. A surrender of the contract as a result of the death of the contractowner. However, the contingent deferred sales charge are not waived as a result of the death of an annuitant who is not the contractowner; and 10. A surrender of a contract or withdrawal of contract value of a contract is- sued to employees and registered representatives of any member of the sell- ing group and their spouses and minor children, or to officers, directors, trustees or bona-fide full-time employees of Lincoln National Corp. or The Capital Group, Inc. or their affiliated or managed companies (based upon the contractowner's status at the time the contract was purchased). If a joint owner exists on a contract, both the owner and joint owner must meet one of the exceptions for waiver of the contingent deferred sales charge. The contingent deferred sales charge is calculated separately for each contract year's purchase payments to which a charge applies. (FOR PURPOSES OF CALCULAT- ING THIS CHARGE, WE ASSUME THAT PURCHASE PAYMENTS ARE WITHDRAWN ON A FIRST IN- FIRST OUT BASIS, AND THAT ALL PURCHASE PAYMENTS ARE WITHDRAWN BEFORE ANY EARN- INGS ARE WITHDRAWN.) The contingent deferred sales charges associated with sur- render 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. 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 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 taxes gener- ally depend upon the law of your state of residence. The tax ranges from 0.5% to 4.0%. OTHER CHARGES AND DEDUCTIONS There are deductions from and expenses paid out of the assets of the underlying series that are more fully described in the Prospectus for the series. Among these deductions and expenses are 12b-1 fees which reimburse Lincoln Life for certain expenses incurred in connection with certain administrative and distri- bution support services provided to the series. ADDITIONAL INFORMATION The administrative and contingent deferred sales charges described previously may be reduced or eliminated for any particular contract. However, these charges will be reduced only to the extent that we anticipate lower distribu- tion and/or administrative expenses, or that we perform fewer sales or adminis- trative services than those originally contemplated in establishing the level of those charges. Lower distribution and administrative expenses may be the re- sult of economies associated with (1) the use of mass enrollment procedures, (2) the performance of administrative or sales functions by the employer, (3) the use by an employer of automated techniques in submitting deposits or infor- mation related to deposits on behalf of its employees or (4) any other circum- stances which reduce distribution or administrative expenses. The exact amount of administrative and contingent deferred sales charges applicable to a partic- ular contract will be stated in that contract. THE CONTRACTS PURCHASE OF CONTRACTS If you wish to purchase a contract, you must apply for it through a sales rep- resentative 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 con- tract 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. If a completed application and all other information necessary for processing a purchase order are received, an initial purchase payment will be priced no later than two business days after we receive the order. While attempting to finish an incomplete application, we may hold the initial purchase payment for no more than five business days. If the incomplete application cannot be com- pleted within those five days, you will be informed of the reasons, and the purchase payment will be returned immediately (unless you specifically autho- rize us to keep it until the application is complete). Once the application is complete, the initial purchase payment must be priced within two business days. 11 WHO CAN INVEST To apply for a contract, you must be of legal age in a state where the con- tracts may be lawfully sold and also be eligible to participate in any of the qualified or nonqualified plans for which the contracts are designed. The contractowner cannot be older than age 85 (or older than age 80 in Pennsylva- nia). 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 $1,500 for non- qualified contracts and Section 403(b) transfers/rollovers; and $300 for quali- fied contracts. The minimum annual amount for subsequent purchase payments is $300 for nonqualified and qualified contracts. The minimum payment to the con- tract at any one time must be at least $100 ($25 if transmitted electronical- ly). Purchase payments in total may not exceed $1 million for an owner or $500,000 for each joint owner. If you stop making purchase payments, the con- tract will remain in force as a paid-up contract subject to our right to termi- nate the contract in accordance with the terms set forth in your state's non- forfeiture law for individual deferred annuities. Payments may be made or, if stopped, resumed at any time until the annuity commencement date, the surrender of the contract, maturity date or the death of the contractowner (or joint own- er, if applicable), whichever comes first. VALUATION DATE Accumulation and annuity units will be valued once daily at the close of trad- ing (currently 4:00 p.m., New York time) on each day the New York Stock Ex- change 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 are placed into the VAA's subaccounts, each of which invests in shares of the class of its corre- sponding fund of the series, accord- ing to your instructions. The minimum amount of any purchase payment which can be put into any one subaccount is $20 under the contract. Upon allocation to the appropriate subaccount, purchase payments are converted into accumulation units. The number of accumulation units credited is determined by dividing the amount allocated to each subaccount by the value of an accumulation unit for that subaccount on the valuation date on which the purchase payment is received at our home office if received before 4:00 p.m., New York time. If the purchase payment is re- ceived at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valuation date. The number of accumulation units de- termined in this way is not changed 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 Accumulation units for each subaccount are valued separately. Initially, the value of each accumulation unit was set at $1.00. Thereafter, the value of an accumulation unit in any subaccount on any valuation date equals the value of an accumulation unit in that subaccount as of the preceding valuation date mul- tiplied by the net investment factor of that subaccount for the current valua- tion period. The net investment factor is an index used to measure the investment perfor- mance of a subaccount from one valuation date to the next. The net investment factor for any subaccount for any valuation date reflects the change in the net asset value per share of the fund held in the subaccount from one valuation Pe- riod to the next, adjusted for the daily deduction of the administrative and mortality and expense risk charges from assets in the subaccount. If any ex- dividend date occurs during the valuation period, the per share amount of any dividend or capital gain distribution is taken into account. Also, if any taxes need to be reserved, a per share charge or credit for any taxes reserved for, which is determined by us to have resulted from the operations of the subaccount, is taken into account. Because a different daily charge is made for contracts with the EGMDB than for those without, a different net investment factor is calculated for each of the two types of contracts, resulting in different corresponding accumulation unit values on any given day. TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE You may transfer all or a portion of your investment from one subaccount to an- other. 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. Currently, there is no charge for a transfer. However, we reserve the right to impose a charge in the future for transfers. Transfers between subaccounts are restricted to six times every contract year. We reserve the right to waive this six-time limit. This limit does not apply to transfers made under a dollar cost averaging or cross-reinvestment program elected on forms available from us. 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. 12 A transfer may be made by writing to our home office or, if a Telephone Ex- change Authorization form (available from us) is on file with us, by a toll- free telephone call. Currently, there is no charge to you for a transfer. In order to prevent unauthorized or fraudulent telephone transfers, we may require the caller to provide certain identifying information before we will act upon their instructions. We may also assign the contractowner a Personal Identifica- tion Number (PIN) to serve as identification. We will not be liable for follow- ing telephone instructions we reasonably believe are genuine. Telephone re- quests may be recorded and written confirmation of all transfer requests will be mailed to the contractowner on the next valuation date. Telephone transfers will be processed on the valuation date that they are received when they are received at our customer service center before 4 p.m. New York time. When thinking about a transfer of contract value, you should consider the in- herent risk involved. Frequent transfers based on short-term expectations may increase the risk that a transfer will be made at an inopportune time. TRANSFERS TO AND FROM THE GENERAL ACCOUNT ON OR BEFORE THE ANNUITY COMMENCEMENT DATE You may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract. The minimum amount which can be transferred to the fixed side is $300 or the total amount in the subaccount, if less than $300. 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. You may also transfer all or any part of the contract value from the fixed side of your contract to the various subaccount(s) subject to the following restric- tions: (1) the sum of the percentages of fixed value transferred is limited to 25% of the value of the fixed side in any 12 month period; (2) the minimum amount which can be transferred is $300 or the amount in the fixed account; and (3) a transfer cannot be made during the first 30 days after the issue date of the contract. These transfers cannot be elected more than six times every contract year. We reserve the right to waive these restrictions. These restrictions do not apply to transfers made under a dollar cost averaging or cross-reinvestment program elected on forms available from us. Currently, there is no charge to you for a transfer. However, we reserve the right to impose a charge in the future for any transfers to and from the General Account. TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE You may transfer all or a portion of your investment in one subaccount to an- other subaccount or to the fixed side of the contract. Those transfers will be limited to three times per contract year. Currently, there is no charge for these transfers. However, we reserve the right to impose a charge. No transfers are allowed from the fixed side of the contract to the subaccounts. DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE You may designate a beneficiary during your lifetime and change the beneficiary by filing a written request with our home 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. If the contractowner dies before the annuity commencement date and the EGMDB is in effect, the death benefit paid to your designated beneficiary will be the greater of: (1) the contract value as of the day on which Lincoln Life approves the payment of the claim; or (2) the highest contract value which the contract attains on any policy anniversary date (including the inception date) on ages up to, and including, the contractowner's age 75. The highest contract value is increased by purchase payments and is decreased by partial withdrawals, partial annuitizations, and any premium taxes made, effected or incurred subsequent to the anniversary date on which the highest contract value is obtained. If the EGMDB is not in effect, the death benefit will be equal to the greater of con- tract value or the GMDB. The GMDB is equal to the sum of all purchase payments minus any withdrawals, partial annuitizations or premium taxes incurred. If there are joint owners, upon the death of the first owner, the surviving owner may continue the contract (subject to federal tax rules) or surrender the contract. Any applicable contingent deferred sales charge will not be waived on a surrender. The provisions above regarding death benefit on the death of the contractowner will apply upon the subsequent death of the surviving joint own- er. The value of the death benefit will be determined as of the date on which the death claim is approved for payment. This payment will occur upon receipt of: (1) proof, satisfactory to us, of the death of the owner; (2) written authori- zation for payment; and (3) our receipt of all required claim forms, fully com- pleted. When applying for a contract, an applicant can request a contract without the EGMDB. The EGMDB is not available under contracts used for qualified plans (other than IRAs) or contracts issued to a contractowner who is age 75 or older at the time of issuance. After a contract is issued, the contractowner may discontinue the EGMDB at any time by sending a written request to Lincoln Life. The benefit will be discon- tinued effective as of the valuation date we receive the request, and we will cease deducting the charge for the benefit as of that date. See Charges and other deductions. If you discontinue the benefit, it cannot be reinstated. If the death benefit becomes payable, the beneficiary may elect to receive pay- ment of the death benefit either in 13 the form of a lump sum settlement or an annuity payout. Federal tax law re- quires that an annuity election be made no later than 60 days after we receive satisfactory notice of death as discussed previously. If a lump sum settlement is requested, the proceeds will be mailed within seven days of receipt of satisfactory claim documentation as discussed previously, subject to the laws and regulations governing payment of death benefits. If an election has not been made by the end of the 60-day period, a lump sum settle- ment will be made to the beneficiary at that time. This payment may be post- poned as permitted by the 1940 Act. Payment will be made in accordance with applicable laws and regulations gov- erning payment of death benefits. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: 1. If any beneficiary dies before the contractowner, that beneficiary's inter- est will go to any other beneficiaries named, according to their respective interests (There are no restrictions on the beneficiary's use of the pro- ceeds.); and/or 2. If no beneficiary survives the contractowner, the proceeds will be paid to the contractowner's estate. The death benefit payable to the beneficiary must be distributed within five years of the contractowner's date of death unless the beneficiary begins re- ceiving within one year of the contractowner's death substantially equal in- stallments over a period not extending beyond the beneficiary's life expectan- cy. 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 and regulations governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. If the beneficiary is the spouse of the contractowner, then the spouse may elect to continue the contract as 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 and the above distribution rules ap- ply. If there are joint owners, upon the death of the first joint owner, the surviv- ing joint owner will receive the death benefit. The surviving joint owner will be treated as the primary, designated beneficiary. Any other beneficiary desig- nation on record at the time of death will be treated as a contingent benefi- ciary. If the surviving joint owner, as spouse of the decreased joint owner, continues the contract as the sole owner in lieu of receiving the death benefit, then the designated beneficiary(s) will receive the death benefit upon the death of the surviving spouse. JOINT OWNERSHIP If a joint owner is named in the application, the joint owners shall be treated as having equal undivided interests in the contract. Either owner, indepen- dently of the other, may exercise any ownership rights in this contract. Only spouses may be joint owners. DEATH OF ANNUITANT If the annuitant is also the contractowner or a joint owner, then the death benefit provided will be the death benefit subject to the provisions of this contract regarding death of the contractowner. If the surviving spouse assumes the contract, the contingent annuitant becomes the annuitant. If no contingent annuitant is named, the surviving spouse becomes the annuitant. If an annuitant who is not the contractowner or joint owner dies, then the con- tingent annuitant, if any, becomes the annuitant. If no contingent annuitant is named, the contractowner (or joint owner if younger) becomes the annuitant. SURRENDERS AND WITHDRAWALS Before the annuity commencement date, we will allow the surrender of the con- tract or a withdrawal of the contract value upon your written request, subject to the rules discussed below. Surrender or withdrawal rights after the annuity commencement date depend upon the annuity option you select. Special restrictions on surrenders/withdrawals apply if your contract is pur- chased as part of a retirement plan of a public school system or 501(c)(3) or- ganization under Section 403(b) of the code. Beginning January 1, 1989, in or- der 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 contributions) pursuant to a salary reduction agreement. However, this restriction does not apply if the annuitant (a) attains age 59 1/2, (b) sepa- rates from service, (c) dies, (d) becomes totally and permanently disabled and/or (e) experiences financial hardship (in which event the income attribut- able 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 be subject to the restrictions. The contract value available upon surrender/withdrawal is the cash surrender value at the end of the valuation period during which the written request for surrender/withdrawal is received at the home office. Unless a request for with- drawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the General Account in the same proportion that the amount of withdrawal bears to the total contract value. The minimum amount which can be withdrawn is $300, and the remaining contract value must be at least $300. Unless prohibited, surrender/withdrawal payments will be mailed within seven days after we receive a valid written request at the home office. The payment may be postponed as permitted by the 1940 Act. There are charges associated with surrender of a contract or withdrawal of con- tract value. You may specify whether 14 these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. See Charges and other deductions. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal tax status. Participants in the Texas Optional Retirement Program should refer to the Re- strictions under the Texas Optional Retirement Program, later in this Prospec- tus booklet. We reserve the right to terminate the contract, if your contract fails to meet minimum contract value or payment frequencies as set forth in your state's non- forfeiture law for individual deferred annuities. REINVESTMENT PRIVILEGE You may elect to make a reinvestment purchase with any part of the proceeds of a surrender/withdrawal, and we will recredit the surrender/withdrawal charges previously deducted. This election must be made within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this Prospectus. 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 home 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. You should consult a tax advisor before you request a surrender/withdrawal or subsequent reinvest- ment 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 noti- fied in writing of any changes, modifications or waivers. COMMISSIONS The commissions paid to dealers are a maximum of 4.75% of each purchase pay- ment; plus an annual continuing commission of up to 0.40% of contract value. At times, additional sales incentives (up to 0.25% of purchase payments and an an- nual continuing 0.10% of contract value) may be provided to dealers maintaining certain sales volume levels. Upon annuitization, an annual continuing commis- sion of up to 0.80% (or up to 0.90% for dealers maintaining certain sales vol- ume levels) of statutory reserves can be paid to dealers. These commissions are not deducted from purchase payments or contract value; they are paid by us. OWNERSHIP As contractowner, you have all rights under the contract. According to Indiana law, the assets of the VAA are held for the exclusive benefit of all contractowners and their designated beneficiaries. The assets of the VAA are not chargeable with liabilities arising from any other business that we may conduct. Qualified contracts may not be assigned or transferred except as per- mitted by the Employee Retirement Income Security Act (ERISA) of 1974 and upon written notification to us. We assume no responsibility for the validity or ef- fect of any assignment. Consult your tax advisor about the tax consequences of an assignment. CONTRACTOWNER QUESTIONS The obligations to purchasers under the contracts are those of Lincoln Life. Questions about your contract should be directed to us at 1-800-942-5500. ANNUITY PAYOUTS When you apply for a contract, you may select any annuity commencement date permitted by law. (PLEASE NOTE THE FOLLOWING EXCEPTION: Contracts issued under qualified employee pension and profit-sharing trusts [described in Section 401(a) and tax exempt under Section 501(a) of the code] and qualified annuity plans [described in Section 403(a) of the code], including H.R.10 trusts and plans covering self-employed individuals and their employees, provide for annu- ity payouts to start at the date and under the option specified in the plan.) 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. You may elect annuity payouts in monthly, quarterly, semiannual or annual in- stallments. 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 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 min- imum number of payouts or provision for a death benefit for beneficiaries. HOW- EVER, 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 INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option guaran- tees periodic payouts 15 during a designated period, usually 10 or 20 years, and then continues through- out 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 life- time of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues dur- ing 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-AND-TWO-THIRDS 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. UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the life- time 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: (a) the total amount applied under this option divided by the annuity unit value for the date payouts begin, divided by (b) 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 home of- fice. GENERAL INFORMATION None of the options listed above currently provide withdrawal features, permit- ting the contractowner to withdraw commuted values as a lump sum payment. Other options, with or without withdrawal features, may be made available by us. Op- tions are only available to the extent they are consistent with the require- ments of the contract as well as Sections 72(s) and 401(a)(9) of the code, if applicable. The mortality and expense risk charge and the charge for adminis- trative services will be assessed on all variable annuity payouts, including options that may be offered that do not have a life contingency and therefore no mortality risk. The annuity commencement date is usually on or before the contractowner's 85th birthday. You may change the annuity commencement date, change the annuity op- tion or change the allocation of the investment among subaccounts up to 30 days before the scheduled annuity commencement date, upon written notice to the home office. You must give us at least 30 days notice before the date on which you want payouts to begin. If proceeds become available to a beneficiary in a lump sum, the beneficiary may choose any annuity payout option. 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 alloca- tions 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 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 your benefi- ciary as payouts become due. VARIABLE ANNUITY PAYOUTS Variable annuity payouts will be determined using: 1. The contract value on the annuity commencement date; 2. The annuity tables contained in the contract; 3. The annuity option selected; and 4. 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. We assume an investment return of 4% per year, as applied to the applicable mortality table. The amount of each payout after the initial payout will depend upon how the underlying fund(s) perform, relative to the 4% assumed rate. There is a more complete explanation of this calculation in the SAI. FEDERAL TAX STATUS This section is a discussion of the Federal income tax rules applicable to the contracts as of the date of this Prospectus. More information is provided in the SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This section does not discuss the Federal tax consequences resulting from every possible situation. No attempt has been made to consider any applicable state, local, or foreign tax law, other than the imposition of any state premium taxes (See Deductions for premium taxes). If you are concerned about the tax implica- tions with respect to the contracts, you should consult a tax advisor. The fol- lowing discussion is based upon our understanding of the present Federal income tax laws as they are currently interpreted by the IRS. No representation is made about the likelihood of continuation of the present Federal income tax laws or their current interpretations by the IRS. 16 TAXATION OF NONQUALIFIED CONTRACTS You are generally not taxed on increases in the value of your contract until a distribution occurs. This distribution can be in the form of a lump sum payout received by requesting all or part of the cash surrender value (i.e. surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment or pledge of, or the agreement to assign or pledge, any portion of the value of a contract will be treated as a distribution. A transfer of ownership of a con- tract, or designation of an annuitant (or other beneficiary) who is not also the contractowner, may also result in tax consequences. The taxable portion of a distribution (in the form of a lump sum payout or an annuity) is taxed as or- dinary income. In general, a contractowner who is not a natural person (for ex- ample, a corporation), subject to limited exceptions, will be taxed on any in- crease in the contract's cash value over the investment in the contract during the taxable year, even if no distribution occurs. [See Section 72(u) of the code.] The next discussion applies to contracts owned by natural persons. In the case of a surrender under the contract or withdrawal of contract value, generally amounts received are first treated as taxable income to the extent that the cash value of the contract immediately before the surrender exceeds the investment in the contract at that time. Any additional amount withdrawn is not taxable. The investment in the contract generally equals the portion, if any, of any purchase payment made by or on behalf of an individual under a con- tract which is not excluded from the individual's gross income. Even though the tax consequences may vary depending on the form of annuity pay- out selected under the contract, the contractowner of an annuity payout gener- ally is taxed on the portion of the annuity payout that exceeds the investment in the contract. For variable annuity payouts, the taxable portion is deter- mined by a formula that establishes a specific dollar amount of each payout that is not taxed. The dollar amount is determined by dividing the investment in the contract by the total number of expected periodic payouts. For fixed an- nuity payouts, there generally is no tax on the portion of each payout that represents the same ratio that the investment in the contract bears to the to- tal expected value of payouts for the term of the annuity; the remainder of each payout is taxable. For individuals, the entire distribution (whether fixed or variable) will be fully taxable once the recipient is deemed to have recov- ered the dollar amount of the investment in the contract. There may be imposed a penalty tax on distributions equal to 10% of the amount treated as taxable income. The penalty tax is not imposed in certain circum- stances, which generally are distributions: 1. Received on or after the contractowner attains age 59 1/2; 2. Made as a result of death or disability of the contractowner; 3. Received in substantially equal periodic payments such as a life annuity (subject to special recapture rules if the series of payouts is subsequently modified); 4. Under a qualified funding asset in a structured settlement; 5. Under an immediate annuity contract as defined in the code; and/or 6. Under a contract purchased in connection with the termination of certain re- tirement plans. TAXATION OF QUALIFIED CONTRACTS The contracts may be purchased in connection with the following types of tax- favored retirement plans: 1. Contracts purchased for employees of public school systems and certain tax- exempt organizations, qualified under Section 403(b) of the code (normally for transfers or rollovers only); 2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of the code; 3. IRAs, qualified under Section 408 of the Code; 4. Deferred compensation plans of state or local governments, qualified under Section 457 of the code; 5. SEPs, qualified under Section 408(k) of the code; and/or 6. Simple retirement accounts, qualified under Section 401(k)(11) of the code, commonly referred to as SIMPLE or SIMPLE 401(k) plans and SIMPLE IRA plans. The tax rules applicable to these plans, including restrictions on contribu- tions and benefits, taxation of distributions and any tax penalties, vary ac- cording to the type of plan and its terms and conditions. Participants under such plans, as well as contractowners, annuitants and beneficiaries, should be aware that the rights of any person to any benefits under such plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the contracts. Purchasers of contracts for use with any qualified plan, as well as plan participants, should consult counsel and other advisors as to the suitability of the contracts to their specific needs, and as to applicable code limitations and tax consequences. MULTIPLE CONTRACTS All contracts entered into after October 21, 1988, and issued by the same in- surance company (or its affiliates) to the same contractowner during any calen- dar year will be treated as a single contract for tax purposes. INVESTOR CONTROL The Treasury Department has indicated that guidelines may be issued under which a variable annuity contract will not be treated as an annuity contract for tax purposes if the contractowner has excessive control over the 17 investments underlying the contract. They may consider the number of investment options or the number of transfer opportunities available between options as relevant when determining excessive control. The issuance of those guidelines may require us to impose limitations on your right to control the investment. We do not know whether any such guidelines would have a retroactive effect. Section 817(h) of the code and the related regulation that the Treasury Depart- ment has adopted require that assets underlying a variable annuity contract be adequately diversified. The regulations provide that a variable annuity con- tract which does not satisfy the diversification standards will not be treated as an annuity contract, unless the failure to satisfy the regulations was inad- vertent, the failure is corrected, and the contractowner or we pay an amount to the Internal Revenue Service. The amount will be based on the tax that would have been paid by the contractowner if the income, for the period the contract was not diversified, had been received by the contractowner. If the failure to diversify is not corrected in this manner, the contractowner of an annuity con- tract will be deemed the owner of the underlying securities and will be taxed on the earnings of his or her account. We believe, under our interpretation of the code and regulations thereunder, that the investments underlying this con- tract meet these diversification standards. WITHHOLDING Generally, pension and annuity distributions are subject to withholding for the recipient's Federal income tax liability at rates that vary according to the type of distribution and the recipient's tax status. Recipients, however, gen- erally are provided the opportunity to elect not to have tax withheld from dis- tributions. Under the Unemployment Compensation Amendments of 1992 (UCA), 20% income tax withholding may apply to eligible rollover distributions. All tax- able distributions from qualified plans (except IRAs) and Section 403(b) annui- ties are eligible rollover distributions, except (1) annuities paid out over life or life expectancy, (2) installments paid for a period spanning 10 years or more, and (3) required minimum distributions. The UCA imposes a mandatory 20% income tax withholding on any eligible rollover distribution that the contractowner does not elect to have paid in a direct rollover to another qual- ified plan, Section 403(b) annuity or individual retirement account. Distribu- tions from Section 457 plans are subject to the general wage withholding rules. VOTING RIGHTS As required by law, we will vote the series shares held in the VAA at meetings of the shareholders of the series. The voting will be done according to the in- structions of contractowners who have interests in any subaccounts which invest in classes of funds of the series. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a re- sult we determine that we are permitted to vote the series 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 ap- plying 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. Series shares of a class held in a subaccount for which no timely instructions are received will be voted by us in proportion to the voting instructions which are received for all contracts participating in that subaccount. Voting in- structions 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, each person having a voting interest in a subaccount will receive proxy voting material, reports and other materials relating to the series. Since the series engages in shared funding, other per- sons or entities besides Lincoln Life may vote series shares. See Sale of fund shares by the series. DISTRIBUTION OF THE CONTRACTS American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, CA 90071, is the distributor and principal underwriter of the contracts. They will be sold by properly licensed registered representatives of independent broker- dealers which in turn have selling agreements with AFD and have been licensed by state insurance departments to represent us. AFD is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers (NASD). Lincoln Life will offer contracts in all states where it is licensed to do business. 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 the home office at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A con- tract canceled under this provision will be void. With respect to the fixed portion of a contract, we will return purchase payments. With respect to the VAA, except as explained in the following paragraph, we will return the con- tract value as of the date of receipt of the cancellation, plus any premium taxes which had been deducted. No contingent deferred sales charge will be as- sessed. A PURCHASER WHO PARTICIPATES IN THE VAA IS SUBJECT TO THE RISK OF A MARKET LOSS DURING THE FREE-LOOK PERIOD. For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return only the purchase payment(s). 18 STATE REGULATION As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana In- surance Department at all times. A full examination of our operations is con- ducted by that Department at least every five years. RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM Title 8, Section 830.105 of the Texas Government Code, consistent with prior interpretations of the Attorney General of the State of Texas, permits partici- pants in the Texas Optional Retirement Program (ORP) to redeem their interest in a variable annuity contract issued under the ORP only upon: 1. Termination of employment in all institutions of higher education as defined in Texas law; 2. Retirement; or 3. Death. Accordingly, a participant in the ORP will be required to obtain a certificate of termination from their employer before accounts can be redeemed. RECORDS AND REPORTS As presently required by the 1940 Act and applicable regulations, we are re- sponsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with the Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the home office, at least semiannually after the first contract year, reports containing informa- tion required by that Act or any other applicable law or regulation. OTHER INFORMATION A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This Prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further informa- tion about the VAA, Lincoln Life and the contracts offered. Statements in this Prospectus about the content of contracts and other legal instruments are sum- maries. For the complete text of those contracts and instruments, please refer to those documents as filed with the SEC. Lincoln National Variable Annuity Account E and Lincoln Life Flexible Premium Variable Life Accounts F, G and J (all registered as investment companies under the 1940 Act) and Lincoln National Flexible Premium Group Variable Annuity Ac- counts 50, 51 and 52 are all segregated investment accounts of Lincoln National Life Insurance Co. (Lincoln Life) which also invest in the series. The series also offers shares of the funds to other segregated investment accounts. STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS FOR VARIABLE ANNUITY ACCOUNT H AMERICAN LEGACY III
Item - ----------------------------------------- General information and history of Lincoln Life - ----------------------------------------- Special terms - ----------------------------------------- Services - ----------------------------------------- Principal underwriter - ----------------------------------------- Purchase of securities being offered
Item ---------------------------------- Calculation of investment results ---------------------------------- Annuity payouts ---------------------------------- Federal tax status ---------------------------------- Automatic increase in the guaranteed minimum death benefit ---------------------------------- Advertising and sales literature ---------------------------------- Financial statements
For a free copy of the SAI please see page one of this booklet. 19 THE AMERICAN LEGACY III LINCOLN NATIONALVARIABLE ANNUITY ACCOUNT H (REGISTRANT) THE LINCOLN NATIONALLIFE INSURANCE COMPANY (DEPOSITOR) STATEMENT OF ADDITIONAL INFORMATION (SAI) This Statement of Additional Information should be read in conjunction with the American Legacy III Prospectus of Lincoln National Variable Annuity Account H dated , 1997. You may obtain a copy of the American Legacy III Prospectus on request and without charge. Please write American Legacy Customer Service, The Lincoln National Life Insur- ance Company, P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500. TABLE OF CONTENTS
Item Page - ------------------------------------------ GENERAL INFORMATION AND HISTORY OF LINCOLN LIFE B-2 - ------------------------------------------ SPECIAL TERMS B-2 - ------------------------------------------ SERVICES B-2 - ------------------------------------------ PRINCIPAL UNDERWRITER B-2 - ------------------------------------------ PURCHASE OF SECURITIES BEING OFFERED B-2 - ------------------------------------------
Item Page - ------------------------------------------ CALCULATION OF INVESTMENT RESULTS B- 2 - ------------------------------------------ ANNUITY PAYOUTS B- 6 - ------------------------------------------ FEDERAL TAX STATUS B- 6 - ------------------------------------------ ADVERTISING AND SALES LITERATURE B- 9 - ------------------------------------------ FINANCIAL STATEMENTS B-11 - ------------------------------------------
THIS SAI IS NOT A PROSPECTUS. The date of this SAI is , 1997. GENERAL INFORMATION AND HISTORY OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (LINCOLN LIFE) The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905, is an Indiana stock insurance corporation, engaged primarily in the direct in- surance of life and health insurance contracts and annuities, and is also a professional reinsurer. Lincoln Life is wholly owned by Lincoln National Cor- poration (LNC), a publicly held insurance and financial services holding com- pany domiciled in Indiana. SPECIAL TERMS The special terms used in this SAI are the ones defined in the Prospectus. In connection with the term, valuation date, the New York Stock Exchange is cur- rently closed on weekends and on these holidays: New Year's 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 Ex- change may also be closed on the business day occurring just before or just after the holiday. SERVICES INDEPENDENT AUDITORS The financial statements of the variable annuity account (VAA) and the finan- cial statements and schedules of Lincoln Life appearing in this SAI and Regis- tration Statement have been audited by Ernst & Young LLP, independent audi- tors, as set forth in their reports also appearing elsewhere in this document and in the Registration Statement. The financial statements and schedules au- dited by Ernst & Young LLP have been included in this document in reliance on their report 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 Lincoln Life or by third parties re- sponsible to Lincoln Life. We have entered into an agreement with the Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide ac- counting services to the VAA. No separate charge against the assets of the VAA is made by Lincoln Life for this service. PRINCIPAL UNDERWRITER Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, California 90071, a licensed broker-dealer, to distribute the contracts through certain legally authorized sales persons and organizations (brokers). AFD and its brokers are compensated under a standard compensation schedule. PURCHASE OF SECURITIES BEING OFFERED The contracts are offered to the public through certain securities broker/dealers who have entered into selling agreements with AFD and whose personnel are legally authorized to sell annuity products. Although there are no special purchase plans for any class of prospective buyers, the contingent deferred sales charge normally assessed upon surrender or withdrawal of con- tract value will be waived for officers, directors or bona fide full time em- ployees of LNC, The Capital Group, Inc., their affiliated or managed compa- nies, and certain other persons. See Contingent deferred sales charges in the Prospectus. Both before and after the annuity commencement date, there are exchange privi- leges between subaccounts, and from the VAA to the General Account 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. CALCULATION OF INVESTMENT RESULTS (A) AVERAGE ANNUAL TOTAL RETURN: The examples below show, for the various subaccounts of the VAA, an average annual total return as of the stated periods, based upon a hypothetical ini- tial purchase payment of $1,000, calculated according to the formula provided after the examples. The average annual total return has been calculated to show the average annual total return for a hypothetical contract with the en- hanced guaranteed minimum death benefit (EGMDB) and without EGMDB. Although the subaccounts commenced activity on , 1997 these figures are calculated as if the subaccounts had commenced activity at the same time as the under- lying funds. B-2 Further, since the class of shares of the funds in which the subaccounts invest was not created until after December 31, 1996, the figures below are based on the performance of the class of shares of the funds issued since the funds com- menced operations in 1989, as adjusted to reflect the fees and expenses charge- able against assets attributable to shares of Class 2. AVERAGE ANNUAL TOTAL RETURN Period Ending December 31, 1996
10-year 1-year period 5-year period period With Without With Without With Without EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB - -------------------------------------------------------------------------------- Growth Subaccount 5.52% 5.69% 12.24% 12.41% 13.14% 13.31% (as if commenced activity 2/8/84) International Subaccount 9.62 9.79 10.34 10.50 8.36 8.53 (as if commenced activity 5/1/90) Growth-Income Subaccount 10.79 10.97 12.21 12.38 11.20 11.37 (as if commenced activity 2/8/84) Asset Allocation Subaccount 7.90 8.07 10.26 10.43 9.52 9.69 (as if commenced activity 8/1/89) High-Yield Bond Subaccount 5.36 5.53 8.92 9.09 9.58 9.74 (as if commenced activity 2/8/84) Bond Subaccount (1.89) (1.73) N/A N/A N/A N/A (as if commenced activity 1/2/96) U.S. Gov't./AAA Subaccount (4.59) (4.44) 4.28 4.44 5.50 5.66 (as if commenced activity 12/1/85) Cash Management Subaccount (2.64) (2.48) 1.99 2.15 3.82 3.97 (as if commenced activity 2/8/84)
The lifetime of each subaccount is less than the complete period indicated. See the date the subaccount commenced activity under its name. There is a Global Growth subaccount but it is not in the chart because it did not begin activity until 1997. The length of the periods and the last day of each period used in the above ta- ble are set out in the table heading and in the footnotes above. The average annual total return for each period was determined by finding the average an- nual compounded rate of return over each period that would equate the initial amount invested to the ending redeemable value for that period, according to the following formula-- P(1 + T)/n/ = ERV Where: P = a hypothetical initial purchase payment of $1,000 T = average annual total return for the period in question n = number of years ERV = redeemable value (as of the end of the period in question) of a hypothet- ical $1,000 purchase payment made at the beginning of the 1-year, 5- year, or 10-year period in question (or fractional portion thereof) The formula assumes that: 1) all recurring fees have been charged to contractowner accounts; 2) all applicable non-recurring charges are deducted at the end of the period in question; and 3) there will be a complete redemption at the end of the period in question. B-3 (B) NON-STANDARDIZED INVESTMENT RESULTS: The VAA may illustrate its results over various periods and compare its results to indices and other variable annuities in sales materials including advertise- ments, brochures and reports. Such results may be computed on a cumulative and/or annualized basis. Cumulative quotations are arrived at by calculating the change in the Accumula- tion Unit Value between the first and last day of the base period being mea- sured, and expressing the difference as a percentage of the unit value at the beginning of the base period. Annualized quotations are arrived at by applying a formula which determines the level rate of return which, if earned over the entire base period, would pro- duce the cumulative return. NON-STANDARDIZED INVESTMENT RESULTS SUBACCOUNTS OF ACCOUNT H* $10,000 INVESTED IN THIS FUND THROUGH AMERICAN LEGACY III THIS MANY YEARS AGO... ...WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31, 1996**
With EGMDB ------------------------------------------------------------------- Growth Growth-Income High-Yield Bond Cash Management - ------------------------------------------------------------------------------------------------------- Number Compound Compound Compound Compound of Growth Growth Growth Growth Years Periods Amount Rate Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------- 1 12/31/95-12/31/96 $11,152 11.52% $11,680 16.80% $11,136 11.36% $10,337 3.37% 2 12/31/94-12/31/96 14,624 20.93 15,284 23.63 13,340 15.50 10,733 3.60 3 12/31/93-12/31/96 14,456 13.07 15,344 15.34 12,264 7.04 10,966 3.12 4 12/31/92-12/31/96 16,543 13.41 16,955 14.11 14,049 8.87 11,077 2.59 5 12/31/91-12/31/96 18,028 12.51 17,996 12.47 15,542 9.22 11,243 2.37 Lifetime of fund 02/08/84-12/31/96 52,461 13.72 50,594 13.40 39,403 11.22 17,155 4.27% Without EGMDB ------------------------------------------------------------------- Growth Growth-Income High-Yield Bond Cash Management - ------------------------------------------------------------------------------------------------------- Number Compound Compound Compound Compound of Growth Growth Growth Growth Years Periods Amount Rate Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------- 1 12/31/95-12/31/96 $11,169 11.69% $11,697 16.97% $11,153 11.53% $10,352 3.52% 2 12/31/94-12/31/96 14,668 21.11 15,329 23.81 13,382 15.68 10,764 3.75 3 12/31/93-12/31/96 14,521 13.24 15,416 15.52 12,319 7.20 11,017 3.28 4 12/31/92-12/31/96 16,642 13.58 17,056 14.28 14,131 9.03 11,142 2.74 5 12/31/91-12/31/96 18,165 12.68 18,133 12.64 15,656 9.38 11,331 2.53 Lifetime of fund 02/08/84-12/31/96 53,486 13.89 51,583 13.57 40,173 11.39 17,491 4.43%
*Although the subaccounts for the contracts did not commence activity until 1997, these figures are calculated as if the subaccounts had commenced activity at the same time as the corresponding underlying funds. **For purposes of determining these investment results, American Legacy III's 1.40% annual asset charge and administrative fee for those contracts with EGMDB and 1.25% for those contracts without EGMDB have been taken into account. However, these examples do not assume redemption at the end of the period. There is also a Global Growth subaccount but it is not in the chart because it did not begin activity until 1997. B-4
With EGMDB Without EGMDB ------------------- ------------------- U.S. Govt/AAA U.S. Govt/AAA - ------------------------------------------------------------------------------- Number Compound Compound of Growth Growth Years Periods Amount Rate Amount Rate - ------------------------------------------------------------------------------- 1 12/31/95-12/31/96 $10,142 1.42% $10,157 1.57% 2 12/31/94-12/31/96 11,513 7.30 11,548 7.46 3 12/31/93-12/31/96 10,832 2.70 10,880 2.85 4 12/31/92-12/31/96 11,848 4.33 11,916 4.48 5 12/31/91-12/31/96 12,540 4.63 12,636 4.79 Lifetime of fund 12/01/85-12/31/96 20,091 6.50 20,428 6.66 Asset Allocation Asset Allocation ------------------- ------------------- Number Compound Compound of Growth Growth Years Periods Amount Rate Amount Rate - ------------------------------------------------------------------------------- 1 12/31/95-12/31/96 $11,390 13.90% $11,407 14.07% 2 12/31/94-12/31/96 14,520 20.50 14,564 20.68 3 12/31/93-12/31/96 14,242 12.51 14,307 12.68 4 12/31/92-12/31/96 15,467 11.52 15,562 11.69 5 12/31/91-12/31/96 16,512 10.55 16,632 10.71 Lifetime of fund 08/01/89-12/31/96 19,666 9.55 19,886 9.71 International International ------------------- ------------------- Number Compound Compound of Growth Growth Years Periods Amount Rate Amount Rate - ------------------------------------------------------------------------------- 1 12/31/95-12/31/96 $11,562 15.62% $11,580 15.80% 2 12/31/94-12/31/96 12,817 13.21 12,855 13.38 3 12/31/93-12/31/96 12,851 8.72 12,908 8.88 4 12/31/92-12/31/96 16,985 14.16 17,086 14.33 5 12/31/91-12/31/96 16,564 10.62 16,692 10.79 Lifetime of fund 05/01/89-12/31/96 17,205 8.48 17,378 8.64 Bond Bond ------------------- ------------------- Number Compound Compound of Growth Growth Years Periods Amount Rate Amount Rate - ------------------------------------------------------------------------------- Lifetime of fund 01/02/96-12/31/96 $10,412 4.14% $10,428 4.29%
B-5 ANNUITY PAYOUTS VARIABLE ANNUITY PAYOUTS Variable annuity payouts will be determined on the basis of: (1) the dollar value of the contract on the annuity commencement date; (2) the annuity tables contained in the contract; (3) the type of annuity option selected; and (4) the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, Lincoln Life makes the following calcula- tion: first, it determines the dollar amount of the first payout; second, it credits the contract with a fixed number of annuity units based on the amount of the first payout; and third, it calculates 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 con- tract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity pay- out 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 4% per annum. The first annuity payout is determined by multiplying the bene- fit per $1,000 of value shown in the contract tables by the number of thou- sands 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 4% interest rate stated above is the mea- suring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds 4%, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than 4%, 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. Lincoln Life may use sex distinct annuity tables in contracts that are not as- sociated 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 the contractowner's fixed number of annuity units in each subaccount by the appro- priate 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 immedi- ately preceding valuation date by the product of: (a) The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and (b) 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 Lincoln Life may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. FEDERAL TAX STATUS GENERAL The operations of the VAA form a part of, and are taxed with, the operations of Lincoln Life under the Internal Revenue Code of 1986, as amended (the Code). VAA investment income and realized net capital gains on the assets of the VAA are reinvested and taken into account in determining the accumulation and annuity unit values. As a result, such investment income and realized net capital gain are automatically retained as part of the reserves under the con- tract. Under existing federal income tax law, Lincoln Life believes that the VAA investment income and realized net capital gain are not taxed to the ex- tent they are retained as part of the reserves under the contract. According- ly, Lincoln Life does not anticipate that it will incur any federal income tax liability attributable to the VAA, and therefore it does not intend to make any provision for such taxes. However, if changes in the federal tax laws or interpretations thereof result in Lincoln Life's being taxed on income or gain attributable to the VAA, then Lincoln Life may impose a charge against the VAA (with respect to some or all (contracts) in order to make provision for pay- ment of such taxes. B-6 TAX STATUS OF NON-QUALIFIED CONTRACTS Section 817(h) of the code provides that separate account investments (or the investments of a mutual fund the shares of which are owned by separate ac- counts of insurance companies) underlying the contract be adequately diversi- fied in accordance with Treasury regulations in order for the contract to qualify as an annuity contract under Section 72 of the code. The VAA, through each of the funds, intends to comply with the diversification requirements prescribed in regulations, which affect how the assets in each of the funds in which the VAA invests may be invested. Capital Research and Management Company is not affiliated with Lincoln Life and Lincoln Life does not have control over the series, or its investments. However, Lincoln Life believes that each fund in which the VAA owns shares will meet the diversification requirements and that therefore the contracts will be treated as annuities under the code. The regulations relating to diversification requirements do not provide guid- ance concerning the extent to which contractowners may direct their invest- ments to particular subaccounts of a separate account. When guidance is pro- vided, the contract may need to be modified to comply with that guidance. For these reasons, Lincoln Life reserves the right to modify the contract as nec- essary to prevent the contractowner from being considered the owner of the as- sets of the VAA. In addition to the requirements of Section 817(h), code Section 72(s) provides that contracts will not be treated as annuity contracts for purposes of Sec- tion 72 unless the contract provides that (1) if any contractowner dies on or after the annuity starting date prior to the time the entire interest in the contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as under the method of distribution in effect at the time of the contractowner's death; and (2) if any contractowner dies prior to the annuity starting date, the entire interest must be distributed within five years after the death of the contractowner. These requirements are considered satisfied if any portion of the contractowner's interest that is payable to or for the benefit of a designated beneficiary is distributed over that designated beneficiary's life, or a period not extending beyond the des- ignated beneficiary's life expectancy, and if that distribution begins within one year of the contractowner's death. The designated beneficiary must be a natural person. No regulations interpreting these requirements have yet been issued. Thus, no assurance can be given that the provisions contained in con- tracts satisfy all such code requirements. However, Lincoln Life believes that such provisions in such contracts meet these requirements. Lincoln Life in- tends to review such provisions and modify them as necessary to assure that they comply with the requirements of Section 72(s) when clarified by regula- tions or otherwise. TAX STATUS OF CONTRACTS USED WITH CERTAIN PLANS The rules governing the tax treatment of contributions and distributions under qualified plans, as set forth in the code and applicable rulings and regula- tions, are complex and subject to change. These rules also vary according to the type of plan and the terms and conditions of the plan itself. Therefore, no attempt is made herein to provide more than general information about the use of contracts with the various types of plans, based on Lincoln Life's un- derstanding of the current federal tax laws as interpreted by the Internal Revenue Service. Purchasers of contracts for use with such a plan and plan participants and beneficiaries should consult counsel and other competent ad- visers as to the suitability of the plan and the contract to their specific needs, and as to applicable code limitations and tax consequences. Partici- pants under such plans, as well as contractowners, annuitants, and beneficia- ries, should also be aware that the rights of any person to any benefits under such plans may be subject to the terms and conditions of the plans themselves regardless of the terms and conditions of the contract. Following are brief descriptions of the various types of plans and of the use of contracts in connection therewith. PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS [SECTION 403(B) PLANS] Payments made to purchase annuity contracts by public school systems or code Section 501(c)(3) organizations for their employees are excludable from the gross income of the employee to the extent that aggregate payments for the em- ployee do not exceed the exclusion allowance provided by Section 403(b) of the code, the over-all limits for excludable contributions of Section 415 of the code or the limit on elective contributions. Furthermore, the investment re- sults of the fund credited to the account are not taxable until benefits are received either in the form of annuity payouts, in a single sum or a withdraw- al. If an employee's individual account is surrendered, usually the full amount received would be includable in income for that year at ordinary rates. QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED ANNUITY PLANS [SECTION 401(A) PLANS] Payments made by a corporate employer and the increments on all payments for qualified corporate plans are not taxable as income to the employee until dis- tributed. However, the employee may be required to include these amounts in gross income prior to distribution if the qualified plan or trust loses its qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the code are subject to extensive rules, including limita- B-7 tions on maximum contributions or benefits. For plan years beginning after De- cember 31, 1996, tax exempt organizations (except state and local governments) may have 401(k) plans. Distributions of amounts in excess of non-deductible employee contributions are generally taxable as ordinary income. If an employee or beneficiary re- ceives a lump-sum distribution, that is, if the employee or beneficiary re- ceives in a single tax year the total amounts payable with respect to that em- ployee, and the benefits are paid as a result of the employee's death or sepa- ration from service or after the employee attains 59 1/2, taxable gain may be eligible for special lump sum averaging treatment. These special tax rules are not available in all cases. SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH) Under code provisions, self-employed individuals may establish plans commonly known as H.R. 10 or Keogh plans for themselves and their employees. The tax consequences to participants under such plans depend upon the plan itself. Such plans are subject to special rules in addition to those applicable to qualified corporate plans; therefore, purchasers of the contracts for use with H.R. 10 plans should seek competent advice as to suitability of plan documents and the funding contracts. INDIVIDUAL RETIREMENT ANNUITIES (IRA) Under Section 408 of the code, individuals may participate in a retirement program known as Individual Retirement Annuity (IRA). An individual may make an annual IRA contribution of up to the lesser of $2,000 (or $4,000 if IRAs are maintained for both the individual and his nonworking spouse) or 100% of compensation. However, IRA contributions may be non-deductible in whole or in part if (1) the individual or his spouse is an active participant in certain other retirement programs and (2) the income of the individual (or of the in- dividual and his spouse) exceeds a specified amount. Distributions from cer- tain other IRA plans or qualified plans may be rolled over to an IRA on a tax deferred basis without regard to the limit on contributions, provided certain requirements are met. Distributions from IRA's are subject to certain restric- tions. Deductible IRA contributions and all IRA earnings will be taxed as or- dinary income when distributed. The failure to satisfy certain code require- ments with respect to an IRA may result in adverse tax consequences. DEFERRED COMPENSATION PLANS (457 PLANS) Under the code provisions, employees and independent contractors (partici- pants) performing services for state and local governments and certain tax-ex- empt organizations may establish deferred compensation plans. While partici- pants in such plans may be permitted to specify the form of investment in which their plan accounts will participate, all such investments are owned by the sponsoring employer and are subject to the claims of its creditors. Plans of state and local governments established on August 20, 1996, or later, must hold all assets and income in trust (or custodial accounts or an annuity con- tract) for the exclusive benefit of participants and their beneficiaries. Sec- tion 457 plans that were in existence before August 20, 1996 are allowed until January 1, 1999 to meet this requirement. The amounts deferred under a plan which meet the requirements of Section 457 of the code are not taxable as in- come to the participant until paid or otherwise made available to the partici- pant or beneficiary. Deferrals are taxed as compensation from the employer when they are actually or constructively received by the employee. As a gen- eral rule, the maximum amount which can be deferred in any one year is the lesser of $7,500, as increased for cost of living adjustments, or 33 1/3% of the participant's includable compensation. However, in limited circumstances, up to $15,000 may be deferred in each of the last three years before retirement. SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)] An employer may make contributions on behalf of employees to a simplified em- ployee pension plan ("SEP") established prior to January 1, 1997, as provided by Section 408(k) of the code. The contributions and distribution dates are limited by the code provisions. All distributions from the plan will be taxed as ordinary income. Any distribution before the employee attains age 59 1/2 (except in the event of death or disability) or the failure to satisfy certain other code requirements may result in adverse tax consequences. For tax years after 1996, salary reduction SEPs (SAR/SEP) may no longer be established. How- ever, SAR/SEPs in existence prior to January 1, 1997 may continue to receive contributions. SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE) Employers with 100 or fewer employees, who earned $5,000.00 during the preced- ing year, may establish SIMPLEs. For tax years beginning after December 31, 1996, SIMPLE plans are available and may be in the form of an IRA or part of a 401(k) plan. Under a SIMPLE IRA, employees are permitted to make elective con- tributions to an IRA, stated as a percentage of the employee's compensation, but not to exceed $6,000.00 annually as indexed. Such deferrals are not sub- ject to income tax until withdrawn. Withdrawals made by an employee in the first two years of the employee's participation are subject to a 25 percent penalty. Later withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE 401(k), employee deferrals are limited B-8 to no more than $6,000.00 annually. Employer contributions are usually re- quired for each type of SIMPLE. TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS The following rules generally apply to distributions from contracts purchased in connection with the plans discussed above, other than 457 plans. The portion, if any, of any contribution under a contract made by or on behalf of an individual which is not excluded from the employee's gross income (gen- erally, the employee's own non-deductible contributions) constitutes his in- vestment in the contract. If a distribution is made in the form of annuity payouts, the employee's investment in the contract (adjusted for certain re- fund provisions) divided by his life expectancy (or other period for which an- nuity payouts are expected to be made) constitutes a return of capital each year. The dollar amount of annuity payouts received in any year in excess of such return is taxable as ordinary income. However, all distributions will be fully taxable once the employee is deemed to have recovered the dollar amount of his investment in the contract. Notwithstanding the above, if the employ- ee's annuity starting date was on or before July 1, 1986 and if his investment in the contract will be recovered within three years of his annuity starting date, no amount is included in income until he has fully recovered such in- vestment. Rules generally provide that all distributions which are not re- ceived as an annuity will be taxed as a pro rata distribution of taxable and non-taxable amounts (rather than as a distribution first of non-taxable amounts). If a surrender of or withdrawal from the contract is effected and a distribu- tion is made in a single payment, the proceeds may qualify for special lump- sum distribution treatment under certain qualified plans, as discussed above. Otherwise, the amount by which the payment exceeds the investment in the con- tract (adjusted for any prior withdrawals) allocated to that payment, if any, will be taxed as ordinary income in the year of receipt. Distributions from Section 401(a) plans, Section 403(b) plans, IRAs, SEPs and Keoghs will be subject to (1) a 10% penalty tax if made before age 59 1/2 un- less certain other exceptions apply, and (2) except during 1997, 1998 and 1999, a 15% penalty tax on combined annual distributions in excess of $150,000 (as indexed), subject to various special rules. Failure to meet certain mini- mum distribution requirements for the above plans, as well as for Section 457 plans, will result in a 50% excise tax. Various other adverse tax consequences may also be potentially applicable in certain circumstances to these types of plans. Upon an annuitant's death, the taxation of benefits payable to his beneficiary generally follow these same principles, subject to a variety of special rules. OTHER CONSIDERATIONS It should be understood that the foregoing comments about the federal tax con- sequences under these contracts are not exhaustive and that special rules are provided with respect to other tax situations not discussed herein. Further, the foregoing discussion does not address any applicable state, local, or for- eign tax laws. In recent years, numerous changes have been made in the federal income tax treatment of contracts and retirement plans, which are not fully discussed above. Before an investment is made in any of the above plans, a tax adviser should be consulted. ADVERTISING AND SALES LITERATURE As set forth in the Prospectus, Lincoln Life may refer to the following orga- nizations (and others) in its marketing materials: A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affect- ing the overall performance of an insurance company in order to provide an opinion as to an insurance company's relative financial strength and ability to meet its contractual obligations. The procedure includes both a quantita- tive and qualitative review of each company. A.M. Best also provides certain rankings, to which Lincoln Life intends to refer. DUFF & PHELPS insurance company claims paying ability (CPA) service provides purchasers of insurance company policies and contracts with analytical and statistical information on the solvency and liquidity of major U.S. licensed insurance companies, both mutual and stock. EAFE INDEX is prepared by Morgan Stanley Capital International (MSCI). It mea- sures performance of securities in Europe, Australia and the Far East. The in- dex reflects the movements of world stock markets by representing the evolu- tion of an unmanaged portfolio. The EAFE Index offers international diversifi- cation with over 1000 companies across 20 different countries. LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher of statistical data covering the investment company industry in the United States and overseas. Lipper is recognized as the leading source of data on open-end and closed-end funds. Lipper currently tracks the performance of over 5,000 investment companies and publishes numerous specialized reports, includ- ing reports on performance and portfolio analysis, fee and expense analysis. B-9 MOODY'S insurance claims-paying rating is a system of rating insurance company's financial strength, market leadership, and ability to meet financial obligations. The purpose of Moody's ratings is to provide investors with a simple system of gradation by which the relative quality of insurance compa- nies may be noted. MORNINGSTAR is an independent financial publisher offering comprehensive sta- tistical and analytical coverage of open-end and closed-end funds and variable annuities. STANDARD & POOR'S insurance claims-paying ability rating is an assessment of an operating insurance company's financial capacity to meet obligations under an insurance policy in accordance with the terms. The likelihood of a timely flow of funds from the insurer to the trustee for the bondholders is a key el- ement in the rating determination for such debt issues. VARDS (VARIABLE ANNUITY RESEARCH DATA SERVICE) provides a comprehensive guide to variable annuity contract features and historical fund performance. The service also provides a readily understandable analysis of the comparative characteristics and market performance of funds inclusive in variable con- tracts. STANDARD & POOR'S INDEX -- broad-based measurement of changes in stock-market conditions based on the average performance of 500 widely held common stocks; commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks, their relative weightings to reflect differences in the number of out- standing shares, and publication of the index itself are services of Standard & Poor's Corporation, a financial advisory, securities rating, and publishing firm. NASDAQ-OTC PRICE INDEX -- this index is based on the National Association of Securities Dealers Automated Quotations (NASDAQ) and represents all domestic over-the-counter stocks except those traded on exchanges and those having only one market maker, a total of some 3,500 stocks. It is market value- weighted and was introduced with a base of 100.00 on February 5, 1971. DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express Company and American Telephone and Telegraph Company. Prepared and published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators. The average is quoted in points, not dollars. In its advertisements and other sales literature for the VAA and the series funds, Lincoln Life intends to illustrate the advantages of the contracts in a number of ways: COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the variable annuity contract. For example, but not by way of illustration, the literature may emphasize the potential savings through tax deferral; the potential advantage of the Variable Annuity Account over the fixed account; and the compounding effect when a client makes regular deposits to his or her contract. INTERNET. An electronic communications network which may be used to provide information regarding Lincoln Life, performance of the subaccounts and adver- tisement literature. DOLLAR-COST AVERAGING ILLUSTRATIONS. (DCA) -- You may systematically transfer on a monthly basis amounts from certain subaccounts into the subaccounts or the fixed side of the contract. You may elect to participate in the DCA pro- gram 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 $10,000 over any period between six and 60 months. Once elected, the program will remain in effect until the earlier of: (1) the annuity commencement date; (2) the value of the amount being DCA'd is deplet- ed; or (3) you cancel the program by written request or by telephone if we have your telephone authorization on file. Currently, there is no charge for this service. However, we reserve the right to impose one. A transfer under this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges which may apply to transfers. 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. 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 our home office. The minimum contract value re- quired 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 our home office. Notwith- standing the requirements of the program, any withdrawal must be permitted by Section 401(a)(9) of the code for qualified plans or permitted under Section 72 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 Contin- gent deferred sales charges. Currently, there is no charge for this service. However, we reserve the right to impose one. If a charge is imposed, it will not exceed $25 per transaction or 2% of the amount withdrawn, whichever is less. We reserve the right to discontinue this service at any time. B-10 CROSS-REINVESTMENT SERVICE -- Under this option, account value in a designated variable subaccount or the fixed side of the contract that exceeds a certain baseline amount is automatically transferred to another specific variable subaccount(s) or the fixed side of the contract at specific intervals. You may elect to participate in cross-reinvestment at the time of application or at any time before the annuity commencement date by sending a written request to our home office or by telephone if we have your telephone authorization on file. You designate the holding account, the receiving account(s), and the baseline amount. Cross-reinvestment will continue until we receive authorization to ter- minate the program. The minimum holding account value required to establish cross-reinvestment is $10,000. Currently, there is no charge for this service. However, we reserve the right to impose one. A transfer under this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges which may apply to transfers. We reserve the right to discontinue this service at any time. LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA and the series' funds may refer to the number of employers and the number of individual annuity cli- ents which Lincoln Life serves. As of the date of this SAI, Lincoln Life was serving over 9,500 employers and had more than 750,000 annuity clients. LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its general financial condition (see, for example, the reference to A.M. Best Company, above); it may refer to its assets; it may also discuss its relative size and/or ranking among companies in the industry or among any sub-classification of those companies, based upon recognized evaluation criteria (see reference to A.M. Best Company above). For example, at year-end 1995 Lincoln Life was one of the ten largest U.S. stock life insurance companies based upon admitted assets. FINANCIAL STATEMENTS Financial statements for the VAA and Lincoln Life appear on the following pages. B-11 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H STATEMENT OF ASSETS AND LIABILITY DECEMBER 31, 1996
Percent Growth- of Net Income Growth Assets Combined Account Account - -------------------------------------------------------------------------------------------------- ASSETS Investments in American Variable Insurance Series at net asset value: . Growth-Income Fund 141,223,350 shares at $32.66 per share (cost-$3,675,152,933) 36.6% $ 4,612,354,618 $4,612,354,618 ------------------------------------------- . Growth Fund 83,729,560 shares at $39.63 per share (cost-$2,701,684,031) 26.3 3,318,202,458 $3,318,202,458 ------------------------------------------- . Asset Allocation Fund 77,304,453 shares at $13.93 per share (cost-$920,764,627) 8.6 1,076,851,024 ------------------------------------------- . High-Yield Bond Fund 41,602,491 shares at $14.39 per share (cost-$561,988,627) 4.8 598,659,845 ------------------------------------------- . U.S. Government AAA-Rated Securities Fund 39,793,585 shares at $10.95 per share (cost-$447,847,243) 3.5 436,137,690 ------------------------------------------- . Cash Management Fund 19,860,060 shares at $11.03 per share (cost-$220,055,373 1.7 219,056,462 ------------------------------------------- . International Fund 150,661,161 shares at $15.09 per share (cost-$1,913,049,576) 18.0 2,273,476,919 ------------------------------------------- . Bond Fund 7,478,693 shares at $10.17 per share (cost-$74,003,332) 0.6 76,058,311 - -------------------------------------------- ----- --------------- -------------- -------------- TOTAL INVESTMENTS AND TOTAL ASSETS (Cost-$10,534,545,742) 100.1 12,610,797,327 4,612,354,618 3,318,202,458 - -------------------------------------------- LIABILITY-- Payable to The Lincoln National Life Insurance Company 0.1 14,422,976 5,284,774 3,854,737 - -------------------------------------------- ----- --------------- -------------- -------------- NET ASSETS 100.0% $12,596,374,351 $4,607,069,844 $3,314,347,721 ===== =============== ============== ============== Net assets are represented by: . Units in accumulation period 2,093,418,167 1,443,311,235 ------------------------------------------- . Annuity reserves units 4,173,814 2,948,313 ------------------------------------------- . Unit value $2.196 $2.292 ------------------------------------------- . Value in accumulation period $4,597,902,642 $3,307,591,163 ------------------------------------------- . Annuity reserves 9,167,202 6,756,558 ------------------------------------------- -------------- -------------- $4,607,069,844 $3,314,347,721 ============== ==============
See accompanying notes. H-1
U.S. Government/ Asset High-Yield AAA-Rated Cash Allocation Bond Securities Management International Bond Account Account Account Account Account Acccount - ------------------------------------------------------------------------------------- $1,076,851,024 $598,659,845 $436,137,690 $219,056,462 $2,273,476,919 $76,058,311 -------------- ------------ ------------ ------------ -------------- ----------- 1,076,851,024 598,659,845 436,137,690 219,056,462 2,273,476,919 76,058,311 1,233,859 675,647 499,790 249,132 2,539,607 85,430 -------------- ------------ ------------ ------------ -------------- ----------- $1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881 ============== ============ ============ ============ ============== =========== 533,336,288 294,028,116 273,794,564 167,434,298 1,291,145,955 72,706,979 1,567,158 372,973 879,214 637,740 2,638,108 40,175 $2.011 $2.031 $1.586 $1.302 $1.755 $1.044 $1,072,465,826 $597,226,620 $434,243,450 $217,977,077 $2,266,306,726 $75,930,925 3,151,339 757,578 1,394,450 830,253 4,630,586 41,956 -------------- ------------ ------------ ------------ -------------- ----------- $1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881 ============== ============ ============ ============ ============== ===========
H-2 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
Growth- Income Growth Combined Account Account - ------------------------------------------------------------------------------- Net investment income: . Dividends from investment income $ 277,129,375 $ 90,647,828 $ 18,369,396 ---------------------------------- . Dividends from net realized gains on investments 726,515,395 332,640,140 235,052,437 ---------------------------------- . Mortality and expense guarantees (151,425,839) (54,864,055) (40,705,133) - ----------------------------------- -------------- ------------ ------------ NET INVESTMENT INCOME 852,218,931 368,423,913 212,716,700 - ----------------------------------- Net realized and unrealized gain (loss) on investments: . Net realized gain (loss) on investments 78,069,710 22,344,277 43,309,847 ---------------------------------- . Net change in unrealized appreciation or depreciation on investments 553,623,030 256,750,744 82,026,981 - ----------------------------------- -------------- ------------ ------------ NET GAIN (LOSS) ON INVESTMENTS 631,692,740 279,095,021 125,336,828 - ----------------------------------- -------------- ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,483,911,671 $647,518,934 $338,053,528 - ----------------------------------- ============== ============ ============
See accompanying notes. H-3
U.S. Government/ Asset High-Yield AAA-Rated Cash Allocation Bond Securities Management International Bond Account Account Account Account Account Account - ------------------------------------------------------------------------------ $ 36,649,106 $47,908,265 $33,334,045 $9,700,922 $ 38,137,872 $2,381,941 69,554,545 -- -- -- 89,268,273 -- (12,975,574) (7,065,463) (6,001,408) (2,694,965) (26,588,689) (550,552) - ------------ ----------- ----------- ---------- ------------ ---------- 93,228,077 40,842,802 27,332,637 7,005,957 100,837,456 1,831,389 5,475,918 412,935 (1,582,017) 83,517 7,981,314 43,919 30,984,974 17,882,219 (19,041,951) 94,873 182,870,211 2,054,979 - ------------ ----------- ----------- ---------- ------------ ---------- 36,460,892 18,295,154 (20,623,968) 178,390 190,851,525 2,098,898 - ------------ ----------- ----------- ---------- ------------ ---------- $129,688,969 $59,137,956 $ 6,708,669 $7,184,347 $291,688,981 $3,930,287 ============ =========== =========== ========== ============ ==========
H-4 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 1996 AND 1995
Growth Income Growth Combined Account Account - ------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 1995 $ 7,019,306,643 $2,404,456,004 $1,766,580,994 Changes from operations: . Net investment income 558,167,503 176,928,002 214,034,026 ------------------------------- . Net realized gain (loss) on investments 46,801,547 10,994,999 25,641,473 ------------------------------- . Net change in unrealized appreciation or depreciation on investments 1,225,286,412 594,578,736 344,000,760 - -------------------------------- --------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,830,255,462 782,501,737 583,676,259 - -------------------------------- Net increase (decrease) from unit transactions 988,532,455 337,575,461 387,635,562 - -------------------------------- --------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,818,787,917 1,120,077,198 971,311,821 - -------------------------------- --------------- -------------- -------------- NET ASSETS AT DECEMBER 31, 1995 9,838,094,560 3,524,533,202 2,737,892,815 - -------------------------------- Changes from operations: . Net investment income 852,218,931 368,423,913 212,716,700 ------------------------------- . Net realized gain (loss) on investments 78,069,710 22,344,277 43,309,847 ------------------------------- . Net change in unrealized appreciation or depreciation on investments 553,623,030 256,750,744 82,026,981 - -------------------------------- --------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,483,911,671 647,518,934 338,053,528 - -------------------------------- Net increase (decrease) from unit transactions 1,274,368,120 435,017,708 238,401,378 - -------------------------------- --------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,758,279,791 1,082,536,642 576,454,906 - -------------------------------- --------------- -------------- -------------- NET ASSETS AT DECEMBER 31, 1996 $12,596,374,351 $4,607,069,844 $3,314,347,721 - -------------------------------- =============== ============== ==============
See accompanying notes. H-5
U.S. Government/ Asset High-Yield AAA-Rated Cash Allocation Bond Securities Management International Bond Account Account Account Account Account Account - ---------------------------------------------------------------------------------------- $ 618,598,667 $328,387,626 $388,493,238 $170,871,848 $1,341,918,266 -- 48,345,696 34,284,347 25,530,883 7,305,656 51,738,893 -- 2,491,208 (707,578) (438,504) 540,337 8,279,612 -- 125,365,119 38,118,567 30,274,816 (1,040,563) 93,988,977 -- -------------- ------------ ------------ ------------ -------------- ----------- 176,202,023 71,695,336 55,367,195 6,805,430 154,007,482 -- 52,991,477 68,159,559 19,409,960 (13,577,326) 138,337,762 -- -------------- ------------ ------------ ------------ -------------- ----------- 229,193,500 137,854,895 74,777,155 (6,771,896) 292,345,244 -- -------------- ------------ ------------ ------------ -------------- ----------- 847,792,167 466,242,521 463,270,393 164,099,952 1,634,263,510 -- 93,228,077 40,842,802 27,332,637 7,005,957 100,837,456 $ 1,831,389 5,475,918 412,935 (1,582,017) 83,517 7,981,314 43,919 30,984,974 17,882,219 (19,041,951) 94,873 182,870,211 2,054,979 -------------- ------------ ------------ ------------ -------------- ----------- 129,688,969 59,137,956 6,708,669 7,184,347 291,688,981 3,930,287 98,136,029 72,603,721 (34,341,162) 47,523,031 344,984,821 72,042,594 -------------- ------------ ------------ ------------ -------------- ----------- 227,824,998 131,741,677 (27,632,493) 54,707,378 636,673,802 75,972,881 -------------- ------------ ------------ ------------ -------------- ----------- $1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881 ============== ============ ============ ============ ============== ===========
H-6 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H NOTES TO FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The account: Lincoln National Variable Annuity Account H (the Variable Account) is a segregated investment account of The Lincoln National Life Insurance Company (the Company) and is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. Investments: The Variable Account invests in the American Variable Insurance Series (AVIS) which consists of eight funds: Growth-Income Fund, Growth Fund, Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA-Rated Securities Fund, Cash Management Fund, International Fund and Bond Fund (the Funds). Investments in the Funds are stated at the closing net asset value per share on December 31, 1996. AVIS is registered as an open-ended management investment company. Investment transactions are accounted for on a trade data basis and dividend income is recorded on the ex-dividend date. 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. 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. Using current law, no federal income taxes are payable with respect to the Variable Account's net investment income and the net realized gain on investments. Annuity Reserves: Reserves on contracts not involving life contingencies are calculated using an assumed investment rate of 4%. Reserves on contracts involving life contingencies are calculated using a modification of the 1971 Individual Annuitant Mortality Table and an assumed investment rate of 4%. 2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE Amounts are paid to the Company for mortality and expense guarantees at the rate of .0036986% of the current value of the Variable Account per day (1.35% on an annual basis). In addition, amounts retained by the Company from the proceeds of the sales of annuity contracts for contract charges and surrender charges were as follows during 1996: Growth-Income Account $ 4,881,706 - -------------------------------------------- Growth Account 4,084,941 - -------------------------------------------- Asset Allocation Account 1,110,799 - -------------------------------------------- High-Yield Bond Account 665,527 - -------------------------------------------- U.S. Government/AAA-Rated Securities Account 609,456 - -------------------------------------------- Cash Management Account 649,261 - -------------------------------------------- International Account 2,283,242 - -------------------------------------------- Bond Account 25,593 - -------------------------------------------- ----------- $14,310,525 ===========
Accordingly, the Company is responsible for all sales, general, and administrative expenses applicable to the Variable Account. H-7 This page was intentionally left blank. H-8 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H NOTES TO FINANCIAL STATEMENTS CONTINUED 3. NET ASSETS Net Assets at December 31, 1996 consisted of the following:
Growth Asset income Growth Allocation Combined Account Account Account - -------------------------------------------------------------------------------------- Unit Transactions: Accumulation units $ 8,214,276,365 $2,785,539,463 $2,051,789,425 $ 690,027,285 - ------------------------ Annuity reserves 20,629,929 6,500,050 5,628,153 2,258,885 - ------------------------ --------------- -------------- -------------- -------------- 8,234,906,294 2,792,039,521 2,057,417,578 692,286,170 Accumulated net investment income 2,078,722,956 833,952,288 518,152,580 217,859,608 - ------------------------ Accumulated net realized gain (loss) on investments 206,493,516 43,876,350 122,259,136 9,384,990 - ------------------------ Net unrealized appreciation (depreciation) on investments 2,076,251,585 937,201,685 616,518,427 156,086,397 - ------------------------ --------------- -------------- -------------- -------------- $12,596,374,351 $4,607,069,844 $3,314,347,721 $1,075,617,165 =============== ============== ============== ==============
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Year Ended Year Ended December 31, 1996 December 31, 1995 Units Amount Units Amount - --------------------------------------------------------------------------------------------------- Growth-Income Account: Accumulation Units: Contract purchases 486,617,752 $ 973,924,835 385,390,093 $ 647,988,912 - ---------------------------------------- Terminated contracts and transfers to annuity reserves (270,329,009) (541,691,853) (188,992,667) (310,925,032) - ---------------------------------------- ------------ ------------- ------------ ------------- 216,288,743 432,232,982 196,397,416 337,063,880 Annuity Reserves: Transfers from accumulation units and between accounts 1,979,594 3,822,907 820,366 1,280,881 - ---------------------------------------- Annuity Payments (652,261) (1,090,938) (517,281) (815,536) - ---------------------------------------- Receipt of mortality guarantee adjustment 24,471 52,757 29,918 46,236 - ---------------------------------------- ------------ ------------- ------------ ------------- 1,351,804 2,784,276 333,003 511,581 Growth Account Accumulation Units: Contract purchases 440,799,983 930,868,833 426,597,921 798,976,148 - ---------------------------------------- Terminated contracts and transfers to annuity reserves (332,516,710) (696,006,371) (224,720,522) (412,118,502) - ---------------------------------------- ------------ ------------- ------------ ------------- 108,283,273 234,862,462 201,877,399 386,857,646 Annuity Reserves: Transfers from accumulation units and between accounts 2,155,956 4,388,824 707,309 1,295,235 - ---------------------------------------- Annuity Payments (604,290) (895,284) (288,125) (521,189) - ---------------------------------------- Receipt of mortality guarantee adjustment 20,019 45,376 3,294 3,870 - ---------------------------------------- ------------ ------------- ------------ ------------- 1,571,685 3,538,916 422,478 777,916
H-9
U.S. Government/ AAA-Rated Cash High-Yield Securities Management International Bond Bond Account Account Account Account Account - -------------------------------------------------------------------- $444,395,696 $329,845,765 $180,220,554 $1,654,455,583 $72,002,594 553,777 1,161,667 772,396 3,714,993 40,000 ------------ ------------ ------------ -------------- ----------- 444,949,473 331,007,432 185,992,950 1,658,170,576 72,042,594 135,595,774 117,948,261 31,942,541 221,440,515 1,831,389 767,733 (1,608,240) 870,750 30,898,878 43,919 16,671,218 (11,709,553) (998,911) 360,427,343 2,054,979 ------------ ------------ ------------ -------------- ----------- $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881 ============ ============ ============ ============== ===========
H-10 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H NOTES TO FINANCIAL STATEMENTS CONTINUED 4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
Year Ended Year Ended December 31, 1996 December 31, 1995 Units Amount Units Amount - ------------------------------------------------------------------------------------------------ Asset Allocation Account Accumulation Units: Contract purchases 126,213,576 $ 232,896,893 89,466,387 $141,915,536 - ---------------------------------------- Terminated contracts and transfers to annuity reserves (73,269,132) (135,297,826) (57,322,585) (89,201,319) - ---------------------------------------- ----------- ------------- ----------- ------------ 52,944,444 97,599,067 32,143,802 52,714,217 Annuity Reserves: Transfers from accumulation units and between accounts 613,943 1,053,233 435,868 658,350 - ---------------------------------------- Annuity Payments (333,206) (525,202) (254,690) (374,470) - ---------------------------------------- Receipt of mortality guarantee adjustment 4,497 8,931 (5,151) (6,620) - ---------------------------------------- ----------- ------------- ----------- ------------ 285,234 536,962 175,845 277,260 High Yield Bond Account Accumulation Units: Contract purchases 104,270,687 196,862,795 95,779,226 160,602,539 - ---------------------------------------- Terminated contracts and transfers to annuity reserves (66,283,425) (124,283,867) (56,284,453) (94,297,060) - ---------------------------------------- ----------- ------------- ----------- ------------ 37,987,262 75,578,928 39,494,773 66,305,479 Annuity Reserves: Transfers from accumulation units and between accounts 100,732 168,516 49,490 32,701 - ---------------------------------------- Annuity Payments (85,786) (140,894) (134,657) (178,831) - ---------------------------------------- Receipt of mortality guarantee adjustment (1,404) (2,829) 130 210 - ---------------------------------------- ----------- ------------- ----------- ------------ 13,542 24,793 (85,037) (145,920) U.S. Government/AAA-Rated Securities Account Accumulation Units: Contract purchases 76,139,686 116,082,744 91,667,759 133,440,225 - ---------------------------------------- Terminated contracts and transfers to annuity reserves (98,694,014) (150,553,945) (78,197,874) (113,990,072) - ---------------------------------------- ----------- ------------- ----------- ------------ (22,554,328) (34,471,201) 13,469,885 19,450,153 Annuity Reserves: Transfers from accumulation units and between accounts 387,122 333,561 111,078 159,394 - ---------------------------------------- Annuity Payments (293,305) (194,168) (149,233) (218,967) - ---------------------------------------- Receipt of mortality guarantee adjustment (5,190) (9,354) 14,142 19,380 - ---------------------------------------- ----------- ------------- ----------- ------------ 87,907 130,039 (24,013) (40,193)
H-11 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H NOTES TO FINANCIAL STATEMENTS CONTINUED 4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
Year ended Year ended December 31, 1996 December 31, 1995 Units Amount Units Amount - ---------------------------------------------------------------------------------------------- Cash Management Account Accumulation Units: Contract purchases 379,951,242 $ 482,476,565 299,743,238 $365,095,920 - ------------------------------------ Terminated contracts and transfers to annuity reserves (342,769,158) (435,210,289) (311,002,759) (378,960,644) - ------------------------------------ ------------ -------------- ------------ ------------ 37,182,084 47,266,276 (11,259,521) (13,864,724) Annuity Reserves: Transfers from accumulation units and between accounts 334,324 398,585 344,875 428,522 - ------------------------------------ Annuity Payments (134,563) (143,549) (116,047) (143,909) - ------------------------------------ Receipt of mortality guarantee adjustment 1,322 1,719 2,237 2,785 - ------------------------------------ ------------ -------------- ------------ ------------ 201,083 256,755 231,065 287,398 International Account Accumulation Units: Contract purchases 413,237,895 663,188,609 301,858,508 430,264,442 - ------------------------------------ Terminated contracts and transfers to annuity reserves (200,244,161) (319,876,422) (208,166,176) (292,419,209) - ------------------------------------ ------------ -------------- ------------ ------------ 212,993,734 343,312,187 93,692,332 137,845,233 Annuity Reserves: Transfers from accumulation units and between accounts 1,476,258 2,103,045 561,618 770,706 - ------------------------------------ Annuity Payments (495,611) (469,790) (229,919) (296,241) - ------------------------------------ Receipt of mortality guarantee adjustment 23,236 39,379 13,665 18,064 - ------------------------------------ ------------ -------------- ------------ ------------ 1,003,883 1,672,634 345,364 492,529 Bond Account Accumulation Units: Contract purchases 90,136,993 88,973,283 -- -- - ------------------------------------ Terminated contracts and transfers to annuity reserves (17,430,014) (16,970,689) -- -- - ------------------------------------ ------------ -------------- ------------ ------------ 72,706,979 72,002,594 -- -- Annuity Reserves: Transfers from accumulation units and between accounts 40,913 40,893 -- -- - ------------------------------------ Annuity Payments (947) (1,110) -- -- - ------------------------------------ Receipt of mortality guarantee adjustment 209 217 -- -- - ------------------------------------ ------------ -------------- ------------ ------------ 40,175 40,000 -- -- -------------- ------------ NET INCREASE FROM UNIT TRANSACTIONS $1,274,368,120 $988,532,455 ============== ============
H-12 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H NOTES TO FINANCIAL STATEMENTS CONTINUED 5. PURCHASES AND SALES OF SECURITIES The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 1996:
Aggregate Aggregate Cost Proceeds of Purchases from Sales - ------------------------------------------------------------------------- Growth-Income Account $ 900,375,081 $ 95,662,150 - -------------------------------------------- Growth Account 674,101,004 222,248,738 - -------------------------------------------- Asset Allocation Account 222,750,969 31,117,253 - -------------------------------------------- High-Yield Bond Account 137,648,756 24,054,151 - -------------------------------------------- U.S. Government/AAA-Rated Securities Account 65,238,828 72,273,200 - -------------------------------------------- Cash Management Account 261,968,878 207,378,722 - -------------------------------------------- International Account 502,741,929 56,226,572 - -------------------------------------------- Bond Account 75,869,334 1,909,921 - -------------------------------------------- -------------- ------------ $2,840,694,779 $710,870,707 ============== ============
6. NEW INVESTMENT FUND Effective January 1, 1996, the AVIS Bond Fund became available as an investment option for Variable Account contract owners. 7. DAILY UNIT VALUATION CALCULATIONS Effective October 1996, the daily unit value calculation process was transferred from Lincoln Life to the Delaware Group, an affiliate of Lincoln National Corporation. Costs associated with the calculation of the unit value are paid by Lincoln Life. H-13 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Lincoln National Variable Annuity Account H We have audited the accompanying statement of assets and liability of Lincoln National Variable Annuity Account H (Variable Account) as of December 31, 1996, and the related statement of operations for the year then ended and the statements of changes in net assets for each of the two years in the period then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lincoln National Variable Annuity Account H at December 31, 1996, the results of its operations for the year then ended, and the changes in its net assets for each of the two years in the period then ended in conformity with generally accepted accounting principles. Fort Wayne, Indiana March 14, 1997 H-14 LINCOLN NATIONAL LIFE INSURANCE COMPANY BALANCE SHEETS--STATUTORY BASIS
December 31 1996 1995 --------- --------- (in millions) -------------------- ADMITTED ASSETS CASH AND INVESTMENTS: Bonds $19,389.6 $17,729.7 - ------------------------------------------------------------------------------------------------------- Preferred stocks 239.7 89.9 - ------------------------------------------------------------------------------------------------------- Unaffiliated common stocks 358.3 535.5 - ------------------------------------------------------------------------------------------------------- Affiliated common stocks 241.5 193.0 - ------------------------------------------------------------------------------------------------------- Mortgage loans on real estate 2,976.7 2,909.7 - ------------------------------------------------------------------------------------------------------- Real estate 621.3 655.2 - ------------------------------------------------------------------------------------------------------- Policy loans 626.5 515.8 - ------------------------------------------------------------------------------------------------------- Other investments 282.7 248.0 - ------------------------------------------------------------------------------------------------------- Cash and short-term investments 759.2 780.9 - ----------------------------------------------------------------------------------- --------- --------- Total cash and investments 25,495.5 23,657.7 - ------------------------------------------------------------------------------------------------------- Premiums and fees in course of collection 60.9 17.1 - ------------------------------------------------------------------------------------------------------- Accrued investment income 343.6 342.5 - ------------------------------------------------------------------------------------------------------- Funds withheld by ceding companies 25.8 595.3 - ------------------------------------------------------------------------------------------------------- Other admitted assets 355.7 217.7 - ------------------------------------------------------------------------------------------------------- Separate account assets 23,735.1 18,461.6 - ----------------------------------------------------------------------------------- --------- --------- Total admitted assets $50,016.6 $43,291.9 - ----------------------------------------------------------------------------------- ========= ========= LIABILITIES AND CAPITAL AND SURPLUS LIABILITIES: Future policy benefits and claims $ 5,954.0 $ 5,713.3 - ------------------------------------------------------------------------------------------------------- Other policyholder funds 17,262.4 15,598.5 - ------------------------------------------------------------------------------------------------------- Amounts withheld or retained by Company as agent or trustee 250.2 499.3 - ------------------------------------------------------------------------------------------------------- Funds held under reinsurance treaties 564.6 1,053.5 - ------------------------------------------------------------------------------------------------------- Asset valuation reserve 375.5 270.0 - ------------------------------------------------------------------------------------------------------- Interest maintenance reserve 76.7 116.3 - ------------------------------------------------------------------------------------------------------- Other liabilities 490.9 391.3 - ------------------------------------------------------------------------------------------------------- Federal income taxes 4.3 3.2 - ------------------------------------------------------------------------------------------------------- Net transfers due from separate accounts (659.7) (548.0) - ------------------------------------------------------------------------------------------------------- Separate account liabilities 23,735.1 18,461.6 - ----------------------------------------------------------------------------------- --------- --------- Total liabilities 48,054.0 41,559.0 - ------------------------------------------------------------------------------------------------------- CAPITAL AND SURPLUS: Common stock, $2.50 par value: Authorized, issued and outstanding shares--10 million (owned by Lincoln National Corporation) 25.0 25.0 - ------------------------------------------------------------------------------------------------------- Paid-in surplus 883.4 783.4 - ------------------------------------------------------------------------------------------------------- Unassigned surplus 1,054.2 924.5 - ----------------------------------------------------------------------------------- --------- --------- Total capital and surplus 1,962.6 1,732.9 - ----------------------------------------------------------------------------------- --------- --------- Total liabilities and capital and surplus $50,016.6 $43,291.9 - ----------------------------------------------------------------------------------- ========= =========
See accompanying notes. S-1 LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF INCOME--STATUTORY BASIS
Year ended December 31 1996 1995 1994 ----------------------- (in millions) -------------------------- PREMIUMS AND OTHER REVENUES: Premiums and deposits $7,268.5 $4,899.1 $5,648.7 - ------------------------------------------------------------------------------- Net investment income 1,756.3 1,772.2 1,606.8 - ------------------------------------------------------------------------------- Amortization of interest maintenance reserve 27.2 34.0 9.8 - ------------------------------------------------------------------------------- Commissions and expense allowances on reinsurance ceded 90.9 98.3 145.0 - ------------------------------------------------------------------------------- Expense charges on deposit funds 100.7 83.2 70.5 - ------------------------------------------------------------------------------- Other income 16.8 14.5 15.6 - --------------------------------------------------- -------- -------- -------- Total revenues 9,260.4 6,901.3 7,496.4 - ------------------------------------------------------------------------------- BENEFITS AND EXPENSES: Benefits and settlement expenses 5,989.9 4,184.0 5,071.6 - ------------------------------------------------------------------------------- Underwriting, acquisition, insurance and other expenses 2,878.5 2,345.7 2,136.1 - --------------------------------------------------- -------- -------- -------- Total benefits and expenses 8,868.4 6,529.7 7,207.7 - --------------------------------------------------- -------- -------- -------- Gain from operations before dividends to policyholders, income taxes and net realized gain on investments 392.0 371.6 288.7 - ------------------------------------------------------------------------------- Dividends to policyholders 27.3 27.3 18.0 - --------------------------------------------------- -------- -------- -------- Gain from operations before federal income taxes and net realized gain on investments 364.7 344.3 270.7 - ------------------------------------------------------------------------------- Federal income taxes 83.6 103.7 52.8 - --------------------------------------------------- -------- -------- -------- Gain from operations before net realized gain on investments 281.1 240.6 217.9 - ------------------------------------------------------------------------------- Net realized gain on investments, net of income tax expense (benefits) [1996--$28.5; 1995--$48.1; 1994--$(178.1)] and excluding net transfers to (from) the interest maintenance reserve [1996-- $(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0 - --------------------------------------------------- -------- -------- -------- Net income $ 334.4 $ 284.5 $ 341.9 - --------------------------------------------------- ======== ======== ========
See accompanying notes. S-2 LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
Year ended December 31 1996 1995 1994 -------- -------- -------- (in millions) ---------------------------- Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5 - ---------------------------------------------------------------- CAPITAL AND SURPLUS INCREASE (DECREASE): Net income 334.4 284.5 341.9 - ---------------------------------------------------------------- Differences in cost and admitted investment amounts 38.6 143.2 (123.3) - ---------------------------------------------------------------- Nonadmitted assets (3.0) 2.9 (3.2) - ---------------------------------------------------------------- Regulatory liability for reinsurance 0.6 (2.0) (1.1) - ---------------------------------------------------------------- Life policy reserve valuation basis (0.4) 2.9 (1.3) - ---------------------------------------------------------------- Asset valuation reserve (105.5) (112.5) 83.8 - ---------------------------------------------------------------- Mortgage loan, real estate and other investment reserves -- 2.2 218.6 - ---------------------------------------------------------------- Paid-in surplus 100.0 15.1 -- - ---------------------------------------------------------------- Separate account receivable due to change in valuation -- 27.0 -- - ---------------------------------------------------------------- Accounting for separate account contracts -- -- (13.3) - ---------------------------------------------------------------- Dividends to shareholder (135.0) (310.0) (125.0) - ---------------------------------------------------------------- -------- -------- -------- Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6 - ---------------------------------------------------------------- ======== ======== ========
SEE ACCOMPANYING NOTES. S-3 LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS--STATUTORY BASIS
Year ended December 31 1996 1995 1994 ---------------------------------- (in millions) ---------------------------------- OPERATING ACTIVITIES Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5 - ------------------------------------------------------------------------------------- Allowances and reserve adjustments received (paid) on reinsurance ceded (767.5) (383.6) 137.1 - ------------------------------------------------------------------------------------- Investment income received 1,700.6 1,713.2 1,588.5 - ------------------------------------------------------------------------------------- Benefits paid (4,050.4) (3,239.6) (3,054.1) - ------------------------------------------------------------------------------------- Insurance expenses paid (2,972.2) (2,513.5) (2,542.5) - ------------------------------------------------------------------------------------- Federal income taxes recovered (paid) (72.3) 38.4 (191.8) - ------------------------------------------------------------------------------------- Dividends to policyholders (27.7) (16.5) (18.4) - ------------------------------------------------------------------------------------- Other income received and expenses paid, net 6.3 14.4 59.2 - ------------------------------------------------------------------------------------- ---------- ---------- ---------- Net cash provided by operating activities 1,876.2 1,043.7 1,632.5 - ------------------------------------------------------------------------------------- INVESTING ACTIVITIES Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0 - ------------------------------------------------------------------------------------- Purchase of investments (14,175.4) (14,049.6) (12,871.8) - ------------------------------------------------------------------------------------- Other uses (266.5) (64.0) (123.4) - ------------------------------------------------------------------------------------- ---------- ---------- ---------- Net cash used in investing activities (1,899.9) (929.7) (1,118.2) - ------------------------------------------------------------------------------------- FINANCING ACTIVITIES Surplus paid-in 100.0 15.1 -- - ------------------------------------------------------------------------------------- Proceeds from borrowings 100.0 63.0 63.0 - ------------------------------------------------------------------------------------- Repayment of borrowings (63.0) (63.0) (60.0) - ------------------------------------------------------------------------------------- Dividends paid to shareholder (135.0) (310.0) (125.0) - ------------------------------------------------------------------------------------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 2.0 (294.9) (122.0) - ------------------------------------------------------------------------------------- ---------- ---------- ---------- Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3 - ------------------------------------------------------------------------------------- Cash and short-term investments at beginning of year 780.9 961.8 569.5 - ------------------------------------------------------------------------------------- ---------- ---------- ---------- Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8 - ------------------------------------------------------------------------------------- ========== ========== ==========
See accompanying notes. S-4 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS The Lincoln National Life Insurance Company ("Company") is a wholly owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In- diana. As of December 31, 1996, the Company owns 100% of the outstanding common stock of four insurance company subsidiaries: First Penn-Pacific Life Insurance Company, Lincoln National Health & Casualty Insurance Compa- ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company of New York. The Company's principal business consist of underwriting annuities, depos- it-type contracts, life and health insurance through multiple distribution channels and the reinsurance of individual and group life and health busi- ness. The Company is licensed and sells its products in 49 states, Canada and several U.S. territories. USE OF ESTIMATES The preparation of financial statements requires management to make esti- mates and assumptions that affect amounts reported in the financial state- ments and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Indiana Department of Insurance, which practices differ from generally accepted accounting prin- ciples ("GAAP"). The more significant variances from GAAP are as follows: INVESTMENTS Bonds are reported at cost or amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating. For GAAP, the Company's bonds are classified as available-for-sale and, accordingly, are reported at fair value with changes in the fair values reported di- rectly in shareholder's equity after adjustments for related amortization of deferred acquisition costs, additional policyholder commitments and de- ferred income taxes. Investments in real estate are reported net of related obligation rather than on a gross basis. Changes between cost and admitted asset investment amounts are credited or charged directly to unassigned surplus rather than to a separate surplus account. Under a formula prescribed by the NAIC, the Company defers the portion of realized capital gains and losses on sales of fixed income investments, principally bonds and mortgage loans, attributable to changes in the gen- eral level of interest rates and amortizes those deferrals over the remain- ing period to maturity of the individual security sold. The net deferral is reported as the interest maintenance reserve in the accompanying balance sheets. Realized capital gains and losses are reported in income net of federal income tax and transfers to the interest maintenance reserve. The asset valuation reserve is determined by an NAIC prescribed formula and is reported as a liability rather than unassigned surplus. Under GAAP, real- ized capital gains and losses are reported in the income statement on a pre-tax basis in the period that the asset giving rise to the gain or loss is sold and valuation allowances are provided when there has been a decline in value deemed other than temporary, in which case, the provision for such declines are charged to income. SUBSIDIARIES The accounts and operations of the Company's subsidiaries are not consoli- dated with the accounts and operations of the Company as would be required by GAAP. Under statutory accounting principles, the Company's subsidiaries are carried at their statutory-basis net equity. POLICY ACQUISITION COSTS The costs of acquiring and renewing business are expensed when incurred. Under GAAP, acquisition costs related to traditional life insurance, to the extent recoverable from future policy revenues, are deferred and amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For uni- versal life insurance, annuity and other investment-type products, deferred policy acquisition costs, to the extent recoverable from future gross prof- its, are amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality and expense margins. NONADMITTED ASSETS Certain assets designated as "nonadmitted," principally furniture and equipment and certain receivables, are excluded from the accompanying bal- ance sheets and are charged directly to unassigned surplus. PREMIUMS Premiums and deposits with respect to universal life policies and annuity and other investment-type contracts are reported as premium revenues; whereas, under GAAP, such premiums and deposits are treated as liabilities and policy charges represent revenues. S-5 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED INCOME TAXES Deferred income taxes are not provided for differences between financial statement amounts and tax bases of assets and liabilities. POLICYHOLDER DIVIDENDS Policyholder dividends are recognized when declared rather than over the term of the related policies. Other significant accounting practices are as follows: INVESTMENTS The discount or premium on bonds is amortized using the interest method. For mortgage-backed bonds, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect ac- tual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Short-term investments include investments with maturities of less than one year at the date of acquisition. The carrying amounts for these investments approximate their fair values. Preferred stocks are reported at cost or amortized cost. Common stocks are reported at market value as determined by the Securities Valuation Office of the NAIC and the related unrealized gains (losses) are reported in unassigned surplus without adjustment for federal income taxes. Policy loans are reported at unpaid balances. The Company uses various derivative instruments as part of its overall lia- bility-asset management program for certain investments and life insurance and annuity products. The Company values all derivative instruments on a basis consistent with that of the hedged item. Upon termination, gains and losses on those instruments are included in the carrying values of the un- derlying hedged items and are amortized over the remaining lives of the hedged items as adjustments to investment income or benefits from the hedged items. Any unamortized gains or losses are recognized when the un- derlying hedged items are sold. Mortgage loans on real estate are reported at unpaid balances, less allow- ances for impairments. Real estate is reported at depreciated cost. As of June 30, 1994, the Company changed its method of accounting for reserves on impaired real estate and mortgage loans. The impaired investment is now shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves were presented as a liability, net of related tax benefits, to approximate the impact on surplus if losses were realized. Realized investment gains and losses on investments sold are determined us- ing the specific identification method. Changes in admitted asset carrying amounts of 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED BENEFIT RESERVES Certain policy reserves are calculated based on statutorily required inter- est and mortality assumptions rather than on estimated expected experience or actual account balances as would be required under GAAP. Death benefits paid, policy and contract withdrawals, and the change in policy reserves on universal life policies, annuity and other investment- type contracts are reported as benefits and settlement expenses; in the ac- companying statement of income, whereas, under GAAP, withdrawals are treated as a reduction of the policy or contract liabilities and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values. REINSURANCE Premiums, claims and policy benefits and contract liabilities are reported in the accompanying financial statements net of reinsurance amounts. For GAAP, all assets and liabilities related to reinsurance ceded contracts are reported on a gross basis. A liability for reinsurance balances has been provided for unsecured policy and contract liabilities and unearned premiums ceded to reinsurers not au- thorized by the Indiana Department of Insurance to assume such business. Changes to those amounts are credited or charged directly to unassigned surplus. Under GAAP, an allowance for amounts deemed uncollectible is es- tablished through a charge to income. Commissions on business ceded are reported as income when received rather than deferred and amortized with deferred policy acquisition costs. Certain reinsurance contracts meeting risk transfer requirements under statutory-basis accounting practices have been accounted for using tradi- tional reinsurance accounting whereas such contracts would be accounted for using deposit accounting under GAAP. POSTRETIREMENT BENEFITS For purposes of calculating the Company's postretirement benefit obliga- tion, only vested employees and current retirees are included in the valua- tion. Under GAAP, active employees not currently eligible would also be in- cluded. S-6 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED CLAIMS AND CLAIM ADJUSTMENT EXPENSES Unpaid claims and claim adjustment expenses on accident and health policies represent the estimated ultimate net cost of all reported and unreported claims incurred during the year. The Company does not discount claims and claim adjustment expense reserves. The reserves for unpaid claims and claim adjustment expenses are estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of trends in claim severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for claims and claim adjustment expenses are adequate. The estimates are con- tinually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current opera- tions. REINSURANCE CEDED AND ASSUMED Reinsurance premiums and claims and claim adjustment expenses are accounted for on bases consistent with those used in accounting for the original pol- icies issued and the terms of the reinsurance contracts. Certain business is transacted on a funds withheld basis and investment income on funds withheld are reported in net investment income. PENSION BENEFITS Costs associated with the Company's defined benefit pension plans is sys- tematically accrued during the expected period of active service of the covered employees. INCOME TAXES The Company and eligible subsidiaries have elected to file consolidated federal and state income tax returns with LNC. Pursuant to an intercompany tax sharing agreement with LNC, the Company provides for income taxes on a separate return filing basis. The tax sharing agreement also provides that the Company will receive benefit for net operating losses, capital losses and tax credits which are not usable on a separate return basis to the ex- tent such items may be utilized in the consolidated income tax returns of LNC. STOCK OPTIONS The Company recognizes compensation expense for its stock option incentive plans using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of LNC's common stock at the grant date, or other mea- surement date, over the amount an employee must pay to acquire the stock. ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS These assets and liabilities represent segregated funds administered and invested by LNC's insurance subsidiaries for the exclusive benefit of pen- sion and variable life and annuity contractholders. The fees received by the Company for administrative and contractholder maintenance services per- formed for these separate accounts are included in the Company's statements of income. 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED bonds, mortgage loans and common and preferred stocks are credited or charged directly in unassigned surplus. DATA PROCESSING EQUIPMENT Data processing equipment is reported at depreciated cost, with deprecia- tion determined on a straight-line basis over five years. GOODWILL Goodwill, which represents the excess of the ceding commission over statu- tory-basis net assets of business purchased under an assumption reinsurance agreement, is amortized on a straight-line basis over ten years. PREMIUMS Life insurance and annuity premiums are recognized as revenue when due. Ac- cident and health premiums are earned prorata over the contract term of the policies. BENEFITS Life, annuity and accident and health benefit reserves are developed by ac- tuarial methods and are determined based on published tables using statuto- rily specified interest rates and valuation methods that will provide, in the aggregate, reserves that are greater than or equal to the minimum or guaranteed policy cash values or the amounts required by the Indiana De- partment of Insurance. The Company waives deduction of deferred fractional premiums on the death of life and annuity policy insureds and returns any premium beyond the date of death, except for policies issued prior to March 1977. Surrender values on policies do not exceed the corresponding benefit reserves. Additional reserves are established when the results of cash flow testing under various interest rate scenarios indicate the need for such reserve. If net premiums exceed the gross premiums on any insurance in- force, additional reserves are established. Benefit reserves for policies underwritten on a substandard basis are determined using the multiple table reserve method. The tabular interest, tabular less actual reserve released and the tabular cost have been determined by formula or from the basic data for such items. Tabular interest funds not involving life contingencies were determined us- ing the actual interest credited to the funds plus the change in accrued interest. Liabilities related to guaranteed investment contracts and policyholder funds left on deposit with the Company generally are equal to fund balances less applicable surrender charges. S-7 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A reconciliation of the Company's net income and capital and surplus deter- mined on a statutory accounting basis with amounts determined in accordance with GAAP is as follows:
Capital and Surplus Net Income -------------------- ----------------------- Year ended December December 31 31 1996 1995 1996 1995 1994 --------- --------- ------ ------ ------- (in millions) Amounts reported on a statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9 ---------------------------- GAAP adjustments: ---------------------------- Deferred policy acquisition costs and present value of future profits 1,119.1 850.2 66.7 (63.0) 191.1 ---------------------------- Policy and contract reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6) ---------------------------- Interest maintenance reserve 76.7 116.3 (39.7) 60.9 (157.0) ---------------------------- Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3) ---------------------------- Policyholders' share of earnings and surplus on participating business (81.9) (91.9) (.3) .2 (3.0) ---------------------------- Asset valuation reserve 375.5 270.0 -- -- -- ---------------------------- Net realized gain (loss) on investments (72.0) (67.4) 78.7 30.0 47.1 ---------------------------- Adjustment to unrealized gain (loss) 825.2 1,494.0 -- -- -- ---------------------------- Nonadmitted assets, including nonadmitted investments (7.1) 57.9 -- -- -- ---------------------------- Net GAAP adjustments of subsidiary companies 156.6 131.2 29.9 34.3 48.2 ---------------------------- Other, net (99.0) (89.7) (82.6) (7.3) (58.6) ---------------------------- --------- --------- ------ ------ ------- Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1) ---------------------------- --------- --------- ------ ------ ------- Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8 ---------------------------- ========= ========= ====== ====== =======
S-8 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 2.PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's statutory-basis financial statements are prepared in accor- dance with accounting practices prescribed or permitted by the Indiana De- partment of Insurance (the "Department"). "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. "Permitted" statutory ac- counting practices encompass all accounting practices that are not pre- scribed; such practices may differ from state to state, may differ from company to company within a state and may change in the future. The NAIC currently is in the process of recodifying statutory accounting practices, the result of which is expected to constitute the only source of "pre- scribed" statutory accounting practices. Accordingly, that project, which is expected to be completed in 1998, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. In 1994, the Company received approval from the Department to change its accounting for surrender charges applicable to separate account liabilities for variable life and annuity products so that the surrender charges on these products are recorded as a liability in the separate account finan- cial statements payable to the Company's general account. In the accompany- ing financial statements, a corresponding receivable is recorded with the related income impact recorded in the accompanying statement of operations as a change in reserves or change in premium and other deposit funds. The cumulative effect of this change increased 1994 net income by $13,299,000. The Company has approval from the Department to establish valuation allow- ances on mortgage loans on real estate in accordance with GAAP, which are in excess of that prescribed by the NAIC and the Department. Prior to 1995, the Company has considered certain amounts under modified coinsurance reinsurance contracts as adjustments to premiums. As such, pol- icyholder dividends, cash surrender charges and reserve adjustments with interest thereon and commissions on reinsurance assumed are classified as premiums, rather than on expense lines, with no net effect on net income or capital and surplus. On a net-of-ceded basis for the year ended December 31, 1994, this practice resulted in increases to both revenues and expenses of approximately $600,000,000. In addition, reserve adjustments with inter- est thereon and commissions on reinsurance ceded were also classified as premiums, rather than in other revenue classifications. For the year ended December 31, 1994, this intra-revenue grouping reduced premiums by approxi- mately $50,000,000. Beginning in 1995, the Company reports modified coin- surance agreements on a gross basis. This change was made as a result of communications with the Department. This accounting change had no effect on income or surplus and prior period amounts have not been restated. S-9 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 3. INVESTMENTS The major categories of net investment income are as follows:
Year ended December 31 1996 1995 1994 ----------------------------------------- (in millions) -------------------------- Income: Bonds $1,442.2 $1,457.4 $1,266.7 -------------------------------------------------------------------------------- Preferred stocks 9.6 6.4 5.8 -------------------------------------------------------------------------------- Unaffiliated common stocks 6.5 5.2 4.4 -------------------------------------------------------------------------------- Affiliated common stocks 9.5 12.6 62.5 -------------------------------------------------------------------------------- Mortgage loans on real estate 269.3 252.0 255.2 -------------------------------------------------------------------------------- Real estate 114.4 110.0 97.4 -------------------------------------------------------------------------------- Policy loans 35.0 32.1 29.7 -------------------------------------------------------------------------------- Other investments 22.4 62.6 121.3 -------------------------------------------------------------------------------- Cash and short-term investments 48.9 53.2 43.3 --------------------------------------------------------------- -------- -------- -------- Total investment income 1,957.8 1,991.5 1,886.3 ----------------------------------------------------------------------------------- Expenses: Depreciation 25.0 25.9 21.9 -------------------------------------------------------------------------------- Other 176.5 193.4 257.6 --------------------------------------------------------------- -------- -------- -------- Total investment expenses 201.5 219.3 279.5 ---------------------------------------------------------------- -------- -------- -------- Net investment income $1,756.3 $1,772.2 $1,606.8 ---------------------------------------------------------------- ======== ======== ========
Nonadmitted accrued investment income at December 31, 1996 and 1995 amounted to $2,500,000 and $11,500,000, respective- ly, consisting principally of interest on bonds in default and mortgage loans. The cost or amortized cost, gross unrealized gains and losses and the fair value of investments in bonds are summa- rized as follows:
Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------ (in millions) ----------------------------------------- At December 31, 1996: Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0 -------------------------------------------------------------- U.S. government 1,088.7 43.2 18.0 1,113.9 -------------------------------------------------------------- Foreign government 1,234.0 105.1 1.4 1,337.7 -------------------------------------------------------------- Mortgage-backed 4,478.4 183.3 27.4 4,634.3 -------------------------------------------------------------- State and municipal 40.4 .1 -- 40.5 -------------------- --------- -------- ------ --------- $19,389.6 $ 918.2 $113.4 $20,194.4 ========= ======== ====== ========= At December 31, 1995: Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3 -------------------------------------------------------------- U.S. government 546.4 82.2 -- 628.6 -------------------------------------------------------------- Foreign government 908.0 68.0 .6 975.4 -------------------------------------------------------------- Mortgage-backed 4,628.3 283.2 11.2 4,900.3 -------------------------------------------------------------- State and municipal 5.0 .1 -- 5.1 -------------------- --------- -------- ------ --------- $17,729.7 $1,508.2 $ 53.2 $19,184.7 ========= ======== ====== =========
S-10 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 3. INVESTMENTS CONTINUED Fair values for bonds are based on quoted market prices, where available. For bonds not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are esti- mated by discounting expected future cash flows using a cur- rent market rate applicable to the coupon rate, credit qual- ity and maturity of the investments. A summary of the cost or amortized cost and fair value of investments in bonds at December 31, 1996, by contractual maturity, is as follows:
Cost or Amortized Fair Cost Value ------------------------------ (in millions) ------------------- Maturity: In 1997 $ 358.0 $ 360.1 ---------------------------------------------------------------------------------------------- In 1998-2001 3,809.0 3,912.3 ---------------------------------------------------------------------------------------------- In 2002-2006 4,760.9 4,917.3 ---------------------------------------------------------------------------------------------- After 2006 5,983.3 6,370.4 ---------------------------------------------------------------------------------------------- Mortgage-backed securities 4,478.4 4,634.3 --------------------------------------------------------------------------- --------- --------- Total $19,389.6 $20,194.4 --------------------------------------------------------------------------- ========= =========
The expected maturities may differ from the contractual ma- turities in the foregoing table because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1996, the Company did not have a material concentration of financial instruments in a single investee, industry or geographic location. Proceeds from sales of investments in bonds during 1996, 1995 and 1994 were $10,996,900,000, $12,234,100,000 and $9,668,300,000, respectively. Gross gains during 1996, 1995 and 1994 of $169,700,000, $225,600,000 and $62,600,000, re- spectively, and gross losses of $177,000,000, $83,100,000 and $286,800,000, respectively, were realized on those sales. At December 31, 1996 and 1995, investments in bonds, with an admitted asset value of $70,700,000 and $60,700,000, respec- tively, were on deposit with state insurance departments to satisfy regulatory requirements. The cost or amortized cost, gross unrealized gains and losses and the fair value of investments in unaffiliated common stocks and preferred stocks are as follows:
Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------- (in millions) ------------------------------- At December 31, 1996: Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5 ---------------------------------------------------------- Unaffiliated common stocks 289.9 84.6 16.2 358.3 ---------------------------------------------------------- At December 31, 1995: Preferred stocks 89.9 13.9 .2 103.6 ---------------------------------------------------------- Unaffiliated common stocks 438.0 110.0 12.5 535.5 ----------------------------------------------------------
S-11 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 3. INVESTMENTS CONTINUED The carrying value of affiliated common stocks, representing their statutory-basis net equity, was $241,500,000 and $193,000,000 at December 31, 1996 and 1995, respectively. The cost basis of investments in subsidiaries as of December 31, 1996 and 1995 was $194,000,000 and $123,000,000, respec- tively. During 1996, the maximum and minimum lending rates for mort- gage loans were 10.5% and 6.0%, respectively. At the issu- ance of a loan, the percentage of loan to value on any one loan does not exceed 75%. At December 31, 1996, the Company did not hold any mortgages with interest overdue beyond one year. At December 31, 1996, the Company's investments in mortgage loans were subject to $59,700,000 of prior liens. All properties covered by mortgage loans have fire insurance at least equal to the excess of the loan over the maximum loan that would be allowed on the land without the building. 4.FEDERAL INCOME TAXES The effective federal income tax rate for financial report- ing purposes differs from the prevailing statutory tax rate principally due to tax-exempt investment income, dividends- received tax deductions, differences in policy acquisition costs and policy and contract liabilities for tax return and financial statement purposes. Federal income taxes incurred of $83,600,000, $103,700,000 and $52,800,000 in 1996, 1995 and 1994, respectively, would be subject to recovery in the event that the Company incurs net operating losses within three years of the years for which such taxes were paid. Prior to 1984, a portion of the Company's current income was not subject to current income tax, but was accumulated for income tax purposes in a memorandum account designated as "policyholders' surplus." The Company's balance in the "pol- icyholders' surplus" account at December 31, 1983 of $187,000,000 was "frozen" by the Tax Reform Act of 1984 and, accordingly, there have been no additions to the accounts after that date. That portion of current income on which in- come taxes have been paid will continue to be accumulated in a memorandum account designated as "shareholder's surplus," and is available for dividends to the shareholder without additional payment of tax by the Company. The December 31, 1996 memorandum account balance for "shareholder's surplus" was $1,606,000,000. Should dividends to the shareholder ex- ceed its respective "shareholder's surplus," amounts would need to be transferred from the "policyholders' surplus" and would be subject to federal income tax at that time. Under existing or foreseeable circumstances, the Company neither expects nor intends that distributions will be made that will result in any such tax. 5.SUPPLEMENTAL FINANCIAL DATA The balance sheet caption, "Other Admitted Assets," includes amounts recoverable from other insurers for claims paid by the Company, and the balance sheet caption, "Future Policy Benefits and Claims," has been reduced for insurance ceded as follows:
December 31 -------------------------- 1996 1995 1994 ---------------------------------------- (in millions) ---------------------------------------- Insurance ceded $1,154.5 $1,634.0 $1,721.1 Amounts recoverable from other insurers 16.0 4.4 4.8
S-12 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 5.SUPPLEMENTAL FINANCIAL DATA CONTINUED Reinsurance transactions included in the income statement caption, "Premiums and Deposits," are as follows:
Year ended December 31 1996 1995 1994 -- (in millions) -------------------- Insurance assumed $241.3 $667.7 $607.3 ------------------------------- Insurance ceded 193.3 453.1 583.8 ------------------------------- ------ ------ ------ Net amount included in premiums $ 48.0 $214.6 $ 23.5 ------------------------------- ====== ====== ======
The income statement caption, "Benefits and Settlement Ex- penses," is net of reinsurance recoveries of $787,886,200, $1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994, respectively. Deferred and uncollected life insurance premiums and annuity considerations included in the balance sheet caption, "Pre- miums and Fees in Course of Collection," are as follows:
December 31, 1996 ----------------------- Net of Gross Loading Loading (in millions) ----------------------- Ordinary new business $ 3.9 $1.9 $ 2.0 --------------------- Ordinary renewal 35.1 3.0 32.1 --------------------- Group life 9.4 (.1) 9.5 --------------------- Group annuity -- -- -- --------------------- ------ ---- ------ $ 48.4 $4.8 $ 43.6 ====== ==== ====== December 31, 1995 ----------------------- Net of Gross Loading Loading (in millions) ----------------------- Ordinary new business $ 2.5 $1.1 $ 1.4 --------------------- Ordinary renewal (19.1) 2.8 (21.9) --------------------- Group life 15.8 -- 15.8 --------------------- Group annuity .2 -- .2 --------------------- ------ ---- ------ $ (.6) $3.9 $ (4.5) ====== ==== ======
The Company has entered into non-exclusive managing general agent agreements with International Benefit Services Corp., HRM Claim Management, Inc. and Pediatrics Insurance Consul- tants, Inc. to write group life and health business. Direct premiums written amounted to $26,200,000 $3,800,000 and $8,600,000 in 1996 and $33,100,000, $10,600,000 and $8,800,000 in 1995, respectively. During 1996, LNC Adminis- trative Services entered into a similar agreement with the Company with direct premiums written amounting to $6,200,000. Authority granted by the managing general agents agreements include underwriting, claims adjustment and claims payment services. S-13 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 6.ANNUITY RESERVES At December 31, 1996, the Company's annuity reserves and de- posit fund liabilities, including separate accounts, that are subject to discretionary withdrawal with adjustment, subject to discretionary withdrawal without adjustment and not subject to discretionary withdrawal provisions are sum- marized as follows:
Amount Percent ---------------- (in millions) ------------------- Subject to discretionary withdrawal with adjustment: With market value adjustment $ 2,971.8 6.0% ------------------------------------------------------ At book value, less surrender charge 5,228.6 12.0 ------------------------------------------------------ At market value 22,703.4 51.0 ------------------------------------------------------ ---------- ------ 30,903.8 69.0 Subject to discretionary withdrawal without adjustment at book value with minimal or no charge or adjustment 10,986.4 25.0 ------------------------------------------------------ Not subject to discretionary withdrawal 2,601.9 6.0 ------------------------------------------------------ ---------- ------ Total annuity reserves and deposit fund 44,492.1 liabilities--before reinsurance 100.0% ------------------------------------------------------ ====== Less reinsurance 1,848.8 ------------------------------------------------------ ---------- Net annuity reserves and deposit fund liabilities, including separate accounts $42,643.3 ------------------------------------------------------ ==========
7.CAPITAL AND SURPLUS Life insurance companies are subject to certain Risk-Based Capital ("RBC") requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus main- tained by a life insurance company is to be determined based on the various risk factors related to it. At December 31, 1996, the Company exceeds the RBC requirements. The payment of dividends by the Company is limited and can- not be made except from earned profits. The maximum amount of dividends that may be paid by life insurance companies without prior approval of the Indiana Insurance Commissioner is subject to restrictions relating to statutory surplus and net gain from operations. In 1997, the Company can pay divi- dends of $281,100,000 without prior approval of the Indiana Insurance Commissioner. 8.EMPLOYEE BENEFIT PLANS Pension plans LNC maintains funded defined benefit pension plans for most of its employees and, prior to January 1, 1995, full-time agents. The benefits for employees are based on total years of service and the highest 60 months of compensation during the last 10 years of employment. The benefits for agents were based on a percentage of each agent's yearly earnings. The plans are funded by contributions to tax-exempt trusts. The Company's funding policy is consistent with the funding requirements of Federal laws and regulations. Contributions are intended to provide not only the benefits attributed to service to date, but also those expected to be earned in the future. Plan assets consist principally of listed equity se- curities, corporate obligations and government bonds. All benefits applicable to the funded defined benefit plan for agents were frozen as of December 31, 1994. The curtail- ment of this plan did not have a significant effect on net pension cost for 1994. Effective January 1, 1995, pension benefits for agents have been provided by a new defined S-14 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 8.EMPLOYEE BENEFIT PLANS CONTINUED contribution plan. Contributions to this plan will be based on 2.3% of an agent's earnings up to the social security wage base and 4.6% of any excess. LNC also administers two types of unfunded, non-qualified, defined benefit plans for certain employees and agents. A supplemental retirement plan provides employees and agents defined benefit pension benefits in excess of limits imposed by Federal tax law. A salary continuation plan provides cer- tain officers of the Company defined pension benefits based on years of service and final monthly salary upon death or retirement. The status of the funded defined benefit pension plans and the amounts recognized in the balance sheets are as follows:
December 31 1996 ------- 1995 (in millions) ---------------- Actuarial present value of benefit obligation: Vested benefits $(156.9) $(146.1) ------------------------------------------------------------------------- Nonvested benefits (6.0) (7.7) ------------------------------------------------------------------------- ------- ------- Accumulated benefit obligation (162.9) (153.8) ------------------------------------------------------------------------- Effect of projected future compensation increases (27.9) (28.5) ------------------------------------------------------------------------- ------- ------- Projected benefit obligation (190.8) (182.3) ------------------------------------------------------------------------- Plan assets at fair value 186.1 173.2 ------------------------------------------------------------------------- ------- ------- Projected benefit obligation in excess of plan assets (4.7) (9.1) ------------------------------------------------------------------------- Unrecognized net loss 4.9 9.3 ------------------------------------------------------------------------- Unrecognized prior service cost 1.4 1.5 ------------------------------------------------------------------------- ------- ------- Prepaid pension costs included in other liabilities $ 1.6 $ 1.7 ------------------------------------------------------------------------- ======= =======
The status of the unfunded defined benefit pension plans and the amounts recognized in the balance sheets are as follows:
December 31 1996 ----- 1995 (in millions) ------------ Actuarial present value of benefit obligation: Vested benefits $(6.6) $(6.4) ------------------------------------------------------------------- Nonvested benefits (.9) (1.1) ------------------------------------------------------------------- ----- ----- Accumulated benefit obligation (7.5) (7.5) ------------------------------------------------------------------- Effect of projected future compensation increases (1.1) (1.7) ------------------------------------------------------------------- ----- ----- Projected benefit obligation (8.6) (9.2) ------------------------------------------------------------------- Unrecognized net loss (gain) (.1) .9 ------------------------------------------------------------------- Unrecognized prior service cost .2 .3 ------------------------------------------------------------------- ----- ----- Accrued pension costs included in other liabilities $(8.5) $(8.0) ------------------------------------------------------------------- ===== =====
S-15 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 8.EMPLOYEE BENEFIT PLANS CONTINUED The determination of the projected benefit obligation for the defined benefit plans was based on the following assump- tions:
December 31 1996 1995 1994 --------------------------- Weighted-average discount rate 7.0% 7.0% 8.0% ---------------------------------------------------------------------- Rate of increase in compensation: ---------------------------------------------------------------------- Salary continuation plan 5.5 6.0 6.5 ---------------------------------------------------------------------- All other plans 4.5 5.0 5.0 ---------------------------------------------------------------------- Expected long-term rate of return on plan assets 9.0 9.0 9.0 ---------------------------------------------------------------------- The components of net pension cost for the defined benefit pension plans are as follows: Year ended December 31 1996 1995 1994 --------------------------- Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9 ------------------------------------------------------------------------ Interest cost on projected benefit obligation 12.9 11.9 11.6 ------------------------------------------------------------------------ Actual return on plan assets (17.5) (32.0) 4.2 ------------------------------------------------------------------------ Net amortization (deferral) 3.1 20.3 (16.7) ------------------------------------------------------------------------ ----- ----- ----- Net pension cost $ 3.7 $ 4.3 $ 7.0 ------------------------------------------------------------------------ ===== ===== =====
401K PLAN LNC and the Company sponsor contributory defined contribu- tion plans for eligible employees and agents. The Company's contributions to the plans are equal to each participant's pre-tax contribution, not to exceed 6% of base pay, multi- plied by a percentage ranging from 25% to 150%, which varies according to certain incentive criteria as determined by LNC's Board of Directors. Expense for these plans amounted to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and 1994, respectively. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS LNC sponsors unfunded defined benefit plans that provide postretirement medical and life insurance benefits to full- time employees and agents who, depending on the plan, have worked for the Company 10 to 15 years and attained age 55 to 60. Medical benefits are also available to spouses and other dependents of employees and agents. For medical benefits, limited contributions are required from individuals retired prior to November 1, 1988; contributions for later retirees, which can be adjusted annually, are based on such items as years of service at retirement and age at retirement. The life insurance benefits are noncontributory, although par- ticipants can elect supplemental contributory benefits. The status of the postretirement medical and life insur- ance benefit plans and the amounts recognized in the bal- ance sheets are as follows:
December 31 1996 1995 -------------------------- (in millions) -------------- Accumulated postretirement benefit obligation: Retirees $(32.4) $(37.9) ------------------------------------------------------------------------ Fully eligible active plan participants (8.2) (8.7) ------------------------------------------------------------------------ ------ ------ Accumulated postretirement benefit obligation (40.6) (46.6) ------------------------------------------------------------------------ Unrecognized net loss (gain) (7.0) .8 ------------------------------------------------------------------------ ------ ------ Accrued plan cost included in other liabilities $(47.6) $(45.8) ------------------------------------------------------------------------ ====== ======
S-16 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 8.EMPLOYEE BENEFIT PLANS CONTINUED The components of periodic postretirement benefit cost are as follows:
Year ended December 31 1996 1995 1994 --------------------------------- (in millions) ---------------- Service cost $1.3 $1.1 $1.4 ------------------------------------------------------------------------ Interest cost 2.7 3.0 3.1 ------------------------------------------------------------------------ Amortized cost (credit) (.5) (.4) .1 ------------------------------------------------------------------------ ---- ---- ---- Net periodic postretirement benefit cost $3.5 $3.7 $4.6 ------------------------------------------------------------------------ ==== ==== ====
The calculation of the accumulated postretirement benefit obligation assumes a weighted-average annual rate of in- crease in the per capita cost of covered benefits (i.e., health care cost trend rate) of 8.5% for 1997. It further assumes the rate will gradually decrease to 5.0% by 2005 and remain at that level. The health care cost trend rate as- sumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 and 1995 by $1,900,000 and $2,100,000, respective- ly. The aggregate of the estimated service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1996 would increase by $184,000. The calculation assumes a long-term rate of increase in com- pensation of 4.5% and 5.0% at December 31, 1996 and 1995, respectively. The weighted-average discount rate used in de- termining the accumulated postretirement benefit obligation was 7.0% for both December 31, 1996 and 1995. 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES DISABILITY INCOME POLICIES The liability for disability income claims net of the related asset for amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net liability of $572,000,000 and $503,800,000, respectively. This liability is based on the assumption that the recent experience will continue in the fu- ture. If incidence levels or claim termination rates vary significantly from these assumptions, adjustments to reserves may be required in the fu- ture. Accordingly, this liability may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the financial position of the Company. The Company con- tinually reviews and updates the level of these reserves. During the fourth quarter of 1995, the Company completed an in-depth review of the experience of its disability income business. As a result of this study, and based on the assumption that recent experience will continue in the future, net income decreased by $15,200,000 as a result of strengthen- ing the disability income reserve. MARKETING AND COMPLIANCE ISSUES Regulators continue to focus on market conduct and compliance issues. Under certain circumstances companies operating in the insurance and financial services markets have been held responsible for providing incomplete or misleading sales materials and for replacing existing policies with poli- cies that were less advantageous to the policyholder. The Company's manage- ment continues to monitor the Company's sales materials and compliance pro- cedures and is making an extensive effort to minimize any potential liabil- ity. However, due to the uncertainty surrounding such matters, it is not possible to provide a meaningful estimate of the range of potential out- comes at this time. GROUP PENSION ANNUITIES The liabilities for guaranteed interest and group pension annuity con- tracts, which are no longer being sold by the Company, are supported by a single portfolio of assets that attempts to match the duration of these li- abilities. Due to the very long-term nature of group pension annuities and the resulting inability to exactly match cash flows, a risk exists that fu- ture cash flows from investments will not be reinvested at rates as high as currently earned by the portfolio. Accordingly, these liabilities may prove to be deficient or excessive. However, it is management's opinion that such future development will S-17 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED INSURANCE CEDED AND ASSUMED The Company cedes insurance to other companies, including certain affili- ates. The portion of risks exceeding the Company's retention limit is rein- sured with other insurers. Industry regulations prescribe the maximum cov- erage that the Company can retain on an individual insured. As of December 31, 1996, the Company's maximum retention on a single insured was $3,000,000. To cover products other than life insurance, the Company ac- quires other insurance coverages with retentions and limits that management believes are appropriate for the circumstances. The accompanying financial statements reflect premiums and benefits and settlement expenses, net of insurance ceded. The Company remains liable if its reinsurers are unable to meet their contractual obligations under the applicable reinsurance agree- ments. The Company assumes insurance from other companies, including certain af- filiates. At December 31, 1996, the Company has provided $17,200,000 of statutory surplus relief to other insurance companies under reinsurance transactions. Generally, such amounts are offset by corresponding receiv- ables from the ceding company, which are secured by future profits on the reinsured business. However, the Company is subject to the risk that the ceding company may become insolvent and the right of offset would not be permitted. VULNERABILITY FROM CONCENTRATIONS At December 31, 1996, the Company did not have a concentration of: 1) busi- ness transactions with a particular customer, lender or distributor; 2) revenues from a particular product or service; 3) sources of supply of la- bor or services used in the business; or 4) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to the Company's financial condition. 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED not materially affect the financial position of the Company. LEASES The Company leases its home office properties. The agreements provide for a 25 year lease period with options to renew for six additional terms of five years each. The agreements also provide the Company with the right of first refusal to purchase the properties during the term of the lease, including renewal periods, at a price as defined in the agreements. In addition, the Company has the option to purchase the leased properties at fair value as defined in the agreements on the last day of the initial 25 year lease pe- riod ending in 2009 or on the last day of any of the renewal periods. Total rental expense on operating leases in 1996, 1995 and 1994 was $26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum rental commitments are as follows (in millions): 1997 $ 17.5 1998 17.1 1999 17.4 2000 16.9 2001 17.2 Thereafter 151.6 ------ $237.7 ======
S-18 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED OTHER CONTINGENCY MATTERS The Company is involved in various pending or threatened legal proceedings 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 proceed- ings ultimately will be resolved without materially affecting the financial position or results of operations of the Company. The number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabili- tated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. The Company has accrued for expected assessments net of estimated future premium tax deductions. REINSURANCE The regulatory required liability for unsecured reserves ceded to unautho- rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and 1995, respectively. GUARANTEES The Company has guarantees with off-balance-sheet risks whose contractual amounts represent credit exposure. Outstanding guarantees with off-balance- sheet risks, shown in notional or contract amounts, are as follows:
Notional or Contract Amounts ----------------- December 31 ----------------- 1996 1995 -------------------- (in millions) ----------------- Mortgage loan pass-through certificates $ 50.3 $ 63.6 Real estate partnerships .5 3.3 -------- -------- $ 50.8 $ 66.9 ======== ========
The Company has invested in real estate partnerships that use conventional mortgage loans. In some cases, the terms of these arrangements involve guarantees by each of the partners to indemnify the mortgagor in the event a partner is unable to pay its principal and interest payments. In addi- tion, the Company has sold commercial mortgage loans through grantor trusts which issued pass-through certificates. The Company has agreed to repur- chase any mortgage loans which remain delinquent for 90 days at a repur- chase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of default the impact would not be material to the Company. Accordingly, both the carrying value and fair value of these guarantees is zero at December 31, 1996 and 1995. S-19 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED DERIVATIVES The Company has derivatives with off-balance-sheet risks whose notional or contract amounts exceed the credit ex- posure. The Company has entered into derivative transac- tions to reduce its exposure to fluctuations in interest rates, the widening of bond yield spreads over comparable maturity U.S. Government obligations and foreign exchange risks. In addition, the Company is subject to the risks associated with changes in the value of its derivatives; however, such changes in the value generally are offset by changes in the value of the items being hedged by such contracts. Outstanding derivatives with off-balance-sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair values, are as follows:
Assets (Liabilities) ------------------------------ Notional or Carrying Fair Carrying Fair contract amounts value value value value --------------------------------------------- December 31 December 31 December 31 1996 1995 1996 1996 1995 1995 --------------------------------------------- (in millions) ------------------------------------------------ Interest rate derivatives: Interest rate cap agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3 Spread-lock agreements -- 600.0 -- -- (.9) (.9) Swaptions 672.0 -- 11.0 10.6 -- -- Financial futures contracts 147.7 -- (2.4) (2.4) -- -- Interest rate swaps -- 5.0 -- -- .2 .2 -------- -------- ----- ----- ----- ---- 6,319.7 5,715.0 29.4 16.4 22.0 4.6 Foreign currency derivatives: Foreign exchange forward contracts 251.5 15.7 .2 (.2) (.6) (.6) Foreign currency options 43.9 99.2 .6 .4 1.9 1.4 Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4 -------- -------- ----- ----- ----- ---- 310.4 129.9 .8 (1.9) 1.7 1.2 -------- -------- ----- ----- ----- ---- $6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8 ======== ======== ===== ===== ===== ====
S-20 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED A reconciliation and discussion of the notional or contract amounts for the significant programs using derivative agree- ments and contracts at December 31 is as follows:
Interest Rate Caps Spread Locks Swaptions ---------------------------------------------------------------------- 1996 1995 1996 1995 1996 1995 ---------------------------------------------------------------------- (in millions) ---------------------------------------------------------------- Balance at beginning of year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ -- New contracts 390.0 710.0 15.0 800.0 672.0 -- Terminations and -- -- (615.0) (1,500.0) -- -- maturities --------- --------- --------- --------- --------- --------- Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ -- ========= ========= ========= ========= ========= ========= Financial Futures ------------------------------------------ Contracts Options Interest Rate Swaps 1996 1995 1996 1995 1996 1995 ---------------------------------------------------------------------- Balance at beginning of year $ -- $ 382.5 $ -- $ -- $ 5.0 $ -- New contracts 7,918.8 810.5 -- 181.6 -- -- Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) -- maturities --------- --------- --------- --------- --------- --------- Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ -- ========= ========= ========= ========= ========= ========= Foreign Currency Derivatives ---------------------------------------------------------------------- Foreign Exchange Foreign Currency Foreign Forward Contracts Options Currency Swaps 1996 1995 1996 1995 1996 1995 ---------------------------------------------------------------------- (in millions) ---------------------------------------------------------------- Balance at beginning of year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ -- New contracts 406.9 131.2 1,168.8 356.6 -- 15.0 Terminations and (171.1) (136.7) (1,224.1) (257.4) -- -- maturities --------- --------- --------- --------- --------- --------- Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0 ========= ========= ========= ========= ========= =========
S-21 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED INTEREST RATE CAPS The interest rate cap agreements, which expire in 1997 through 2003, enti- tle the Company to receive payments from the counterparties on specified future reset dates, contingent on future interest rates. For each cap, the amount of such quarterly payments, if any, is determined by the excess of a market interest rate over a specified cap rate multiplied by the notional amount divided by four. The purpose of the Company's interest rate cap agreement program is to protect its annuity line of business from the ef- fect of fluctuating interest rates. The premium paid for the interest rate caps is included in other assets ($20,800,000 as of December 31, 1996) and is being amortized over the terms of the agreements. This amortization is included in net investment income. SWAPTIONS Swaptions, which expire in 2002, entitle the Company to receive settlement payments from the counterparties on specified expiration dates, contingent on future interest rates. For each swaption, the amount of such settlement payments, if any, is determined by the present value of the difference be- tween the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. The purpose of the Company's swaption program is to protect the assets supporting its annuity line of business from the effect of fluctuating interest rates. The premium paid for the swaptions is in- cluded in other assets ($11,000,000 as of December 31, 1996) and is being amortized over the terms of the agreements. This amortization is included in net investment income. SPREAD LOCKS Spread-lock agreements provide for a lump sum payment to or by the Company, depending on whether the spread between the swap rate and a specified U.S. Treasury note is larger or smaller than a contractually specified spread. Cash payments are based on the product of the notional amount, the spread between the swap rate and the yield of an equivalent maturity U.S. Treasury security and the price sensitivity of the swap at that time. It is ex- pressed in dollars-per-basis point. The purpose of the Company's spread- lock program is to protect a portion of its fixed maturity securities against widening of spreads. FINANCIAL FUTURES The Company uses exchange-traded financial futures contracts and options on those financial futures to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Op- tions on financial futures give the Company the right, but not the obliga- tion, to assume a long or short position in the underlying futures at a specified price during a specified time period. FOREIGN CURRENCY DERIVATIVES The Company uses a combination of foreign exchange forward contracts, for- eign currency options and foreign currency swaps, all of which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. The foreign currency forward contracts obligate the Company to deliver a specified amount of currency at a future date at a specified exchange rate. Foreign currency options give the Company the right, but not the obligation, to buy or sell a foreign currency at a specific exchange rate during a specified time period. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries pursuant to an agreement to re- exchange the two currencies at the same rate of exchange at a specified fu- ture date. ADDITIONAL DERIVATIVE INFORMATION Expenses for the agreements and contracts described above amounted to $6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses of $37,600,000 as of December 31, 1996, were the result of: 1) terminated and expired spread-lock agreements; and 2) financial futures contracts. These losses are included with the related fixed maturity securities to which the hedge applied and are being amortized over the life of such secu- rities. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, foreign exchange forward contracts, for- eign currency options and foreign currency swaps. However, the Company does not anticipate nonperformance by any of these counterparties. The credit risk associated with such agreements is minimized by purchasing such agree- ments from financial institutions with long-standing, superior performance records. The amount of such exposure is essentially the net replacement cost or market value for such agreements with each counterparty if the net market value is in the Company's favor. At December 31, 1996, the exposure was $17,500,000. 10.FAIR VALUE OF FINANCIAL INSTRUMENTS The following discussion outlines the methodologies and assumptions used to determine the estimated fair values of the Company's financial instruments. Considerable judgment is required to develop these fair values. Ac- S-22 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 10.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED cordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. BONDS Fair values of bonds are based on quoted market prices, where available. For bonds not actively traded, fair values are estimated using values ob- tained from independent pricing services. In the case of private place- ments, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality and maturity of the investments. The fair values of affiliated common stocks are based on quoted market prices. MORTGAGE LOANS ON REAL ESTATE The estimated fair value of mortgage loans on real estate was established using a discounted cash flow method based on credit rating, maturity and future income when compared to the expected yield for mortgages having sim- ilar characteristics. The rating for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service cov- erage, loan to value, caliber of tenancy, borrower and payment record. Fair values for impaired mortgage loan are measured based on: 1) the present value of expected future cash flows discounted at the loan's effective in- terest rate; 2) the loan's market price; or 3) the fair value of the col- lateral if the loan is collateral dependent. POLICY LOANS The estimated fair value of investments in policy loans was calculated on a composite discounted cash flow basis using Treasury interest rates consis- tent with the maturity durations assumed. These durations were based on historical experience. OTHER INVESTMENTS AND CASH AND INVESTED CASH The carrying value for assets classified as other investments and cash and invested cash in the accompanying balance sheet approximates their fair value. INVESTMENT-TYPE INSURANCE CONTRACTS The balance sheet captions, "Future Policy Benefits and Claims" and "Other Policyholder Funds," include investment-type insurance contracts (i.e., de- posit contracts and guaranteed interest contracts). The fair values for the deposit contracts and certain guaranteed interest contracts are based on their approximate surrender values. The fair values for the remaining guar- anteed interest and similar contracts are based on their approximate sur- render values. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations. These calculations are based on interest rates currently offered on similar contracts with maturities consistent with those remaining for the contracts being valued. The remainder of the balance sheet captions "Future Policy Benefits and Claims" and "Other Policyholder Funds," that do not fit the definition of "investment type insurance contracts" are considered insurance contracts. Fair value disclosures are not required for these insurance contracts and have not been determined by the Company. It is the Company's position that the disclosure of the fair value of these insurance contracts is important because readers of these financial statements could draw inappropriate con- clusions about the Company's capital and surplus determined on a fair value basis. It could be misleading if only the fair value of assets and liabili- ties defined as financial instruments are disclosed. The Company and other companies in the insurance industry are monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insur- ance contract liabilities. SHORT-TERM DEBT Fair values of short-term debt approximates carrying values. GUARANTEES The Company's guarantees include guarantees related to real estate partner- ships and mortgage loan pass-through certificates. Based on historical per- formance where repurchases have been negligible and the current status, which indicates none of the loans are delinquent, the fair value liability for the guarantees related to the mortgage loan pass-through certificates is insignificant. DERIVATIVES The Company's derivatives include interest rate cap agreements, swaptions, spread-lock agreements, foreign currency exchange contracts, financial futures contracts, options on financial futures, interest rate swaps, call options, foreign currency options and foreign currency swaps. Fair values for derivative contracts are based on current settlement val- ues. These values are based on: 1) quoted market prices for the foreign currency exchange contracts, financial future contracts, and options on fi- nancial futures; and 2) brokerage quotes that utilized pricing models or formulas using current assumptions for all other swaps and agreements. S-23 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 10.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED INVESTMENT COMMITMENTS Fair values for commitments to make investment in fixed maturity securities (primarily private placements), mortgage loans on real estate and real es- tate are based on the difference between the value of the committed invest- ments as of the date of the accompanying balance sheets and the commitment date. These estimates would take into account changes in interest rates, the counterparties' credit standing and the remaining terms of the commit- ments. S-24 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 10.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED The carrying values and estimated fair values of the Company's financial instruments are as follows:
December 31 ---------------------------------------------- 1996 1995 ---------------------- ---------------------- Carrying Fair Carrying Fair Assets (Liabilities) value value value value ---------------------------------------- ---------- ---------- ---------- ---------- (in millions) ---------------------------------------------- Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7 ---------------------------------------- Preferred stock 239.7 248.5 89.9 103.6 ---------------------------------------- Unaffiliated common stock 358.3 358.3 535.5 535.5 ---------------------------------------- Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9 ---------------------------------------- Policy loans 626.5 612.7 515.8 504.0 ---------------------------------------- Other investments 282.7 282.7 248.0 248.0 ---------------------------------------- Cash and short-term investments 759.2 759.2 780.9 780.9 ---------------------------------------- Investment type insurance contracts: ---------------------------------------- Deposit contracts and certain guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0) ---------------------------------------- Remaining guaranteed interest and similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4) ---------------------------------------- Short-term debt (100.0) (100.0) (63.0) (63.0) ---------------------------------------- Derivatives 26.5 13.8 23.7 5.8 ---------------------------------------- Investment commitments -- (.6) -- (.8) ----------------------------------------
11.ACQUISITIONS AND SALES OF SUBSIDIARIES The Company sold its 100% interest in two subsidiaries--Se- curity Connecticut Life Insurance Company ("SCL") and Em- ployers Health Insurance Company ("EHI"). SCL was sold through a public offering of stock in January 1994. This transaction resulted in a realized gain of $90,000,000 and a direct increase in surplus of $24,000,000. Net of expenses, the Company received cash of $172,000,000 and notes of $65,000,000. EHI was also sold through public offerings in March and April 1994. LNC purchased 29% of the stock of the new pub- licly traded holding company from LNL. Prior to the sale, the Company received a $50,000,000 dividend in the form of a note. The sale transaction resulted in a realized gain of $133,000,000 and a direct reduction in surplus of $21,000,000 due to release of unrealized gain amounts, for a net surplus increase of $112,000,000. Net of expenses, the Company received cash of $348,000,000. In October 1996, the Company and its wholly owned subsidiary purchased a block of group tax qualified annuity business from UNUM Corporation. The transaction was completed in the form of a reinsurance transaction, which resulted in a ced- ing commission of $71,800,000. The ceding commission has been recorded as admissible goodwill of $62,300,000, which is to be amortized on a straight-line basis over 10 years. The Company's subsidiary was required by the New York De- partment of Insurance to expense its portion of the ceding commission in 1996. Policy liabilities and related accruals of the Company and its wholly owned subsidiary increased by $3,200,000,000 as a result of this transaction. In its previously-filed 1996 NAIC Annual Statement, the Com- pany recorded the ceding commission as a nonadmitted asset, which was charged directly to unassigned surplus. According- ly, unassigned surplus was understated at December 31, 1996 by $62,300,000, net of amortization in 1996. In 1997, man- agement will correct its opening balance of unassigned sur- plus in its NAIC Annual Statement. S-25 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED The balance sheets include reinsurance balances with affiliated companies as follows:
December 31 1996 1995 -------- -------- (in millions) ----------------- Future policy benefits and claims assumed $ 312.7 $ 344.8 Future policy benefits and claims ceded 891.8 1,344.5 Amounts recoverable on paid and unpaid losses 31.2 65.9 Reinsurance payable on paid losses 2.7 5.5 Funds held under reinsurance treaties--net liability 1,062.4 712.3
Substantially all reinsurance ceded to affiliated companies is with unau- thorized companies. To take a reserve credit for such reinsurance, the Com- pany holds assets from the reinsurer, including funds held under reinsur- ance treaties, and is the beneficiary on letters of credit aggregating $314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and $241,400,000, respectively, of these letters of credit. At December 31, 1996, the Company has a receivable (included in the foregoing amounts) from affiliated insurance companies in the amount of $135,700,000 for statutory surplus relief received under financial reinsurance ceded agreements. 13. SEPARATE ACCOUNTS Separate account assets and liabilities reported in the accompanying bal- ance sheets represent funds that are separately administered, principally for annuity contracts, and for which the contractholder, rather than the Company, bears the investment risk. Separate account contractholders have no claim against the assets of the general account of the Company. Separate account assets are reported at fair value and consist primarily of long- term bonds, common stocks, short-term investments and mutual funds. The de- tailed operations of the separate accounts are not included in the accompa- nying financial statements. Fees charged on separate account policyholder deposits are included in other income. Separate account premiums, deposits and other considerations amounted to $4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994, respectively. Reserves for separate accounts with assets at fair value were $23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec- tively. All reserves are subject to discretionary withdrawal at market val- ue. Substantially all of the Company's separate accounts are nonguaranteed. 12. TRANSACTIONS WITH AFFILIATES A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"), has a nearly exclusive general agents contract with the Company under which it sells the Company's products and provides the service that otherwise would be provided by a home office marketing department and regional of- fices. For providing these selling and marketing services, the Company paid LFGI override commissions and operating expense allowances of $56,300,000, $43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in- curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995 and 1994, respectively, in excess of the override commissions and operating expense allowances received from the Company, which the Company is not re- quired to reimburse. Cash and short-term investments at December 31, 1996 and 1995 include the Company's participation in a short-term investment pool with LNC of $175,100,000 and $324,000,000, respectively. Related investment income amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and 1994, respectively. Other liabilities at December 31, 1996 and 1995 include $100,000,000 of notes payable to LNC. The Company provides services to and receives services from affiliated com- panies which resulted in a net payment of $34,100,000 and $24,900,000 in 1996 and 1995, respectively. The Company both cedes and accepts reinsurance from affiliated companies. Premiums in the accompanying statement of income includes reinsurance transactions with affiliated companies as follows:
Year ended December 31 1996 1995 1994 ------ ------ ------ (in millions) -------------------- Insurance assumed $ 17.9 $ 17.6 $ 19.8 Insurance ceded 302.8 214.4 481.3
S-26 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED 13. SEPARATE ACCOUNTS CONTINUED A reconciliation of transfers to (from) separate accounts are as follows:
Year ended December 31 1996 1995 ---------------------------------------------------- (in millions) --------------------- Transfers as reported in the Summary of Operations of various Separate Accounts: Transfers to separate accounts $ 4,149.6 $ 3,070.2 Transfers from separate accounts (2,058.5) (1,457.8) --------- --------- Net transfer to separate accounts as reported in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4 ========= =========
S-27 OTHER FINANCIAL INFORMATION REPORT OF INDEPENDENT AUDITORS Board of Directors The Lincoln National Life Insurance Company We have audited the accompanying statutory-basis balance sheets of The Lincoln National Life Insurance Company (a wholly owned subsidiary of Lincoln National Corporation) as of December 31, 1996 and 1995, and the related statutory-basis statements of income, changes in capital and surplus and cash flows for each of the three years in the period ended December 31, 1996. These financial state- ments 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 generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. As described in Note 1 to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or per- mitted by the Indiana Department of Insurance, which practices differ from gen- erally accepted accounting principles. The variances between such practices and generally accepted accounting principles and the effects on the accompanying financial statements are also described in Note 1. In our opinion, because of the effects of the matter described in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial posi- tion of The Lincoln National Life Insurance Company at December 31, 1996 and 1995, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 1996. However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Lincoln Na- tional Life Insurance Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with accounting practices prescribed or permitted by the Indiana Department of Insurance. As described in Note 2, in 1994 the Company changed its method of accounting for separate account contracts. /s/ Ernst & Young LLP February 6, 1997 S-28 LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA DECEMBER 31, 1996 (IN MILLIONS) Investment income earned: Government bonds $ 74.6 --------------------------------------------------------------------- Other bonds (unaffiliated) 1,367.6 --------------------------------------------------------------------- Preferred stocks (unaffiliated) 9.6 --------------------------------------------------------------------- Common stocks (unaffiliated) 6.5 --------------------------------------------------------------------- Common stocks of affiliates 9.5 --------------------------------------------------------------------- Mortgage loans 269.3 --------------------------------------------------------------------- Real estate 114.4 --------------------------------------------------------------------- Premium notes, policy loans and liens 35.0 --------------------------------------------------------------------- Cash on hand and on deposit 0.9 --------------------------------------------------------------------- Short-term investments 48.0 --------------------------------------------------------------------- Other invested assets 17.6 --------------------------------------------------------------------- Derivative instruments (6.3) --------------------------------------------------------------------- Aggregate write-ins for investment income 11.1 ----------------------------------------------------------- -------- Gross investment income $1,957.8 - ------------------------------------------------------------- ======== Real estate owned (cost, less encumbrances) $ 621.3 - ------------------------------------------------------------- ======== Mortgage loans (unpaid balance): Farm mortgages $ 1.1 --------------------------------------------------------------------- Residential mortgages 3.7 --------------------------------------------------------------------- Commercial mortgages 2,971.9 ----------------------------------------------------------- -------- Total mortgage loans $2,976.7 - ------------------------------------------------------------- ======== Mortgage loans by standing (unpaid balance): Good standing $2,922.1 ----------------------------------------------------------- ======== Good standing with restructured terms $ 39.6 ----------------------------------------------------------- ======== Interest overdue more than three months, not in foreclosure $ -- ----------------------------------------------------------- ======== Foreclosure in process $ 14.9 ----------------------------------------------------------- ======== Other long-term assets (statement value) $ 248.1 - ------------------------------------------------------------- ========
S-29 LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA CONTINUED DECEMBER 31, 1996 (IN MILLIONS) Bonds and stocks of parent, subsidiaries and affiliates (cost): Common stocks $ 194.0 ------------------------------------------------------------- ========== Bonds and short-term investments by class and maturity: Bonds by maturity (statement value): Due within one year or less $ 1,618.0 ------------------------------------------------------------- Over 1 year through 5 years 5,928.1 ------------------------------------------------------------- Over 5 years through 10 years 6,025.9 ------------------------------------------------------------- Over 10 years through 20 years 3,670.6 ------------------------------------------------------------- Over 20 years 2,860.4 ------------------------------------------------------------- ---------- Total by maturity $ 20,103.0 - --------------------------------------------------------------- ========== Bonds by class (statement value): Class 1 $ 14,013.7 ------------------------------------------------------------- Class 2 4,504.1 ------------------------------------------------------------- Class 3 807.6 ------------------------------------------------------------- Class 4 705.9 ------------------------------------------------------------- Class 5 71.4 ------------------------------------------------------------- Class 6 0.3 ------------------------------------------------------------- ---------- Total by class $ 20,103.0 - --------------------------------------------------------------- ========== Total bonds publicly traded $ 16,520.3 - --------------------------------------------------------------- ========== Total bonds privately placed $ 3,582.7 - --------------------------------------------------------------- ========== Preferred stocks (cost or amortized cost) $ 239.7 - --------------------------------------------------------------- ========== Unaffiliated common stocks (market value) $ 358.3 - --------------------------------------------------------------- ========== Short-term investments (cost or amortized cost) $ 713.4 - --------------------------------------------------------------- ========== Financial options and caps owned (statement value) $ 32.2 - --------------------------------------------------------------- ========== Financial options and caps written (statement value) $ 0.3 - --------------------------------------------------------------- ========== Swap and forward agreements open (statement value) $ 0.2 - --------------------------------------------------------------- ========== Futures contracts open (current value) $ 161.2 - --------------------------------------------------------------- ========== Cash on deposit $ 45.8 - --------------------------------------------------------------- ========== Life insurance in-force: Ordinary $ 97.9 ------------------------------------------------------------- ========== Group life $ 31.4 ------------------------------------------------------------- ==========
S-30 LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA CONTINUED DECEMBER 31, 1996 (IN MILLIONS) Amount of accidental death insurance in-force under ordinary policies $ 4.9 - ----------------------------------------------------------------------------------------------- ========= Life insurance policies with disability provisions in-force: Ordinary $ 4.9 --------------------------------------------------------------------------------------------- ========= Group life $ 12.9 --------------------------------------------------------------------------------------------- ========= Supplementary contracts in-force: Ordinary--not involving life contingencies: Amount on deposit $ -- --------------------------------------------------------------------------------------------- ========= Income payable $ 3.2 --------------------------------------------------------------------------------------------- ========= Ordinary--involving life contingencies: Income payable $ 0.9 --------------------------------------------------------------------------------------------- ========= Group--not involving life contingencies: Income payable $ -- --------------------------------------------------------------------------------------------- ========= Group--involving life contingencies: Income payable $ 0.9 --------------------------------------------------------------------------------------------- ========= Annuities: Ordinary: Immediate--amount of income payable $ 68.4 --------------------------------------------------------------------------------------------- ========= Deferred--fully paid account balance $ 0.6 --------------------------------------------------------------------------------------------- ========= Deferred--not fully paid account balance $ 326.6 --------------------------------------------------------------------------------------------- ========= Group: Amount of income payable $ -- --------------------------------------------------------------------------------------------- ========= Fully paid account balance $ -- --------------------------------------------------------------------------------------------- ========= Not fully paid account balance $ 78.1 --------------------------------------------------------------------------------------------- ========= Accident and health insurance--premiums in-force: Ordinary $ 180.6 --------------------------------------------------------------------------------------------- ========= Group $ 97.1 --------------------------------------------------------------------------------------------- ========= Deposit funds and dividend accumulations: Deposit funds account balance $17,456.6 --------------------------------------------------------------------------------------------- ========= Dividend accumulations--account balance $ 114.7 --------------------------------------------------------------------------------------------- =========
S-31 LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA CONTINUED DECEMBER 31, 1996 (IN MILLIONS) Claim payments 1996: Group Accident and Health: 1996 $ 9.4 ===== -------------- 1995 $ 3.1 ===== -------------- 1994 $ 0.1 ===== -------------- 1993 $ -- ===== -------------- 1992 $(0.1) ===== -------------- Prior $ -- ===== --------------
S-32 LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA NOTE--BASIS OF PRESENTATION The accompanying schedule presents selected statutory-basis financial data as of December 31, 1996 and for the year then ended for purposes of complying with paragraph 9 of the Annual Audited Financial Reports in the General Section of the National Association of Insurance Commissioners' Annual Statement Instruc- tions and agrees to or is included in the amounts reported in The Lincoln Na- tional Life Insurance Company's 1996 Statutory Annual Statement as filed with the Indiana Department of Insurance. S-33 REPORT OF INDEPENDENT AUDITORS ON OTHER FINANCIAL INFORMATION Board of Directors The Lincoln National Life Insurance Company Our audits were conducted for the purpose of forming an opinion on the statutory-basis financial statements taken as a whole. The accompanying supplemental schedule of selected statutory-basis financial data is presented to comply with the National Association of Insurance Commissioners' Annual Statement Instructions and is not a required part of the statutory-basis financial statements. Such information has been subjected to the auditing procedures applied in our au- dit of the statutory-basis financial statements and, in our opinion, is fairly stated in all material respects in rela- tion to the statutory-basis financial statements taken as a whole. /s/ Ernst & Young LLP February 6, 1997 S-34 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H REGISTRATION STATEMENT ON FORM N-4 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. 2. Part B The following Financial Statements for the Variable Account are included in Part B of this Registration Statement. 3. Part B The following Statutory Financial Statements and Schedules of Lincoln National Life Insurance Company are included in the SAI: Balance Sheets--Years ended December 31, 1996 and 1995 Statements of Income--Years ended December 31, 1996, 1995 and 1994 Statements of Capital and Surplus--Years ended December 31, 1996, 1995, and 1994 Notes to Financial Statements--December 31, 1996 Supplemental Schedule of Selected Statutory Basis Financial Data--December 31, 1996 Report of Ernst & Young LLP, Independent Auditors Item 24. (Continued) (b) List of Exhibits (1) Resolutions of the Board of Directors of the Lincoln National Life Insurance Company establishing Separate Account H are incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on December 5, 1996. (2) None. (3)(a) Underwriting Agreement incorporated by reference to Registration Statement on Form N-4 (33-27783) filed on December 5, 1996. (3)(b) Amendment to Underwriting Agreement (4) Variable Annuity Contract. (5) Application. (6) Articles of Incorporation and Bylaws of the Lincoln National Life Insurance Company are incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on December 5, 1996. (7) Not applicable. (8) Services Agreement between the Lincoln National Life Insurance Company and the Delaware Management Company is incorporated herein by reference to Registration on Form N-4 (33-27783) filed on December 5, 1996. (8)(a) Participation Agreement (8)(b) Amendment to Participation Agreement (8)(c) Amendment to Indemnification Agreement. (9) Opinion and consent of Jeremy Sachs, Senior Counsel, Lincoln National Life Insurance Company as to legality of securities being issued. (10) Consent of auditors. (11) Not applicable. (12) Not applicable. (13) Schedule for computation for performance quotations. (14) Other Exhibits: (a) Organizational Chart of the Lincoln National Insurance Holding Company System (b) Books and Records Report. 17(a) Financial Data Schedule Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Name Positions and Offices with LNL - ---- ------------------------------ Jon A. Boscia* President, Chief Executive Officer and Director Carolyn P. Brody* Vice President Thomas L. Clagg* Vice President and Associate General Counsel Kelly D. Clevenger* Vice President Jeffrey K. Dellinger* Vice President Jack D. Hunter* Executive Vice President and General Counsel Donald E. Keller* Vice President Stephen H. Lewis* Senior Vice President H. Thomas McMeekin** Director Reed P. Miller* Vice President Ian M. Rolland** Director Lawrence T. Rowland *** Executive Vice President and Director Keith J. Ryan* Vice President, Chief Financial Officer and Assistant Treasurer Richard C. Vaughan** Director Roy V. Washington* Vice President and Chief Compliance Officer Janet C. Whitney** Vice President and Treasurer C. Suzanne Womack** Secretary and Assistant Vice President O. Douglas Worthington* Vice President and Controller *Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802. **Principal business address is 200 East Berry Street, Fort Wayne, Indiana 46802-2706. ***Principal business address is 1700 Magnavox Way, One Reinsurance Place, Fort Wayne, Indiana 46804. Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT See Exhibit 14(b): Organizational Chart of the Lincoln National Insurance Holding Company System (11/1/96). Item 27. NUMBER OF CONTRACTOWNERS As of December 31, 1996, there were 230,760 (variable and fixed) contract owners under Account H. Item 28. Indemnification (a) Brief description of indemnification provisions. In general, Article VII of the By-Laws of The Lincoln National Life Insurance Company (LNL) provides that LNL will indemnify certain persons against expenses, judgments and certain other specified costs incurred by any such person if he/she is made a party or is threatened to be made a party to a suit or proceeding because he/she was a director, officer, or employee of LNL, as long as he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of, or not opposed to the best interests of, LNL. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officers, and employees of LNL in connection with suits by, or in the right of, LNL. Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b) hereto) for the full text of the indemnification provisions. Indemnification is permitted by, and is subject to the requirements of, Indiana law. (b) Undertaking pursuant to Rule 484 of Regulation C under the Securities Act of 1933: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 28(a) above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 29. Principal Underwriter (a) American Funds Distributors, Inc., is also the Principal Underwriter of shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds Income Series, The American Funds Tax-Exempt Series I, The American Funds Tax-Exempt Series II American High-Income Municipal Bond Fund, Inc., American High-Income Trust, American Mutual Fund, Inc., The Bond Fund of America, Inc., Capital Income Builder, Inc., Capital World Bond Fund, Inc., Capital World Growth and Income Fund, Inc., The Cash Management Trust of America, EuroPacific Growth Fund, Fundamental Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc., Intermediate Bond Fund of America, The Investment Company of America, Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New Perspective Fund, Inc., The Tax-Exempt Bond Fund of America, Inc., The Tax-Exempt Money Fund of America, The U.S. Treasury Money Fund of America, Washington Mutual Investors Fund, Inc. and SMALLCAP World Fund, Inc. (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter *David L. Abzug Regional Vice President 5657 Lemona Avenue Van Nuys, CA 91411 John A. Agar Regional Vice President 1501 N. University Drive Little Rock, AR 72207 Robert B. Aprison Vice President 2983 Bryn Wood Drive Madison, WI 53711 %Richard Armstrong Assistant Vice President *William W. Bagnard Vice President Steven L. Barnes Senior Vice President 8000 Town Line Avenue South Suite 204 Minneapolis, MN 55438 Michelle A. Bergeron Vice President 4160 Gateswalk Drive Smyrna, GA 30080 Item 29. Principal Underwriter (continued) (b) (continued) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter - ------------------ --------------------- Joseph T. Blair Senior Vice President 27 Drumlin Road West Simsbury, CT 06092 John A. Blanchard Regional Vice President 6421 Aberdeen Road Mission Hills, KS 66208 Ian B. Bodell Senior Vice President 3100 West End Avenue, Suite 870 Nashville, TN 37215 Michael L. Brethower Vice President 108 Hagen Court Georgetown, TX 78628 C. Alan Brown Regional Vice President 4619 McPherson Avenue St. Louis, MO 63108 *Daniel C. Brown Senior Vice President @J. Peter Burns Vice President Brian C. Casey Regional Vice President 9508 Cable Drive Kensington, MO 20895 Victor C. Cassato Vice President 609 W. Littelton Blvd. - Suite 310 Littleton, CO 80121 Christopher J. Cassin Senior Vice President 111 West Chicago Street - Suite G3 Hinsdale, IL 60521 Denise M. Cassin Regional Vice President 1301 Stoney Creek Drive San Ramon, CA 94538 *Larry P. Clemmensen Director *Kevin G. Clifford Director, Senior Vice President Ruth M. Collier Vice President 145 West 67th Street, Suite #12K New York, NY 10023 Thomas E. Cournoyer Vice President 2333 Granada Boulevard Coral Gables, FL 33134 Douglas A. Critchell Vice President 4116 Woodbine St. Chevy Chase, MD 20815 *Carl D. Cutting Vice President Dan J. Delianedis Regional Vice President 8689 Braxton Drive Eden Prairie, MN 55347 Michael A. Dilella Vice President P.O. Box 661 Ramsey, NJ 07446 Item 29. Principal Underwriters (continued) (b) (continued) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter - --------------------- --------------------- G. Michael Dill Senior Vice President 505 East Main St. Jenks, OK 74037 Kirk D. Dodge Regional Vice President 2617 Salisbury Road Ann Arbor, MI 48103 Peter J. Doran Senior Vice President 1205 Franklin Avenue Garden City, NY 11530 *Michael J. Downer Secretary Robert W. Durbin Vice President 74 Sunny Lane Tiffin, OH 44883 &Lloyd G. Edwards Vice President *Paul H. Fieberg Senior Vice President John Foder Regional Vice President 15 Latisquana Road Southborough, MA 01772 *Mark P. Freeman, Jr. Director and President Clyde E. Gardner Senior Vice President Route 2, Box 3162 Osage Beach, MO 65065 #Evelyn K. Glassford Vice President Jeffrey J. Greiner Regional Vice President 5898 Heather Glen Court Dublin, OH 43017 David E. Harper Senior Vice President R.D.1, Box 210, Rte 519 Frenchtown, NJ 08825 Ronald R. Hulsey Vice President 6744 Avalon Dallas, TX 75214 Robert S. Irish Regional Vice President 1225 Vista Del Mar Dr. Delray Beach, FL 33483 *Robert L. Johansen Vice President and Controller Michael J. Johnston Chairman of the Board 630 Fifth Ave., 36th Floor New York, NY 10111 Victor J. Kriss Senior Vice President P. O. Box 274 Surfside, CA 90743 Arthur J. Levine Vice President 12558 Highlands Place Fishers, IN 46038 Item 29. Principal Underwriters (continued) (b) (continued) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter - ------------------ ------------------------ #Karl A. Lewis Assistant Vice President T. Blake Liberty Regional Vice President 1940 Blake St., Ste. 303 Denver, CO 80202 *Lorin E. Liesy Assistant Vice President *Susan G. Lindgren Vice President - Institutional Investment Services Division %Stella Lopez Vice president +Robert W. Lovelace Director Stephen A. Malbasa Regional Vice President 13405 Lake Shore Boulevard Cleveland, OH 44110 Steven M. Markel Vice President 5241 South Race St. Littleton, CO 80121 *John C. Massar Director and Senior Vice President *E. Lee McClennahan Senior Vice President Laurie B. McCurdy Regional Vice President 3500 W. Camino de Urania Tucson, AZ 85255 %John V. McLaughlin Senior Vice President Terry W. McNabb Vice President 2002 Barrett Station Road St. Louis, MO 63131 *R. William Melinat Vice President Institutional Investment Services Division David R. Murray Vice President 25701 S. E. 32nd Place Issaquah, WA 98027 Stephen S. Nelson Vice President 7215 Trevor Road Charlotte, NC 28226 William E. Noe Regional Vice President 304 River Oaks Road Brentwood, TN 37027 Peter A. Nyhus Regional Vice President 3084 Wilds Ridge Court Prior Lake, MN 55372 Eric P. Olson Regional Vice President 62 Park Drive Glenview, IL 60025 Frederic Phillips Vice President 32 Ridge Avenue Newton Centre, MA 02159 #Candance D. Pilgrim Assistant Vice President Item 29. Principal Underwriters (continued) - ------- (b) (continued) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter - ------------------ --------------------- Carl S. Platou Regional Vice President 4021 96th Avenue, SE Mercer Island, WA 98040 *John O. Post, Jr. Vice President Steven J. Reitman Vice President 212 The Lane Hinsdale, IL 60521 Brian A. Roberts Regional Vice President 12025 Delmahoy Drive Charlotte, NC 28277 George S. Ross Vice President 55 Madison Avenue Morristown, NJ 07962 *Julie D. Roth Vice President *James F. Rothenberg Director Douglas F. Rowe Regional Vice President 30309 Oak Tree Drive Georgetown, TX 78628 Christopher Rowey Regional Vice President 9417 Beverlywood Street Los Angeles, CA 90034 Dean B. Rydquist Vice President 1080 Bay Pointe Crossing Alpharetta, GA 30202 Richard R. Samson Vice President 4604 Glencoe Ave., #4 Marina Del Rey, CA 90292 Joe D. Scarpitti Regional Vice President 31465 St. Andrews Westlake, OH 44145 *Daniel B. Seivert Assistant Vice President *R. Michael Shanahan Director David W. Short Director and Senior Vice President 1000 RIDC Plaza, Suite 212 Pittsburgh, PA 15238 William P. Simon, Jr. Vice President 554 Canterbury Lane Berwyn, PA 19312 *John C. Smith Assistant Vice President Institutional Investment Services Division *Mary E. Smith Assistant Vice President Institutional Investment Services Division Rodney G. Smith Regional Vice President 100 N. Central Expressway Suite 1214 Richardson, TX 75080 Nicholas D. Spadaccini Regional Vice President 855 Markley Woods Way Cincinnati, OH 45230 Item 29. Principal Underwriters (continued) - -------- (b) (continued) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter - ------------------ --------------------- Daniel S. Spradling Senior Vice President #4 West Fourth Avenue, Suite 406 San Mateo, CA 94402 Thomas A. Stout Regional Vice President 12913 Kendale Lane Bowie, MD 20715 Craig R. Strausser Regional Vice President 17040 Summer Place Lake Oswego, OR 97035 Francis N. Strazzeri Regional Vice President 31641 Saddletree Drive Westlake Village, CA 91361 Drew Taylor Assistant Vice President %James P. Toomey Assistant Vice President &Christopher E. Trede Assistant Vice President George F. Truesdail Vice President 400 Abbotsford Court Charlotte, NC 28270 Scott W. Ursin-Smith Regional Vice President 606 Glenwood Avenue Mill Valley, CA 94941 *David M. Ward Assistant Vice President Institutional Investment Services Division Thomas E. Warren Regional Vice President 4001 Crockers Lake Blvd. Sarasota, FL 34238 *J. Kelly Webb Senior Vice President and Treasurer Gregory J. Weimer Vice President 125 Surrey Drive Canonsburg, PA 15317 #Timothy W. Weiss Director **N. Dexter Williams Vice President Timothy J. Wilson Regional Vice President 113 Farmview Place Venetia, PA 15367 #Laura L. Wimberly Assistant Vice President *Marshall D. Wingo Director and Senior Vice President *Robert L. Winston Director and Senior Vice President William Yost Regional Vice President 9320 Overlook Trail Eden Prairie, MN 55347 Janet M. Young Regional Vice President 1616 Vermont Houston, TX 77006 Scott D. Zombon Regional Vice President 209 Robinson Drive Tustin Ranch, CA 92782 *Business Address, 333 South Hope Street, Los Angeles, CA 90071 **Business Address, One Market Plaza, Steuart Tower, Suite 1800, San Francisco, CA 94111 +Business Address, 11100 Santa Monica Blvd., Los Angeles, CA 90025 #Business Address, 135 South State College Blvd., Brea, CA 92821 %Business Address, 8000 IH-10, Suite 1400, San Antonio, TX 78230 @Business Address, 5300 Robin Hood Road, Norfolk, VA 23513 &Business Address, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240 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 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 Life at the address or phone number listed in the Prospectus. (d) The Lincoln National Life Insurance Company 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 The Lincoln National Life Insurance Company. (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 duly has caused this Registration Statement to be signed on its behalf, in the City of Fort Wayne, and the State of Indiana on this 1st day of April, 1997. LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H (American Legacy III), (Registrant) By: /s/ Stephen H. Lewis ------------------------------------- Stephen H. Lewis (Signature-Officer of Depositor) Senior Vice President, LNL (Title) By: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (LNL) (Depositor) By: /s/ Jon A. Boscia ------------------------------------- Jon A. Boscia President (Title) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Jon A. Boscia President, Chief Executive April 1, 1997 - -------------------------- Officer & Director ----------------- Jon A. Boscia (Principal Executive Officer) /s/ Jack D. Hunter Executive Vice President, April 1, 1997 - -------------------------- General Counsel & Director ----------------- Jack D. Hunter - -------------------------- Executive Vice President Lawrence T. Rowland and Director ----------------- /s/ O. Douglas Worthington Vice President and Controller April 1, 1997 - -------------------------- ----------------- O. Douglas Worthington /s/ Ian M. Rolland Director April 1, 1997 - -------------------------- ----------------- Ian M. Rolland - -------------------------- Director H. Thomas McMeekin ----------------- /s/ Richard C. Vaughan Director April 1, 1997 - -------------------------- ----------------- Richard C. Vaughan /s/ Keith J. Ryan Vice President, and Assistant April 1, 1997 - -------------------------- Treasurer and Chief ----------------- Keith J. Ryan Financial Officer (Principal Financial Officer) EX-99.3.A 2 UNDERWRITING AGREEMENT EXHIBIT 3 PRINCIPAL UNDERWRITING AGREEMENT THIS AGREEMENT is effective on the 12th day of July, 1989 among THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana on behalf of itself and SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate Account"), a separate account established by Lincoln National pursuant to the Indiana Insurance Code and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the laws of the State of California. WITNESSETH: WHEREAS, Lincoln National proposes to issue to the public certain variable annuity contracts ("Contracts") and has, by resolution of its Board of Directors on November 4, 1982, and by directive of its Chief Executive Officer on February 7, 1989, authorized the creation of a segregated investment account in connection therewith; and WHEREAS, Lincoln National has established the Separate Account for the purpose of issuing the Contracts and has registered the Separate Account with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940; and WHEREAS, the Contracts to be issued by Lincoln National are registered with the Commission for offer and sale to the public, and otherwise are in compliance with all applicable laws; and WHEREAS, AFD is a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc., and proposes to form a selling group for the distribution of said Contracts; and WHEREAS, Lincoln National desires to obtain the services of AFD as principal underwriter of the Contracts issued by Lincoln National through the Separate Account; NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants and conditions set forth herein, and for other good and valuable consideration, Lincoln National, the Separate Account and AFD hereby agree as follows: Duties of AFD - ------------- 1. AFD will form a selling group consisting of broker-dealers appointed by Lincoln National to distribute the Contracts which are issued by Lincoln National through the Separate Account and are registered with the Commission for offer and sale to the public. Broker-dealers listed in the attached Schedule B - Schedule of Broker-Dealers to be Excluded from the Selling Group - may not be members of such selling group. Said Schedule B may be amended from time to time by the mutual consent of the undersigned parties. 2. AFD will enter into and maintain a dealer agreement with each broker- dealer joining such selling group ("member"); an executed copy of each will be provided to Lincoln National. Any such dealer agreement expressly will be made subject to this Agreement. Any such dealer agreement will provide: (i) that each member will distribute the Contracts only in those jurisdictions in which the Contracts are registered or qualified for sale and only through duly licensed registered representatives of the members who are fully licensed with Lincoln National to sell the Contracts in the applicable jurisdiction(s); (ii) that all applications and initial and subsequent payments under the Contracts collected by the member will be remitted promptly by the member to Lincoln National at such address as it may from time to time designate; (iii) that each member will comply with all applicable federal and stated laws, rules and regulations; and (iv) that the Contracts will not be offered in connection with plans qualified under Section 403(b) of the U.S. Internal Revenue Code. 3. AFD will use reasonable efforts to provide information and marketing assistance to the members, including preparing and providing members with advertising materials and sales literature, and providing members with current Prospectuses of the Contracts and of American Variable Insurance Series (the "Series"). AFD will use reasonable efforts to ensure that members deliver only the currently effective Prospectuses of the Contracts and the Series. AFD and Lincoln National will cooperate in the development of advertising and sales literature, as requested. AFD will deliver to members, and use reasonable efforts to ensure that members use, only sales literature and advertising material which conforms to the requirements of federal and state laws and regulations and which has been authorized by Lincoln National and AFD. AFD will be responsible for filing sales literature and advertising material, where necessary, with appropriate securities regulatory authorities, including the National Association of Securities Dealers, Inc. AFD will not distribute any Prospectus, sales literature, advertising material or any other printed matter or material relating to the Contracts or the Series if, to its knowledge, any of the foregoing misstates and duties, obligations or liabilities of Lincoln National or AFD. AFD will not actively encourage any member to sell Contracts to employees of hospitals in the State of California that are members of the California Hospital Association. 4. AFD shall not be responsible for (i) taking or transmitting applications for the Contracts; (ii) examining or inspecting risks or approving, issuing or delivering Contracts; (iii) receiving, collecting or transmitting premium payments; (iv) assisting in the completion of applications for Contracts; (v) paying sales commissions to licensed broker-dealers and insurance agents; and (vi) otherwise offering and selling Contracts directly to the public. 5. AFD will bear all its expenses of providing services under this Agreement, including the cost of preparing, printing and mailing advertising and sales literature, and the cost of printing and mailing Series and Contract Prospectuses which are used for sale purposes, except that AFD shall not bear the expenses of registering and qualifying shares for Contracts for sale under federal and state laws and expenses of preparing, printing and mailing Prospectuses, proxies and shareholder reports to the extent authorized by laws. It is understood that Lincoln National will not be required to bear the cost of preparing, printing and mailing Series Prospectuses. AFD will, except with respect to agents and brokers with Lincoln National Sales Corporation ("LNSC"), reimburse Lincoln National for all state appointing fees and associated renewal fees incurred to enable members to sell the Contracts. 6. AFD will furnish to Lincoln National such information with respect to the Series in such form and signed by such of its officers as Lincoln National may reasonably request, and will warrant that the statements therein contained when so signed will be true and correct. AFD will advise Lincoln National immediately of: (a) any request by the Commission (i) for amendment of the registration statement relating to the Contracts or the Series or (ii) for additional information; (b) the issuance by the Commission of any stop order suspending the effectiveness of the registration statement of the Contracts or the Series or the initiation of any proceedings for that purpose; (c) the institution of any proceeding, investigation or hearing involving the offer of sale of the Contracts or the Series of which it becomes aware; or (d) the happening of any material even, if known, which makes untrue any statement made in the registration statement of the Contracts or the Series or which requires the making of a change therein in order to make any statement made therein not misleading. 7. AFD will use reasonble efforts to have the Series register for sale under the Securities Act of 1933 and, as required, under state securities laws, from time to time as necessary, such additional shares of the Series as may reasonably be necessary for use as the funding vehicle for the Contracts. Duties of Lincoln National - -------------------------- 8. Lincoln National or its agent will receive and process applications and premium payments in accordance with the terms of the Contracts and the current Prospectuses. All applications for Contracts are subject to acceptance or rejection by Lincoln National in its sole discretion. Lincoln National will inform AFD of any such rejection and the reason therefor. 9. Lincoln National will be responsible for filing the Contracts, applications, forms, sales literature and advertising material, where necessary, with appropriate insurance regulatory authorities. 10. Lincoln National will furnish to AFD such information with respect to the Separate Account and the Contracts in such form and signed by such of its officers as AFD may reasonably request, and will warrant that the statements therein contained when so signed will be true and correct. Lincoln National will advise AFD immediately of: (a) any request by the Commission (i) for amendment of the registration statement relating to the Contracts or the Series or (ii) for additional information; (b) the issuance by the Commission of any stop order suspending the effectiveness of the registration statement of the Contracts or the Series or the initiation of any proceedings for that purpose; (c) the institution of any proceeding, investigation, hearing or other action involving the offer or sale of the Contracts or the fund of which it becomes aware; (d) the happening of any material event, if known, which makes untrue any statement made in the registration statement of the Contracts or the Series or which requires the making of a change therein in order to make any statement made therein not misleading. 11. Lincoln National will use reasonable efforts to register for sale, from time to time as necessary, additional dollar amounts of the Contracts under the Securities Act of 1933, and, should it ever be required, under state securities laws and to file for approval under state insurance laws when necessary and will maintain the Investment Company Act of 1940 registration of the Separate Account. 12. Lincoln National will pay to members of this selling group such commissions as are from time to time set forth in dealer agreements. Such dealer agreements shall provide for the return of sales commissions by the members to Lincoln National if the Contracts are tendered for redemption to Lincoln National in accordance with the 10-day review provision in the Contract. 13. Lincoln National will bear its expenses of providing services under this Agreement, including the cost of preparing (including typesetting costs), printing and mailing Prospectuses of the Contracts to Contract Owners, expenses and fees of registering or qualifying the Contracts and the Separate Account under federal or state laws, and any direct expenses incurred by its employees in assisting AFD in performing its duties hereunder. Lincoln National will pay to AFD such remuneration for its services and for the services of its salaried employees, and such reimbursement for its charges and expenses, as may be contained in such schedule of renumeration as may be adopted and appended to this Agreement from time to time. (See Schedule A - Commission to Members and Remuneration to AFD.) Said Schedule A may be amended from time to time by the mutual consent of the undersigned parties; except that AFD may alter the ratio of commissions paid to dealers and renumeration paid to AFD as set forth in paragraph 25 of this Agreement. Warranties - ---------- 14. Lincoln National represents and warrants to AFD that: (i) a registration statement under the Securities Act of 1933 (File No. 33-27783) and under the Investment Company Act of 1940 (File no. 811-5721) on Form N-4 with respect to the Contracts and Separate Account has been filed with the Commission in the form previously delivered to AFD, and copies of any and all amendments thereto will be forwarded to AFD at the time that they are filed with the Commission; (ii) the registration statement and any further amendments or supplements thereto will, when they become effective, conform in all material respects to the requirements of the Securities Act of 1993 and the Investment Company Act of 1940, and the rules and regulations of the Commission thereunder, and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statement or omission made in reliance upon and in conformity with information furnished in writing to Lincoln National by AFD expressly for use therein; (iii) Lincoln National is validly existing as a stock life insurance company in good standing under the laws of the State of Indiana, with power (corporate or other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification; (iv) the Contracts to be issued through the Separate Account have been duly and validly authorized and, when issued and delivered against payment therefor as provided in the Prospectuses and in the Contracts, will be duly and validly issued and will conform to the description of such Contracts contained in the Prospectuses relating thereto; (v) Lincoln National will not pay commissions to persons who, to the best of Lincoln National's knowledge, are not appropriately licensed in a manner as to comply with the state insurance laws; (vi) the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms or provisions of, or constitute a default under any statute, any indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which Lincoln National is a party or by which Lincoln National is bound, Lincoln National's Charter as a stock life insurance company or By-laws, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Lincoln National or any of its properties; and no consent, approval, authorization or order of any court or governmental agency or body which has not been obtained by the effective date of this Agreement is required for the consummation by Lincoln National of the transactions contemplated by this Agreement; and (vii) there are no material legal or governmental proceedings pending to which Lincoln National or the Separate Account is a party or of which any property of Lincoln National or the Separate Account is the subject, other than set forth in the Prospectus relating to the Contracts, and other litigation incident to the kind of business conducted by Lincoln National which, if determined adversely to Lincoln National, would not individually or in the aggregate have a material adverse effect on the financial position, surplus or operations of Lincoln National; and (viii) any information furnished in writing by Lincoln National to AFD for use in the registration statement of the Series will not result in the registration statement's failing to conform in all respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder or containing any untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 15. AFD represents and warrants to Lincoln National that: (i) a registration statement under the Securities Act of 1933 (File No. 2-86838), and under the Investment Company Act of 1940 (File No. 811-3857) with respect to American Variable Insurance Series has been filed with the Commission in the form previously delivered to Lincoln National, and copies of any and all amendments thereto will be forwarded to Lincoln National at the time they are filed with the Commission; (ii) the Series' registration statement and any further amendments or supplements thereto will, when they become effective, conform in all material respects to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, and the rules and regulations of the Commission thereunder, and will not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided however, that this representation and warranty shall not apply to any statements of omissions made in reliance upon and in conformity with information furnished in writing to AFD by Lincoln National expressly for use therein; (iii) the performance of its duties under this Agreement by AFD will not result in a breach or violation of any of the terms or provisions or constitute a default under any statute, any indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which AFD is a party or by which AFD is bound, the Certificate of Incorporation or By-Laws of AFD, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over AFD or its property; and (iv) any information furnished in writing by AFD to Lincoln National for use in the registration statement for the Contracts will not result in the registration statement's failing to conform in all respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder or containing any untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (v) it is a broker-dealer duly registered with the Commission pursuant to the Securities Exchange Act of 1934 and a member in good standing of the National Association of Securities Dealers, Inc. and is in compliance with the securities laws in those states in which it conducts business as a broker- dealer; (vi) it will use reasonable efforts to ensure that no offering, sale or other disposition of the Contracts will be made until it has been notified by Lincoln National that the subject registration statements have been declared effective and the Contracts have been released for sale by Lincoln National, and that such offering, sale or other disposition shall be limited to those jurisdictions that have approved or otherwise permit the offer and sale of the Contracts by Lincoln National; and (vii) it will comply with the requirements of state broker-dealer regulations and the Securities Exchange Act of 1934 as each applies to AFD and shall conduct its affairs in accordance with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. Miscellaneous - ------------- 16. AFD makes no representation or warranty regarding the number of Contracts to be sold by licensed broker-dealers and insurance agents or the amount to be paid thereunder. AFD does, however, represent that it will actively engage in its duties under this Agreement on a continuous basis while the Agreement is in effect and there is an effective registration of the Contracts and of the Series, or its successor, with the Commission. 17. AFD may act as principal underwriter, sponsor, distributor or dealer for issuers other than Lincoln National or its affiliates in connection with mutual funds or insurance products; except that AFD shall not, while this Agreement is in effect, act as principal underwriter, sponsor, distributor or dealer with respect to insurance contracts which are issued by insurance companies other than Lincoln National or its affiliates that are similar to the Contracts. While this Agreement is in effect, Lincoln National will not issue, through any broker-dealer (except LNSC) and those broker-dealers listed in Schedule B attached hereto--"Schedule of Brokers to be Excluded from the Selling Group"), any insurance contract similar to the Contracts, without the written consent of AFD. Schedule C attached hereto--"List of Broker-Dealers Selling Similar Contracts With Consent of AFD"-- contains the listing of those broker-dealers for which AFD has so consented. Furthermore, Lincoln National will not enter into any agreement with any other organization for the purpose of distributing the Contracts. In addition, AFD agrees not to offer the Contracts through the Broker- Dealers listed in the aforesaid Schedule B. It is understood that shares of American Variable Insurance Series may be sold to fund insurance contracts of issuers other than Lincoln National or its affiliates or to other shareholders in accordance with Internal Revenue Code Section 817 (h) and the regulations thereunder. 18. Nothing in this Agreement shall obligate Lincoln National to appoint any member or registered representative of a member its agent for purposes of the distribution of the Contracts. Nothing in this Agreement shall be construed as requiring AFD to effect sales of the Contracts directly to the public or to act as an insurance agent or insurance broker on behalf of Lincoln National for purposes of state insurance laws. 19. AFD agrees to indemnify Lincoln National (or any control person, shareholder, director, officer or employee of Lincoln National) for any liability incurred (including costs relating to defense of any action) arising out of any AFD act or omission relating to (i) rendering services under this Agreement or (ii) the purchase, retention or surrender of a Contract by any person or entity; provided, however that indemnification will not be provided hereunder for any such liability that results from the willful misfeasance, bad faith or gross negligence of Lincoln National or from the reckless disregard by Lincoln National of the duties and obligations arising under this Agreement. 20. Lincoln National agrees to indemnify AFD (or any control person, shareholder, director, officer or employee of AFD) for any liability incurred (including costs relating to defense of any action) arising out of any Lincoln National act or omission relating to (i) rendering services under this Agreement or (ii) the purchase, retention or surrender of a Contract by any person or entity; provided, however, that indemnification will not be provided hereunder for any such liabilty that results from the willful misfeasance, bad faith and gross negligence of AFD or from the reckless disregard by AFD of the duties and obligations arising under this Agreement. 21. This Agreement will terminate automatically upon its assignment, as that term is defined in the Investment Company Act of 1940. The parties understand that there is no intention to create a joint venture in the subject matter of this Agreement. Accordingly, the right to terminate this Agreement and to engage in any activity not inconsistent with this Agreement is absolute. This Agreement will terminate, without the payment of any penalty by either party: (a) at the option of Lincoln National upon six months' advance written notice to AFD; or (b) at the option of AFD upon six months' advance written notice to Lincoln National; or (c) at the option of Lincoln National upon institution of formal proceedings against AFD by the National Association of Securities Dealers, Inc. or by the Commission; or (d) at the option of AFD upon the institution of formal proceedings against LNL by the Department of Insurance of a state; or (e) as otherwise provided in the Investment Company Act of 1940. 22. Each notice required by this Agreement shall be given in writing and delivered by certified mail-return receipt requested. 23. This Agreement shall be subject to the laws of the State of Indiana and construed so as to interpret the Contracts as insurance products written within the business operation of Lincoln National. 24. This Agreement covers and includes all agreements, oral and written (expressed or implied) between Lincoln National and AFD with regard to the marketing and distribution of the Contracts, and supersedes any and all Agreements between the parties with respect to the subject matter of this Agreement; except that this Agreement shall not affect the operation of any previous agreements entered into between Lincoln National and AFD unrelated to the subject matter of this Agreement. 25. This Agreement, along with any Schedules attached hereto and incorporated herein by reference, may be amended from time to time by the mutual agreement and consent of the undersigned parties, provided such amendment be in writing and duly executed; except that with respect to any Schedule A, AFD in its sole discretion, may alter upon written notice to Lincoln National the ratio of member commissions paid to remuneration paid to AFD. AFD agrees to reimburse Lincoln National any remuneration previously received to the extent necessary to pay additional commissions to members due to a retroactive change of this ratio. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed and attested as follows: The Lincoln National Life Insurance Company on behalf of itself and Separate Account H of the Lincoln National Life Insurance Company Attest: /s/ Kelly D. Clevenger By: /s/ Robert A. Nikels ----------------------- ------------------------------ American Funds Distributors, Inc. Attest: /s/ Mike Downer By: /s/ Hoyt J. Turner ----------------------- ------------------------------ SCHEDULE A - COMMISSIONS TO MEMBERS AND REMUNERATION TO AFD Effective July 12, 1989 1. All Sales of the Contracts (also referred to herein as "American Legacy II"). a) Lincoln National will make direct payment of commissions to members and remuneration to AFD with respect to all sales of the above-cited Contracts according to the schedule set forth below. Where state law prohibits direct payment to AFD, payment will be made in accordance with the applicable state law. Commissions to Members Other than Remuneration LNSC To AFD ----------- ------------ All Contract Purchase Payments From Contracts Sold 4.7% 1.00% Commissions Remuneration To LNSC To AFD ----------- ------------ All Contract Purchase Payments From Contracts Sold 5.2% 0.50% b) All annual .25% continuing commission will be paid to dealers on the value of all Contract purchase payments beginning in the second Contract year. This compensation will be paid at the end of each calendar quarter and will be calculated as follows: At the end of each calendar quarter, Lincoln National will calculate and pay, for all Contracts which have been in force for 15 months or more as of the last day of the quarter, an amount equal to .0625% of an amount equal to the quarter ending account value less any deposits made in the previous 15 months. This continuing commission is not paid on Contracts that have been annuitized. c) A .25% commission is all that will be paid on transfers from The American Legacy to American Legacy II. 2. Annuitization Commissions to Members Other than Remuneration LNSC To AFD ----------- ------------ All Purchase Payments 4.7% 1.00% five years and individual Contract Earnings which are annuitized (Contracts issued by LNL that are annuitized solely on a fixed basis will result in a separate Contract being issued.) Commissions Remuneration To LNSC To AFD ----------- ------------ All Purchase Payments held five years and individual 5.2% 0.45% Contract Earnings which are annuitized (Contracts issued by LNL that are annuitized solely on a fixed basis will result in a separate Contract being issued.) 3. Sell and Reload --------------- Commissions to Members Other than Remuneration LNSC To AFD ----------- ------------ All Contract Purchase Payments arising from Reloaded Contracts Sold 3.7% 1.00% Commissions Remuneration To LNSC To AFD ----------- ------------ All Contract Purchase Payments arising from Reloaded Contracts Sold 4.2% 0.50% b) "Sell and Reload" occurs when Contract Purchase Payments are again subjected to a contingent deferred sales charge (once such charge has expired with respect to all Contract Purchase Payments) for purposes of increasing the minimum death benefit. c) An annual continuing commission of .25% will be paid on the value of such Purchase Payments in the manner indicated in 1(b) above, except that the first year's continuing commission of .25% will be paid when the initial commission is paid. 4. Sales Volume Allowance ---------------------- AFD will give up a portion of its remuneration in order to provide an extra sales volume allowance of .25% of Purchase Payments to be paid to dealers maintaining a sales volume of at least $5,000,000 in each calendar year. Lincoln National, upon notification from AFD, will deduct enough from AFD's remuneration to pay this additional allowance to that dealer on all sales for that calendar year. Payments will be made to dealers every quarter after notification from AFD is received by Lincoln National. 5. Introductory Period ------------------- From September 1 through October 31, 1989, AFD will waive its remuneration in connection with new sales of the Contracts, in order that the commissions to dealers be increased by amounts which AFD has waived. IN WITNESS WHEREOF, the undersigned parties have caused this Schedule A - Commissions to Members and Remuneration to AFD to be duly executed and attested as follows: The Lincoln National Life Insurance Company Attest: /s/ Kelly D. Clevenger By: /s/ Robert A. Nikels ----------------------- ------------------------- American Funds Distributors, Inc. Attest: /s/ Mike Downer By: /s/ Hoyt J. Turner ----------------------- ------------------------- SCHEDULE B - BROKER-DEALERS TO BE EXCLUDED FROM SELLING GROUP ------------------------------------------------------------- ABI Management H.C. Copeland Durham James Freeman Mutual of America United Resources R.M. Weber Western Annuities Zahorik SCHEDULE C - LIST OF BROKER-DEALERS SELLING SIMILAR CONTRACTS WITH CONSENT OF AFD 1. Advisory Financial Consultants - CA 2. American Capital Corp. - PA *3. American Investors Company - CA 4. APS Securities Corp. - TX *5. Bates Securities, Inc. - IL 6. Beach Street Financial Corp. - CA 7. Benefit Securities Inc. - AK 8. Berthel, Fisher & Fleischman - IA *9. Boardwalk Capital Corp. - CA 10. Capital Analysts Inc. - PA 11. CBL Equities, Inc. - IL 12. CES Insurance Agency - MA *13. Chubb Securities Corp. - NH 14. Colorado Investors Resources Inc. - CO *15. DeRand Investment Corp. - TX *16. E.F. Hutton Inc. - MI *17. E.I. Sales Inc. - IA 18. Equity Services Inc. - VT 19. Federation for Financial Independence - CA (Ind. Advantage Fin. & Ins. Services, Inc.) 20. Financial Designs, Ltd. - CA *21. Financial Network Investment Corp. - CA 22. First Financial Capital Corp. - TX 23. Frank B. Hall Securities Inc. - WA *24. FSC Securities Corp. - GA *25. Hackett Associates - PA 26. H.C. Copeland - NJ *27. H.D. Vest - TX *28. International Money Management Group - MD 29. Investors Brokerage Services - IL 30. Jason Mackinzie Securities Inc. - GA *31. Laney & Company - WA *32. Linsco Financial Group Inc. - MA *33. Main Street Management Co. - CT *34. Market Securities Corp. - FL 35. Marsh & McLennan Securities Corp. - NY 36. Municicorp of California - CA *37. Mutual Service Corporation - MI *38. Paine Webber Jackson & Curtis - NY 39. Pal-Star Management Corp. - IL *40. Parker-Hunter Inc. - PA 41. PEBSCO - OH 42. Philadelphia Financial Advisors - PA 43. Portsmouth Financial Services - CA *44. Raffensperger, Hughes & Co. - IN *45. William L. Marshall - PA 46. Zahorik - CA * Also have Group Selling Agreement with AFD EX-99.3.B 3 AMENDMENT TO UNDERWRITING AGREEMENT EXHIBIT 3(b) AMENDMENT TO THE PRINCIPAL UNDERWRITING AGREEMENT This amendment, dated as of March , 1997 (this "Amendment"), to a certain Principal Underwriting Agreement effective on the 12th day of July, 1989 (the "Original Agreement"), is executed by and between LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana, on behalf of itself and SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate Account"), a separate account established by Lincoln National pursuant to the Indiana Insurance Code, and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the laws of the state of California (collectively, the "Parties"). WITNESSETH: WHEREAS, the Original Agreement provides for AFD to serve as principal underwriter for certain variable annuity contracts defined more fully therein and marketed under the name "American Legacy II"; and WHEREAS, the Parties desire to restate in full the compensation schedule to the Original Agreement to reflect amendments to the schedule that the Parties have agreed upon from time to time; and WHEREAS, the Parties desire to extend the terms and conditions of the Original Agreement to cover a new class of variable annuity contracts proposed to be issued by Lincoln National through the Separate Account, which would provide for investment in Class 2 Shares of the American Variable Insurance Series (the "Series") and for which AFD would serve as principal underwriter and which would be marketed under the name "American Legacy III"; NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants and conditions contained herein and in the Original Agreement, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Lincoln National, the Separate Account and AFD hereby agree as follows: 1. American Legacy II Compensation. Schedule A to the Original Agreement is hereby replaced by Schedule A-II attached to this Amendment, which restates in full the compensation agreed upon by the Parties for the American Legacy II Contracts, as modified from time to time by the Parties pursuant to Section 25 of the Original Agreement. All terms and conditions of the Original Agreement, except as Schedule A is amended hereby, are hereby ratified and confirmed with respect to the American Legacy II Contracts. 2. American Legacy III Contracts. Lincoln National hereby authorizes AFD to serve as principal underwriter for the American Legacy III Contracts and, in such capacity, to form a selling group for the American Legacy III Contracts, and AFD accepts such authorization, subject to the same terms and conditions of the Original Agreement as apply to the American Legacy II Contracts as though set forth in full herein, except as provided otherwise in Section 3 of this Amendment. For this purpose and subject to Section 3 of this Amendment, all references to "Contracts" in the Original Agreement, as amended hereby, shall include the American Legacy III Contracts; all references therein to "Member" shall include each broker-dealer joining the American Legacy III selling group; all references therein to "Registration Statement" for the Contracts shall include the Registration Statement of the Lincoln National Variable Annuity Account H as filed with the Commission on Form N-4 (SEC File No. 333-18419); and all references therein to "Series" shall include the Class 2 Shares of the Funds of the American Variable Insurance Series. 3. Special Terms and Conditions for the American Legacy III Contracts. The following terms and conditions shall apply with respect to the American Legacy III Contracts. a. Effective Date. The duties, warranties, and other undertakings of the Parties under the Original Agreement shall not take effect with respect to American Legacy III Contracts until the initial registration statement for the American Legacy III Contracts has been declared effective by the Commission. b. Compensation. Compensation with respect to the American Legacy III Contracts shall be paid in accordance with Schedule A-III which is attached to, and hereby incorporated into this Amendment; provided, however, that Lincoln National shall not be obligated to pay servicing fees or trail commissions to Members in the event that Lincoln National has not received, or is no longer eligible to receive, payments to reimburse expenses under the plan of distribution adopted by the Class 2 Shares of the Series of the American Variable Insurance Series pursuant to rule 12b-1 under the Investment Company Act of 1940. Changes may be made to Schedule A-III from time to time in accordance with Section 25 of the Original Agreement governing changes to the Schedules. c. 12b-1 Plan. AFD shall take all necessary and appropriate actions to ensure that the plan of distribution adopted by the Class 2 Shares of the Funds of American Variable Insurance Series pursuant to rule 12b-1 under the Investment Company Act of 1940 is administered and operated in accordance with all applicable rules and regulations promulgated by the Commission which are either currently in effect or which may be adopted from time to time, and that such plan shall provide for reimbursement to Lincoln National of its expenses relating to sales and servicing of American Legacy III Contracts by Members. 4. Counterparts. This Amendment may be executed in two or more counterparts, each of which, when so executed, shall be deemed to be an original, but such counterparts taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be duly executed and attested as follows: The Lincoln National Life Insurance Company on behalf of itself and Separate Account H of the Lincoln National Life Insurance Company Attest: By: Attest: American Funds Distributors: By: EX-99.4 4 FORM OF VARIABLE ANNUITY CONTRACT ARTICLE 1 DEFINITIONS ACCOUNT or VARIABLE ACCOUNT -- The segregated investment account into which The Lincoln National Life Insurance Company sets aside and invests the variable assets attributable to this Variable Annuity Contract. ACCUMULATION UNIT -- A unit of measure used to calculate the variable Contract Value during the accumulation period. ANNUITANT -- The person upon whose life the annuity benefit payments made after the Annuity Commencement Date will be based. ANNUITY COMMENCEMENT DATE -- The Valuation Date when the funds are withdrawn for payment of annuity benefits under the Annuity Payment Option selected. ANNUITY PAYMENT OPTION -- An optional form of payment of the annuity provided for under this Contract. ANNUITY UNIT -- A unit of measure used after the Annuity Commencement Date to calculate the amount of variable annuity payments. BENEFICIARY -- The person designated by the Owner to receive the Death Benefit, if any, payable upon the death of the Owner. CODE -- The Internal Revenue Code (IRC) of 1986, as amended. CONTINGENT DEFERRED SALES CHARGE (CDSC) -- Charges assessed on premature surrender of the Contract, calculated according to the Contract provisions. CONTRACT -- The Agreement between LNL and the Owner providing a variable annuity. CONTRACT VALUE -- The sum of the values of all the Accumulation Units attributable to this Contract at a given time and the value of monies in the Fixed Account. CONTRACT YEAR -- The period from the Contract Anniversary date on your Contract Data Page 3 (month and day) to the anniversary of the Contract in the following year. DEATH BENEFIT -- The amount payable to the Owner's designated Beneficiary upon death of the Owner. FUND -- Underlying investment options available in the Series. FIXED ACCOUNT -- The fixed portion of this Contract which is invested in the general account of LNL. HOME OFFICE -- The principal office of LNL located at 1300 South Clinton Street, Fort Wayne, Indiana 46801. LNL -- The Lincoln National Life Insurance Company. MATURITY DATE -- The date specified on Page 3 of this Contract. OWNER -- The individual or entity who exercises rights of ownership under this contract. PURCHASE PAYMENTS -- Amounts paid into this Contract. QUALIFIED PLAN -- A retirement plan qualified for special tax treatment under the Internal Revenue Code of 1986, as amended, including Sections 401, 403, 408 and 457. All other plans are considered non-qualified. SERIES -- American Variable Insurance Series, the Mutual Fund into which Purchase Payments allocated to the Variable Account are invested. SUB-ACCOUNT -- That portion of the Variable Account which pertains to investments in the Accumulation Units and Annuity Units of a particular Fund. VALUATION DATE -- Close of the market of each day that the New York Stock Exchange is open for business. VALUATION PERIOD -- The period commencing at the close of business on a particular Valuation Date and ending at the close of business on the next succeeding Valuation Date. ARTICLE 2 PURCHASE PAYMENTS, OPTIONS, AND BENEFITS 2.01 WHERE PAYABLE All Purchase Payments must be made to LNL at its Home Office. 2.02 AMOUNT AND FREQUENCY Purchase Payments are made in an amount and at the frequency shown on page 3. The Owner may change the frequency or amount of Purchase Payments subject to LNL's rules in effect at the time of the change. The minimum initial Purchase Payment is $1,500 for Non-Qualified Plans and $300 for Qualified Plans. The minimum annual amount of subsequent Purchase Payments is $300 for either Non-Qualified Plans or Qualified Plans. The minimum payment to the Contract at any one time must be at least $25.00 if transmitted electronically; otherwise the minimum amount is $100.00. Purchase Payments may be made until the earliest of the Annuity Commencement Date, the Surrender of the Contract, Maturity date or payment of any Death Benefit. 2.03 VARIABLE ACCOUNT Purchase Payments under the Contract may be allocated to the Lincoln National Variable Annuity Account H (Variable Account) and/or to the Fixed Account of the Contract. The Variable Account is for the exclusive benefit of persons entitled to receive benefits under variable annuity contracts. The Variable Account will not be charged with the liabilities arising from any other part of LNL's business. The Owner may direct Purchase Payments under the Contract to any of the available Sub-accounts subject to the following limitations. A minimum payment to any one Sub-account must be at least $20. If the Owner elects to direct Purchase Payments to a new Sub-account not previously selected, the election must be in writing to LNL or by telephone transfer provided LNL has received the appropriate authorization. The amounts allocated to each Sub- account will be invested at net asset value in the shares of one of the Funds of the American Variable Insurance Series (Series). The Funds are shown on page 3 of the Contract. LNL reserves the right to eliminate the shares of any Fund and substitute the securities of a different Fund or investment company or mutual fund if the shares of a Fund are no longer available for investment, or, if in the judgment of LNL, further investment in any Fund should become inappropriate in view of the purposes of the Contract. LNL may add a new Sub-account in order to invest the assets of the Variable Account into a Fund. LNL shall give the Owner written notice of the elimination and substitution of any Fund within fifteen days after such substitution occurs. LNL shall use each Purchase Payment allocated to the Variable Account by the Owner to buy Accumulation Units in the Sub-account(s) selected by the Owner. The number of Accumulation Units bought shall be determined by dividing the amount directed to the Sub-account by the dollar value of an Accumulation Unit in such Sub-account as of the point of the next valuation of such Sub-account immediately following receipt of the Purchase Payment at the Home Office of LNL. The number of Accumulation Units held for the account of an Owner shall not be changed by any change in the dollar value of Accumulation Units in any Sub- account. 2.04 VALUATION OF ACCUMULATION UNITS The variable Contract Value of an Owner's Contract at any time prior to the Annuity Commencement Date equals the sum of the values of the Accumulation Units credited in the Variable Account under the Contract. The value of a Sub-account is the number of units in the Sub-account multiplied by the value of an Accumulation Unit in the Sub-account. Accumulation Units for each Sub-account are valued separately. Initially, the value of an Accumulation Unit was set at $1.00. Thereafter, the value of an Accumulation Unit in any Sub-account on any Valuation Date equals the value of an Accumulation Unit in that Sub-account as of the immediately preceding Valuation Date, multiplied by the "Net Investment Factor" of that Sub-account for the current Valuation Period. The Net Investment Factor is an index which measures the investment performance of a Sub-account from one Valuation Period to the next. The Net Investment Factor for any Sub-account for any Valuation Period is equal to (1) divided by (2) and subtracting (3) from the result, where: (1) is the result of: (a) the Net Asset Value Per Share of the Fund held in the Sub-account, determined at the end of the current Valuation Day; plus (b) the per share amount of any dividend or capital gain distribution made by the Fund in the Sub-account, if the "ex-dividend" date occurs during the Valuation Period; plus or minus (c) a per share charge or credit for any taxes reserved for; (2) is the Net Asset Value Per Share of the Fund held in the Sub-account, determined at the end of the prior Valuation Day; (3) is a daily factor representing the mortality and expense risk and administrative charge deducted from the Sub-account adjusted for the number of days in the Valuation Period. On an annual basis, this charge will not exceed 1.40%. For any period in which the Enhanced Guaranteed Minimum Death Benefit (see Section 2.12) is not in effect, on an annual basis, this charge will not exceed 1.25% on an annual basis. The accumulation and Annuity Unit Value may increase or decrease the dollar value of benefits under the Contract. The dollar value of benefits will not be adversely affected by expenses incurred by LNL. 2.05 FIXED ALLOCATIONS Purchase Payments under the Contract may be allocated to the Variable Account and/or to the Fixed Account. A minimum allocation to the fixed portion must be at least $20. 2.06 CREDITING OF INTEREST ON FIXED ALLOCATIONS Interest shall be credited daily on all Purchase Payments that are allocated to the Fixed Account of this Contract. Prior to: the Annuity Commencement Date; payment of any Death Benefit; or surrender of this Contract; whichever occurs first, LNL guarantees that it will credit interest on fixed allocations at an effective annual rate not less than 3.0% during all years. A table of guaranteed values for the fixed allocations may be found in Article 8. LNL may credit interest at rates in excess of the guaranteed rates at any time. 2.07 AUTOMATIC NONFORFEITURE OPTION In the event that Purchase Payments are stopped, this Contract will continue as a paid-up Contract until the earlier of: the Maturity Date, surrender of the Contract, payment of any Death Benefit, or the Annuity Commencement Date. Purchase Payments may be resumed at any time prior to: the Maturity Date, surrender of the Contract, payment of any Death Benefit, or the Annuity Commencement Date. LNL reserves the right to surrender this Contract in accordance with the terms set forth in the nonforfeiture law applicable in your state, for individual deferred annuities. 2.08 TRANSFERS Prior to the earlier of: the Maturity Date; surrender of the Contract; payment of any Death Benefit; or the Annuity Commencement Date, the Owner may direct a transfer of assets from one Sub-account to another Sub-account or to the Fixed Account. The Owner may also direct a transfer of assets from the fixed portion of the Contract to one or more Sub-accounts of the Variable Account. Such a transfer request must be in writing or by telephone provided LNL has received the appropriate authorization from the Owner. Amounts transferred to the Sub-account(s) will purchase Accumulation Units as described in Section 2.03. A transfer will result in the purchase of Accumulation Units in one Sub-account and the redemption of Accumulation Units in the other Sub-account. Such a transfer will be accomplished at relative Accumulation Unit values as of the Valuation Date the transfer request is received. The valuation of Accumulation Units is described in Section 2.04. LNL reserves the right to impose a charge in the future for transfers between Sub-accounts. The minimum transfer amount is $300 or the entire amount in the Sub- account/Fixed Account, whichever is less. If, after the transfer, the amount remaining under this Contract in the Sub-account/Fixed Account from which the transfer is taken is less than $300, the entire amount held in that Sub- account/Fixed Account will be transferred with the transfer amount. For transfers between Sub-accounts and from the Sub-account(s) to the Fixed Account of the Contract, there are no restrictions on the maximum amount which may be transferred. For transfers from the fixed portion of the Contract to the Variable Account, the sum of the percentages of fixed value transferred will be limited to 25% in any 12 month period. Transfers cannot be made during the first 30 days after the contract date of the Contract and no more than six transfers will be allowed in any Contract Year. LNL reserves the right to waive any of these restrictions. 2.09 WITHDRAWAL OPTION The Owner may withdraw a part of the surrender value of this Contract, subject to the charges outlined under Surrender Option (see Section 2.10). The first four partial withdrawals of Contract Value during a Contract Year will be free of Contingent Deferred Sales Charges to the extent that the sum of the percentages of the Contract Value withdrawn does not exceed 10%. Withdrawals will be treated as "first in-first out" ("FIFO") for purposes of calculating the Contingent Deferred Sales Charge (see Section 2.11). Withdrawal will be effective on the Valuation Date on which LNL receives a written request at its Home Office. The minimum withdrawal is $300. LNL reserves the right to surrender this Contract if any withdrawal reduces the total contract value to a level in which this Contract may be surrendered in accordance with the terms set forth in the nonforfeiture law, applicable in your state, for individual deferred annuities. LNL may surrender the Contract for its surrender value. The remaining value will be subject to the charges as provided under Surrender Option (see Section 2.10). The request should specify from which Sub-account the withdrawal will be made. If no Sub-account is specified, LNL will withdraw, on a pro-rata basis from each Sub-account, the amount requested. Any cash payment will be mailed from LNL's Home Office within seven days after the date of withdrawal; however, LNL may be permitted to defer such payment under the Investment Company Act of 1940, as in effect at the time such request for withdrawal is received. For purposes of this Section, the Fixed Account of the Contract is considered a Sub-account. The Withdrawal Option is not available after the Annuity Commencement Date. 2.10 SURRENDER OPTION The Owner may surrender this Contract for its surrender value. On surrender, this Contract terminates. Surrender will be effective on the Valuation Date on which LNL receives a written request at its Home Office. The surrender value will be the total Contract Value on the Valuation Date, less a Contingent Deferred Sales Charge. Any cash payment will be mailed from LNL's Home Office within seven days after the date of surrender; however, LNL may be permitted to defer such payment under the Investment Company Act of 1940, as in effect at the time a request for surrender is received in its Home Office. The Surrender Option is not available after the Annuity Commencement Date. 2.11 CONTINGENT DEFERRED SALES CHARGE The Contingent Deferred Sales Charge (CDSC) is calculated separately for each Contract Year's Purchase Payments to which a charge applies. Charges are applied as follows: Number of complete Contract Years that a Purchase Payment has been invested. Less than At least 2 Years 2 3 4 5 6 7+ CDSC as a percentage 6% 5 4 3 2 1 0% of the surrendered or withdrawn Purchase Payments. A CDSC will be waived under certain circumstances (see Section 2.14 for details). For purposes of calculating CDSC, LNL assumes that Purchase Payments are withdrawn on a "first in-first out (FIFO)" basis, and that all Purchase Payments are withdrawn before any earnings are withdrawn. 2.12 DEATH BENEFITS Before the Annuity Commencement Date. Entitlement. If there is a single Owner, upon the death of the Owner LNL will pay a Death Benefit to the designated Beneficiary(s). If there are Joint Owners, upon the death of the first Joint Owner, LNL will pay a Death Benefit to the surviving Joint Owner. If the surviving Joint Owner is the spouse of the deceased Joint Owner such spouse may continue the Contract as sole Owner. Upon the death of the spouse who continues the Contract, LNL will pay a Death Benefit to the designated Beneficiary(s). The Death Benefit will be paid if LNL is in receipt of: (1) proof, satisfactory to LNL, of the death; (2) written authorization for payment; and (3) all claim forms, fully completed. Due proof of death may be a certified copy of a death certificate, a certified copy of the statement of death from the attending physician, a certified copy of a decree of a court of competent jurisdiction as to the findings of death, or any other proof of death acceptable to LNL. All Death Benefit payments will be subject to the laws and regulations governing death benefits. Notwithstanding any provision of this Contract to the contrary, no payment of Death Benefits provided under the Contract will be allowed that does not satisfy the requirements of Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Determination of Amounts. This Contract provides a Death Benefit equal to the Contract Surrender Value, or the Contract Value, or a Guarantee of Principal, or an Enhanced Guaranteed Minimum Death Benefit (EGMDB). The EGMDB will not be in effect if this Contract is issued to an Owner with an attained age of 75 or greater at issue. Under these circumstances, there will be no EGMDB provided. The EGMDB will only be in effect, UNLESS TERMINATED BY THE OWNER, for Non-Qualified Contracts and Contracts sold as Individual Retirement Annuities (IRA) under Code Section 408. Upon the death of the sole Owner, this Contract provides a Death Benefit of an EGMDB, if still in effect. If the EGMDB has been terminated by the Owner prior to the Owner's death, the Death Benefit is equal to the Guarantee of Principal. If there are Joint Owners, upon the death of the first Joint Owner, this Contract will provide a Death Benefit of the Contract surrender value to the surviving Joint Owner. If the surviving Joint Owner is the spouse of the deceased Joint Owner, the surviving spouse may continue the Contract in lieu of receiving the Death Benefit. IF THE CONTRACT IS CONTINUED BY THE SPOUSE OF THE DECEASED JOINT OWNER, THEN UPON THE DEATH OF THE SPOUSE WHO CONTINUED THE CONTRACT, THIS CONTRACT PROVIDES A DEATH BENEFIT OF AN EGMDB, IF STILL IN EFFECT. IF THE EGMDB HAS BEEN TERMINATED PRIOR TO THE DEATH OF THE SPOUSE WHO CONTINUED THE CONTRACT, THIS CONTRACT PROVIDES A DEATH BENEFIT EQUAL TO THE GUARANTEE OF PRINCIPAL. If the EGMDB is in effect and payable as described above, LNL will pay to the designated Beneficiary(s) a Death Benefit equal to the greater of: (a) the current Contract Value as of the date on which the death claim is approved by LNL for payment; or (b) the highest Contract Value at the time of fund valuation on any policy anniversary date (including the inception date) on ages up to, and including, the Owner's age 75. The highest Contract Value is increased by purchase payments and is decreased by partial withdrawals, partial annuitizations, and premium tax made, effected, or incurred subsequent to such anniversary date on which the highest Contract Value is obtained. At any time prior to the Annuity Commencement Date, an Owner may choose to terminate the EGMDB by giving written notice to LNL, and will them have no EGMDB. The EGMDB will terminate on the next Valuation Date following receipt of the written notice in the LNL Home Office. Termination of the EGMDB by the Owner will be permanent and final. If the Guarantee of Principal is in effect and payable as described above, LNL will pay to the designated Beneficiary(s) a Death Benefit equal to the greater of: a. the current Contract Value as of the date on which the death claim is approved by LNL for payment; or b. the sum of all purchase payments minus withdrawals, partial annuitizations and premium tax incurred. If the Owner is a corporation or other non-individual (non-natural person), the death of the Annuitant will be treated as the death of the Owner. The EGMDB will apply on the death of the Annuitant only in this situation. Payment of Amounts. THE DEATH BENEFIT PAYABLE ON THE DEATH OF THE OWNER, OR AFTER THE DEATH OF THE FIRST JOINT OWNER, OR UPON THE DEATH OF THE SPOUSE WHO CONTINUES THE CONTRACT, WILL BE DISTRIBUTED TO THE DESIGNATED BENEFICIARY(S) AS FOLLOWS: (a) the Death Benefit must be completely distributed within five years of the Owner's date of death; or (b) the designated Beneficiary may elect, within the one year period after the Owner's date of death, to receive the Death Benefit in substantially equal installments over the life of such designated Beneficiary or over a period not extending beyond the life expectancy of such designated Beneficiary; provided that such distributions begin not later than one year after the Owner's date of death. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by LNL of the claim. This payment may be postponed as permitted by the Investment Company Act of 1940. If the designated Beneficiary of the Death Benefit proceeds is the surviving spouse of the deceased Owner, the surviving spouse may elect to continue the Contract as the new Owner if the election is made within one year of the death of the Owner. On or After the Annuity Commencement Date. On receipt of due proof of death, as described above, of the Annuitant or Joint Annuitant, if any, remaining annuity payments, if any, under the Annuity Payment Option will be paid to the Beneficiary. 2.13 DEATH OF ANNUITANT If the Annuitant is also the Owner or a Joint Owner, then the Death Benefit paid will be subject to the Contract provisions regarding death of the Owner. If the surviving spouse of the Owner/Annuitant assumes the Contract, the Contingent Annuitant becomes the Annuitant. If no Contingent Annuitant is named, the surviving spouse becomes the Annuitant. If an Annuitant who is not the Owner or Joint Owner dies, then the Contingent Annuitant, if any, becomes the Annuitant. If no Contingent Annuitant is named, the Owner (or the younger of the Joint Owners) becomes the Annuitant. 2.14 WAIVER OF CONTINGENT DEFERRED SALES CHARGES A surrender of this Contract or withdrawal of Contract Value prior to the Annuity Commencement Date may be subject to a Contingent Deferred Sales Charge as described in Sections 2.09 and 2.10, except that such charges do not apply to: (1) the first four withdrawals of Contract Value during a Contract Year to the extent that the sum of the percentages of the Contract Value withdrawn by the first four withdrawals does not exceed 10% (this 10% withdrawal exception does not apply to a surrender of a Contract); (2) a surrender of the Contract as a result of "permanent and total disability" of the Owner as defined in section 22(e)(3) of the Internal Revenue Code subsequent to the effective date of this Contract and prior to the 65th birthday of the Owner; (3) when the surviving spouse assumes ownership of the Contract as a result of the death of the original Owner (in such case, the CDSC would be waived on the Contract Value as of the date which the surviving spouse assumed the Contract ownership); however, this does not apply if the spouses were Joint Owners; (4) a surrender of this Contract as a result of 90 days of continuous confinement of the Owner in an accredited nursing home or equivalent health care facility; (5) a surrender of this Contract as a result of terminal illness of the Owner that results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; (6) a surrender of the Contract as a result of the death of the Owner; and (7) annuitization. The Contingent Deferred Sales Charge will only be waived if LNL is in receipt of proof, satisfactory to LNL, of the exception. If a non-natural person is the Owner of the Contract, the Annuitant will be considered the Owner of the Contract for purposes of this Section 2.14. If a Joint Owner exists on the Contract, both the Joint Owners must meet one of the exceptions for waiver of the CDSC. ARTICLE 3 ANNUITY PAYOUT OPTION BENEFITS 3.01 ANNUITY PAYMENTS An election to receive payments under an Annuity Payment Option must be made by the Maturity Date. If an Annuity Payment Option is not chosen prior to the Maturity Date, payments will commence to the Owner on the Maturity Date under the Annuity Payment Option providing a Life Annuity with Annuity Payments guaranteed for 10 years. The Maturity Date is set forth on Page 3. Upon written request by the Owner and any Beneficiary who cannot be changed, the Maturity Date may be deferred. Purchase Payments may be made until the new Maturity Date. 3.02 CHOICE OF ANNUITY PAYMENT OPTION By Owner Prior to the Annuity Commencement Date, the Owner may choose or change any Annuity Payment Option, if that right has been reserved. For a 100% fixed annuity benefit payment, the Annuity Commencement Date must be at least thirty days prior to the time annuity payments are to begin. By Beneficiary At the time proceeds are payable to a Beneficiary, a Beneficiary may choose or change any Annuity Payment Option that meets the requirements of Code Section 72(s) or 401(a)(9) if proceeds are available to the Beneficiary in a lump sum. A choice or change must be in writing to LNL. After the Annuity Commencement Date, the Annuity Payment Option may not be changed. 3.03 ANNUITY PAYMENT OPTIONS a) Life Annuity /Life Annuity with Guaranteed Period -- Payments will be made for life with no certain period, or life and a 10 year certain period, or life and a 20 year certain period. b) Unit Refund Life Annuity -- Payments will be made for the lifetime of the Annuitant with the guarantee that upon death a payment will be made of the value of the number of Annuity Units equal to the excess, if any, of (a) over (b) where (a) is the total amount applied under the option divided by the Annuity Unit Value at the Annuity Commencement Date and (b) is the product of the number of Annuity Units represented by each payment and the number of payments paid prior to death. c) Joint Life Annuity/Joint Life Annuity with Guaranteed Period -- Payments will be made during the joint life of the Annuitant and a Joint Annuitant of the Owner's choice. Payments will be made for life with no certain period, or life and a 10 year certain period, or life and a 20 year certain period. Payments continue for the life of the survivor at the death of the Annuitant or Joint Annuitant. d) Other options may be available as agreed upon in writing by LNL. At the time an Annuity Payment option is selected to start under the provisions of this Contract, the Owner may elect to have the total Contract Value applied to provide a variable annuity payment, a fixed annuity payment, or a combination fixed and variable annuity payment. If no election is made, the value of the Owner's Variable Account shall be used to provide a variable annuity payment, and the value of the Owner's Fixed Account shall be used to provide a fixed annuity payment. The amount of Annuity Payment will depend on the age and sex (except in cases where unisex rates are required) of the Annuitant as of the Annuity Commencement Date. A choice may be made to receive payments once each month, four times each year, twice each year, or once each year. The Contract Value and Annuity Unit Value used to effect benefit payments will be calculated as of the Annuity Commencement Date. If any portion of the annuity payment will be on a variable basis, the first payment will be made fourteen days after the Annuity Commencement Date. Article 6 of this Contract illustrates the minimum payment amounts and the age adjustments which will be used to determine the first monthly payment under a variable annuity payment option. The tables show the dollar amount of the first monthly payment which can be purchased with each $1,000 of Contract Value, after deduction of any applicable premium taxes. Amounts shown use the 1983 'a' Individual Annuity Mortality Table, modified, with an assumed rate of return of 4% per year. Article 7 of this Contract illustrates the minimum payment amounts and the age adjustments which will be used to determine the monthly payments under a fixed annuity payment option. The tables show the dollar amount of the guaranteed monthly payments which can be purchased with each $1,000 of Contract Value, after deduction of any applicable premium tax. Amounts shown use the 1983 'a' Individual Annuity Mortality Table, modified, with an interest rate of 3.0% per year and a 2.0% expense load. 3.04 DETERMINATION OF THE AMOUNT OF VARIABLE ANNUITY PAYMENTS AFTER THE FIRST PAYMENT The first variable annuity payment is sub-divided into components each of which represents the product of: (a) the percentage elected by the Contract Owner of a specific Sub-account the performance of which will determine future variable annuity payments, and (b) the entire first variable annuity payment. Each Variable annuity payment after the first payment attributable to a specific Sub- account will be determined by multiplying the Annuity Unit Value for that Sub- account for the date each payment is due by a constant number of Annuity Units. This constant for each specific Sub-account is determined by dividing the component of the first payment attributable to such Sub-account as described above by the Annuity Unit Value for that Sub-account on the Annuity Commencement Date. The total variable annuity payment will be the sum of the payments attributable to each Sub-account. The Annuity Unit Value for any Valuation Period for any Sub-account is determined by multiplying the Annuity Unit Value for the immediately preceding Valuation Period by the product of (a) 0.9998926 raised to a power equal to the number of days in the current Valuation Period and (b) the Net Investment Factor of the Sub-account for the Valuation Period for which the Annuity Unit Value is being determined. The valuation of all assets in the Sub-account shall be determined in accordance with the provisions of applicable laws, rules, and regulations. The method of determination by LNL of the value of an Accumulation Unit and of an Annuity Unit will be conclusive upon the Owner and any Beneficiary. LNL guarantees that the dollar amount of each installment after the first shall not be affected by variations in mortality experience from mortality assumptions on which the first installment is based. After the Annuity Commencement Date, if any portion of the annuity payment is a variable annuity payment, the Owner may direct a transfer of assets from one Sub-account to another Sub-account or to a fixed annuity payment. Such transfers will be limited to three (3) times per Contract Year. Assets may not be transferred from a fixed annuity payment to a variable annuity payment. A transfer from one Sub-account to another Sub-account will result in the purchase of Annuity Units in one Sub-account, and the redemption of Annuity Units in the other Sub-account. Such a transfer will be accomplished at relative Annuity Unit values as of the Valuation Date the transfer request is received. The valuation of Annuity Units is described above. A transfer from one Sub- account to a fixed annuity payment will result in the redemption of Annuity Units in one Sub-account and the purchase of a minimum fixed annuity payment based on the tables in Article 7. 3.05 PROOF OF AGE Payment will be subject to proof of age that LNL will accept such as a certified copy of a birth certificate. 3.06 MINIMUM ANNUITY PAYMENT REQUIREMENTS If the Annuity Payment Option chosen results in payments of less than $50 per Sub-account, the frequency will be changed so that payments will be at least $50. For the purposes of this Section, the fixed annuity payment of the Contract is considered a Sub-account. 3.07 EVIDENCE OF SURVIVAL LNL has the right to ask for proof that the person on whose life the payment is based is alive when each payment is due. 3.08 CHANGE IN ANNUITY PAYMENT OPTION The Annuity Payment Option may not be changed after the Annuity Commencement Date. ARTICLE 4 BENEFICIARY 4.01 DESIGNATION The Owner may designate a Beneficiary(s), if there is a single owner. The designated Beneficiary(s) will receive the Death Benefit proceeds upon the death of the Owner. If there are Joint Owners, upon the death of the first Joint Owner, the surviving Joint Owner will receive the Death Benefit proceeds. 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, as spouse of the deceased Joint Owner, continues the Contract as the sole Owner in lieu of receiving the Death Benefit proceeds, then the designated Beneficiary(s) will receive the Death Benefit proceeds upon the death of the surviving spouse. UNLESS OTHERWISE STATED IN THE BENEFICIARY DESIGNATION, IF THERE IS MORE THAN ONE BENEFICIARY THEY ARE PRESUMED TO SHARE EQUALLY. 4.02 CHANGE The Owner may change any Beneficiary unless otherwise provided in the previous designation. A change of Beneficiary will revoke any previous designation. A change may be made by filing a written request in a form acceptable to LNL, at its Home Office. The change will become effective upon receipt of the written request by LNL at its Home Office. LNL reserves the right to request the Contract for endorsement of the change. 4.03 DEATH OF BENEFICIARY Unless otherwise provided in the Beneficiary designation, if any Beneficiary dies before the Owner, that Beneficiary's interest will go to any other Beneficiaries named, according to their respective interests. If there are no Beneficiaries, benefits will be paid to a Contingent Beneficiary(s), if any. If no Beneficiary or Contingent Beneficiary survives the Owner, the proceeds will be paid to the Owner's estate. Once a Beneficiary is entitled to death proceeds, the Beneficiary may name his or her own Beneficiary(s) to receive any remaining benefits due under the Contract, should the Beneficiary die prior to receipt of all benefits. This designation must be made to the LNL Home Office. ARTICLE 5 GENERAL PROVISIONS 5.01 THE CONTRACT The Contract and any riders attached constitute the entire Contract. Only the President, a Vice President, the Secretary or an Assistant Secretary of LNL has the power, on behalf of LNL, to change, modify, or waive any provisions of this Contract. LNL reserves the right to unilaterally change the Contract for the purpose of keeping the Contract in compliance with federal or state law. Any changes, modifications, or waivers must be in writing. No representative or person other than the above named officers has authority to change or modify this Contract or waive any of its provisions. All terms used in this Contract will have usual and customary meaning except when specifically defined. 5.02 OWNERSHIP The Owner is the person who has the ability to exercise the rights within this Contract. The Owner may only name his or her spouse as a Joint Owner. Joint Owner(s) shall be treated as having equal, undivided interests in the contract, including rights of survivorship. Either Joint Owner, independently of the other, may exercise any ownership rights in the Contract. Prior to the Annuity Commencement Date, the Owner has the right to change the Annuitant at any time by notifying LNL in writing of the change. The Annuitant may not be changed in a Contract owned by a non-natural person. The Owner may also name a Contingent Annuitant by notifying LNL in writing. The Contingent Annuitant designation is no longer applicable after the Annuity Commencement Date. 5.03 ASSIGNMENTS If this Contract is used with a Qualified Plan, the Contract will not be transferable. It may not be sold, assigned, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose. 5.04 INCONTESTABILITY This Contract will not be contested by LNL. 5.05 MISSTATEMENT OF AGE AND/OR SEX If the age and/or sex of the Annuitant has been misstated, the benefits available under this Contract will be those which the Purchase Payments would have purchased using the correct age and/or sex. Any underpayment already made by LNL shall be made up immediately and any overpayments already made by LNL shall be charged against the Annuity Payments falling due after the correction is made. 5.06 NONPARTICIPATING The Contract is nonparticipating and will not share in the surplus earnings of LNL. 5.07 VOTING RIGHTS The Owner shall have a right to vote at the meetings of the Series. Ownership of this Contract shall not entitle any person to vote at any meeting of shareholders of LNL. Votes attributable to the Contract shall be cast in conformity with applicable law. 5.08 OWNERSHIP OF THE ASSETS LNL shall have exclusive and absolute ownership and control of its assets, including all assets in the Variable Account. 5.09 REPORTS At least once each Contract Year LNL shall mail a report to the Owner. The report shall be mailed to the last address known to LNL. Prior to the Annuity Commencement Date, the report shall include a statement of the number of units credited to the Variable Account under this Contract and the dollar value of such units as well as a statement of the value of the Fixed Account of this Contract. The information in the report shall be as of a date not more than two months prior to the date of mailing the report. LNL shall also mail to the Owner at least once in each Contract Year a report of the investments held in the Sub- accounts under this Contract. 5.10 PREMIUM TAX State and local government premium tax, if applicable, will be deducted from Purchase Payments or Contract Value. This will be deducted when incurred by LNL or at another time of LNL's choosing. 5.11 MAXIMUM ISSUE AGE This Contract will not be issued to Owners over the age of 85. This also applies to Joint Owners, if any. ARTICLE 6 ANNUITY PURCHASE RATES UNDER A VARIABLE PAYMENT OPTION DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS PURCHASED WITH EACH $1,000 APPLIED SINGLE LIFE ANNUITIES No 120 240 Period Months Months Cash age Certain Certain Certain Refund 60 4.78 4.73 4.56 4.56 61 4.87 4.81 4.63 4.63 62 4.97 4.90 4.69 4.71 63 5.07 5.00 4.75 4.78 64 5.19 5.10 4.82 4.87 65 5.30 5.21 4.88 4.95 66 5.43 5.32 4.95 5.04 67 5.57 5.44 5.01 5.14 68 5.72 5.56 5.08 5.24 69 5.88 5.70 5.14 5.34 70 6.05 5.84 5.20 5.46 71 6.23 5.99 5.26 5.57 72 6.44 6.14 5.31 5.69 73 6.66 6.30 5.36 5.82 74 6.89 6.47 5.40 5.96 75 7.15 6.65 5.44 6.10 JOINT AND SURVIVOR ANNUTIES Joint and Full to Survivor Joint and Two-Thirds Survivor Certain Period Joint Certain Period None 120 240 Age None 120 240 4.37 4.37 4.34 60 4.78 4.74 4.57 4.44 4.44 4.40 61 4.88 4.82 4.63 4.52 4.51 4.46 62 4.97 4.91 4.69 4.60 4.59 4.53 63 5.08 5.00 4.76 4.68 4.68 4.60 64 5.19 5.10 4.82 4.77 4.77 4.67 65 5.31 5.21 4.88 4.87 4.86 4.74 66 5.44 5.32 4.95 4.98 4.96 4.82 67 5.57 5.44 5.01 5.09 5.07 4.89 68 5.72 5.56 5.08 5.21 5.19 4.96 69 5.87 5.69 5.14 5.34 5.31 5.04 70 6.04 5.83 5.20 5.47 5.44 5.11 71 6.22 5.97 5.25 5.62 5.58 5.18 72 6.42 6.12 5.31 5.78 5.73 5.24 73 6.62 6.28 5.36 5.96 5.88 5.30 74 6.85 6.44 5.40 6.14 6.05 5.36 75 7.09 6.61 5.44
Age Adjustment Table Year of Birth Adjustment to Age Year of Birth Adjustment to Age Before 1920 + 2 1960-1969 - 3 1920-1929 + 1 1970-1979 - 4 1930-1939 0 1980-1989 - 5 1940-1949 - 1 1990-1999 - 6 1950-1959 - 2 ETC. ETC.
ARTICLE 7 ANNUITY PURCHASE RATES UNDER A FIXED PAYMENT OPTION DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS PURCHASED WITH EACH $1,000 APPLIED SINGLE LIFE ANNUITIES No 120 240 Period Months Months Cash age Certain Certain Certain Refund 60 4.42 4.38 4.22 4.18 61 4.52 4.47 4.29 4.26 62 4.62 4.56 4.36 4.34 63 4.73 4.66 4.43 4.42 64 4.85 4.77 4.50 4.51 65 4.97 4.89 4.57 4.60 66 5.11 5.01 4.64 4.69 67 5.25 5.13 4.71 4.79 68 5.41 5.27 4.78 4.90 69 5.57 5.41 4.85 5.01 70 5.75 5.56 4.91 5.13 71 5.95 5.71 4.98 5.25 72 6.16 5.88 5.04 5.38 73 6.38 6.05 5.09 5.52 74 6.63 6.23 5.14 5.66 75 6.90 6.42 5.19 5.81
JOINT AND SURVIVOR ANNUTIES Joint and Full to Survivor Joint and Two-Thirds Survivor Certain Period Joint Certain Period None 120 240 Age None 120 240 4.01 4.01 3.98 60 4.43 4.38 4.22 4.09 4.08 4.05 61 4.52 4.47 4.29 4.17 4.16 4.12 62 4.63 4.57 4.36 4.25 4.25 4.19 63 4.74 4.67 4.43 4.34 4.34 4.26 64 4.85 4.78 4.50 4.44 4.43 4.34 65 4.98 4.89 4.57 4.54 4.54 4.42 66 5.11 5.01 4.64 4.66 4.64 4.50 67 5.26 5.13 4.71 4.77 4.76 4.58 68 5.41 5.27 4.78 4.90 4.88 4.66 69 5.57 5.41 4.85 5.04 5.01 4.74 70 5.75 5.55 4.91 5.18 5.15 4.82 71 5.94 5.70 4.98 5.34 5.30 4.89 72 6.14 5.86 5.03 5.51 5.45 4.96 73 6.35 6.03 5.09 5.69 5.62 5.03 74 6.59 6.20 5.14 5.89 5.79 5.09 75 6.84 6.38 5.18
Age Adjustment Table Year of Birth Adjustment to Age Year of Birth Adjustment to Age Before 1920 +2 1960-1969 -3 1920-1929 +1 1970-1979 -4 1930-1939 0 1980-1989 -5 1940-1949 -1 1990-1999 -6 1950-1959 -2 ETC. ETC.
ARTICLE 8 GUARANTEED ACCUMULATED VALUES AND SURRENDER VALUES FOR FIXED ALLOCATIONS* $1,000 Annual Contribution $100 Monthly Contribution Guaranteed Guaranteed Guaranteed Guaranteed End of Accumulated Surrender End of Accumulated Surrender Year Value Value Year Value Value 1 1,030.00 970.00 1 1,219.41 1,147.41 2 2,090.90 1,970.90 2 2,475.41 2,331.41 3 3,183.63 3,013.63 3 3,769.08 3,565.08 4 4,309.14 4,099.14 4 5,101.56 4,849.56 5 5,468.41 5,228.41 5 6,474.02 6,186.02 6 6,662.46 6,402.46 6 7,887.66 7,575.66 7 7,892.34 7,622.34 7 9,343.70 9,019.70 8 9,159.11 8,889.11 8 10,843.42 10,519.42 9 10,463.88 10,193.88 9 12,388.14 12,064.14 10 11,807.80 11,537.80 10 13,979.19 13,655.19 11 13,192.03 12,922.03 11 15,617.98 15,293.98 12 14,617.79 14,347.79 12 17,305.93 16,981.93 13 16,086.32 15,816.32 13 19,044.52 18,720.52 14 17,598.91 17,328.91 14 20,835.27 20,511.27 15 19,156.88 18,886.88 15 22,679.74 22,355.74 16 20,761.59 20,491.59 16 24,579.54 24,255.54 17 22,414.44 22,144.44 17 26,536.34 26,212.34 18 24,116.87 23,846.87 18 28,551.84 28,227.84 19 25,870.37 25,600.37 19 30,627.81 30,303.81 20 27,676.49 27,406.49 20 32,766.06 32,442.06 21 29,536.78 29,266.78 21 34,968.45 34,644.45 22 31,452.88 31,182.88 22 37,236.91 36,912.91 23 33,426.47 33,156.47 23 39,573.43 39,249.43 24 35,459.26 35,189.26 24 41,980.05 41,656.05 25 37,553.04 37,283.04 25 44,458.86 44,134.86 26 39,709.63 39,439.63 26 47,012.04 46,688.04 27 41,930.92 41,660.92 27 49,641.81 49,317.81 28 44,218.85 43,948.85 28 52,350.48 52,026.48 29 46,575.42 46,305.42 29 55,140.41 54,816.41 30 49,002.68 48,732.68 30 58,014.03 57,690.03 31 51,502.76 51,232.76 31 60,973.86 60,649.86 32 54,077.84 53,807.84 32 64,022.49 63,698.49 33 56,730.18 56,460.18 33 67,162.58 66,838.58 34 59,462.08 59,192.08 34 70,396.87 70,072.87 35 62,275.94 62,005.94 35 73,728.18 73,404.18 36 65,174.22 64,904.22 36 77,159.44 76,835.44 37 68,159.45 67,889.45 37 80,693.64 80,369.64 38 71,234.23 70,964.23 38 84,333.86 84,009.86 39 74,401.26 74,131.26 39 88,083.29 87,759.29 40 77,663.30 77,393.30 40 91,945.20 91,621.20 41 81,023.20 80,753.20 41 95,922.96 95,598.96 42 84,483.89 84,213.89 42 100,020.07 99,696.07 43 88,048.41 87,778.41 43 104,240.08 103,916.08 44 91,719.86 91,449.86 44 108,586.69 108,262.69 45 95,501.46 95,231.46 45 113,063.71 112,739.71
* Guaranteed Accumulated Values and Guaranteed Surrender Values may be more or less than shown in the table because of the variable of the day of receipt of the Purchase Payment at the Home Office from period to period and the crediting of interest to the Annuitant's account on a daily basis. Values shown are based upon contributions equally spaced with interest occurring at the beginning of the year. These values do not provide for premium tax, if any. EX-99.5 5 FORM OF APPLICATION ------------------------- The Lincoln National Life [LOGO FOR AMERICAN LEGACY III] Variable Annuity Application Insurance Company ------------------------- ================================================================================ Instructions: Please type or print. Any alterations to this application MUST BE INITIALED BY THE CONTRACT OWNER. ================================================================================ 1a Contract Owner (if no Annuitant is specified in section 2a, the Contract Owner, or Joint Contract Owner if younger, will be the Annuitant) Note: Maximum age of Contract Owner is 85 (80 in Pennsylvania). Social Security number/TIN - --------------------------------------- --- -- ---- [ ] Male Full legal name [ ] Female [ ] Trustee - --------------------------------------- Street address - --------------------------------------- Date of birth -- -- -- City State Zip Month Day Year - -------------------------------------------------------------------------------- 1b Joint Contract Owner (Joint Contract Owner may be a spouse) Note: Maximum age of Joint Contract Owner is 85 (80 in Pennsylvania). Social Security number/TIN - --------------------------------------- --- -- ---- [ ] Male Full legal name [ ] Female - --------------------------------------- Street address - --------------------------------------- Date of birth -- -- -- City State Zip Month Day Year ================================================================================ 2a Annuitant (complete only if different from Contract Owner) Note: Maximum age of Annuitant is 85 (80 in Pennsylvania). Social Security number/TIN - --------------------------------------- --- -- ---- [ ] Male Full legal name [ ] Female - --------------------------------------- Street address - --------------------------------------- Date of birth -- -- -- City State Zip Month Day Year - -------------------------------------------------------------------------------- 2b Contingent Annuitant Note: Maximum age of Contingent Annuitant is 85 (80 in Pennsylvania). - -------------------------------------------------------------------------------- Full legal name Relationship to Contract Owner ================================================================================ 3 Beneficiary(ies) of Contract Owner (list additional beneficiaries on separate sheet) - ------------------------------ -------------------------------- --------- --- Primary: Full legal name Relationship to Contract Owner SSN/TIN % - ------------------------------ -------------------------------- --------- --- Contingent: Full legal name Relationship to Contract Owner SSN/TIN % - ------------------------------ Date of Trust -- -- -- Trusts only: Executor/Trustee Month Day Year ================================================================================ 4 Type of Contract Nonqualified: [ ] Initial Contribution OR [ ] 1035 Exchange Tax-Qualified (must complete plan type): [ ] Initial Contribution, Tax year 19__ OR [ ] Transfer [ ] Rollover Plan Type (check one): [ ] IRA [ ] 401(k)" [ ] 401(a)"___________ (specify) "Indicate plan [ ] Other" ____________ [ ] 457 [ ] 403(b) (transfers only) year-end: _____/___ (specify) Month Day ================================================================================ 5a Allocation Please allocate my contribution of $______________________________ as follows: Initial minimums: Nonqualified/403(b) - $1,500.00 ________________ % Global Growth Fund Qualified - $300.00 ________________ % Growth Fund ________________ % International Fund The current allocation will ________________ % Growth-Income Fund apply to future contributions ________________ % Asset Allocation Fund unless otherwise specified. ________________ % High-Yield Bond Fund If no allocations are specified, ________________ % Bond Fund the entire amount will be ________________ % U.S. Govt./AAA-Rated allocated to the Cash Management Securities Fund Fund pending Instructions from ________________ % Cash Management Fund the Contract Owner. ________________ % Fixed Account Use whole percentages ================ % Total (must = 100%) - -------------------------------------------------------------------------------- 5b Dollar Cost Averaging ------------------------------------------------------ Total amount to DCA: $___________________________ OR (min $10,000) MONTHLY amount to DCA:$___________________________ ------------------------------------------------------ OVER THE FOLLOWING PERIOD: ____________MONTHS(0-00) NOTE: Period can be 6-60 months with a minimum of $10,000 in the holding account. ------------------------------------------------------ INTO THE FUND(S) AT THE RIGHT ------------------------------------------------------ FROM THE FOLLOWING HOLDING ACCOUNT (check one): [ ] DCA Fixed Account* [ ] Cash Management Fund* [ ] U.S. Govt./AAA-Rated Securities Fund* ------------------------------------------------------ Use whole percentages: ________________ % Global Growth Fund ________________ % Growth Fund ________________ % International Fund ________________ % Growth-Income Fund ________________ % Asset Allocation Fund ________________ % High-Yield Bond Fund ________________ % Bond Fund ________________ % U.S. Govt./AAA-Rated Securities Fund* ________________ % Cash Management Fund* ________________ % Fixed Account* ================ % Total (must = 100%) *The DCA holding account and the DCA fund elected cannot be the same. - ------------------------------------------------------------------------------- 5c Cross-Reinvestment To initiate the cross-reinvestment program, complete the appropriate form (available from your broker or financial planner). =============================================================================== 6 Automatic Bank Draft To: ATTACH VOIDED CHECK ------------------------- ------------------------- Bank name ABA number -------------------------- ------------------ -------------- ------------ Bank street address City State ZIP Automatic bank draft start date: [ ] [ ] [ ] Month Day(1-28) Year $ --------------------------------------------------- --------------------- Checking account number Monthly amount I/We hereby request and authorize you to pay and charge to my/our account checks or electronic fund transfer debts processed by and payable to the order of Lincoln Life, P.O. Box 2348, Fort Wayne, IN 46801-2948, provided there are sufficient collected funds in said account to pay the same upon presentation. It will not be necessary for any officer or employee of Lincoln Life to sign such checks. I/We agree that your rights in respect to each such check shall be the same as if it were a check drawn on you and signed personally by me/us. This authority is to remain in effect until revoked by me/us, and until you actually receive such notice I/We agree that you shall be fully protected in honoring any such check or electronic fund transfer debit. I/We further agree that if any such check or electronic fund transfer debit be dishonored, whether with or without cause and whether intentionally or inadvertently, you shall be under no liability whatsoever even though such dishonor results in the forfeiture of insurance or investment loss to me/us. Date [ ] [ ] [ ] Month Day Year - ----------------------------- ------------------------- Signature(s) EXACTLY as shown on bank records Litho in USA CGD/CXC/3370 Form 28817 0497------------------------- -------------(R)1997 American Funds Print full legal name(s) Distributors, Inc. Lit. No. LEGIIIAP-001-0497 ================================================================================ 7 Automatic Withdrawal A $10,000 minimum account balance is required. Note: Withdrawals may not exceed 10% per year of total contract value. ___ Please provide me with automatic withdrawals based on 10% of total contract value OR ___ Please provide me with automatic withdrawals of $__________ The withdrawal(s) should be made (check one): [_] Monthly [_] Quarterly [_] Semiannually [_] Annually. Begin withdrawals in [___] [__] Month Year ELECT ONE: [_] Do withhold taxes [_] Do not withhold taxes Note: If no selection is made, taxes will be withheld. ELECT ONE: [_] Send check to address of record OR [_] Send check to the following alternate address: ______________________________________________ ______________________________________________ For direct deposit into your bank account, an electronic fund transfer form must be completed and submitted with a voided check _______________________ ================================================================================ 8 Telephone Transfer [_] YES. I/we hereby authorize and direct Lincoln Life to accept telephone instructions from any person who can furnish proper identification to exchange units from subaccount to subaccount and/or to change the allocation of future investments. I/We agree to hold harmless and indemnify Lincoln Life, American Funds Distributors, Inc. and their affiliates and any mutual fund managed by such affiliates and their directors, trustees, officers, employees and agents for any losses arising from such instructions. ================================================================================ 9 Replacement Will the proposed contract replace any existing annuity or insurance contract? ELECT ONE: [_] No [_] Yes If yes, complete the 1035 Exchange or Qualified Retirement Account Transfer form. Company name _________________________________ Plan name __________________ Year issued ______ (Attach a replacement form if required by your state.) ================================================================================ 10 Signatures All statements made in this application (including on the reverse side) are true to the best of my/our knowledge and belief, and I/we agree to all terms and conditions as shown on the front and back. I/We further agree that this application is part of the annuity contract. I/We acknowledge receipt of current prospectuses for American Legacy III and American Variable Insurance Series and verify my/our understanding that all payments and values provided by the contract, when based on investment experience of the funds in the Series, are variable and not guaranteed as to dollar amount. Under penalty of perjury, the Contract Owner(s) certifies that the Social Security (or taxpayer identification) number(s) is correct as it appears in this application. Any person who knowingly and with intent to defraud any insurance company or other person, files or submits an application for insurance or statement of claim containing any materially false or deceptive information, or conceals, for the purpose of misleading, information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime and subjects such person to criminal and civil penalties. _____________________________ __________________ ________________________ Signed at (city) State County ___________________________________________________________________________ Signature of Contract Owner/Joint Contract Owner (if applicable) Date [____] [__] [__] Month Day Year _____________________________ __________________ ________________________ Signed at (city) State County ___________________________________________________________________________ Signature of Annuitant (Annuitant must sign if Contract Owner is a trust or custodian) Date [____] [__] [__] Month Day Year ================================================================================ THE FOLLOWING SECTIONS MUST BE COMPLETED BY THE SECURITIES DEALER OR FINANCIAL PLANNER. Please type or print. ================================================================================ 11 Insurance in Force Does this contract replace or change any other life insurance or annuity in this or any other company? ELECT ONE: [_] No [_] Yes If yes, complete the 1035 Exchange or Qualified Retirement Account Transfer form. Company name _______________________ Year issued __________________________ Amount _____________________________ Accidental death amount ______________ ================================================================================ 12 Additional Remarks ________________________________________________________ ___________________________________________________________________________ ================================================================================ 13 Dealer Information Note: Licensing appointment with Lincoln Life is required for this application to be processed. ___________________________________________________________________________ Registered representative's name (print as it appears on NASD licensing.) [___] [___]-[____] Registered representative's telephone number ___________________________________________________________________________ Client account number at dealer [___]-[___]-[____] Social Security number ___________________________________________________________________________ Dealer's name ___________________________________________________________________________ Branch address [_] Check if broker change of address ___________________________________________________________________________ City State ZIP ================================================================================ 14 Representative's Signature The representative hereby certifies that he/she witnessed the signature(s) in section 10 and that all information contained in this application is true to the best of his/her knowledge and belief. Signature _________________________________________________________________ ================================================================================ Send completed application--with a check made payable to Lincoln Life--to your investment dealer's home office or to: By Express Mail: American Lincoln Life Lincoln Life Legacy P.O. Box 2348 Attention: American Legacy Operations III Fort Wayne, IN 46801-2348 1300 South Clinton Street Fort Wayne, IN 46802 [LOGO American Legacy III] Request for Qualified Retirement Account Transfer/Direct Rollover ================================================================================ Instructions: A. Please type or print. B. Owner's/Trustee's Signature is required on this form. C. The following items must be mailed to Lincoln Life to process a transfer of funds: 1. This form, "Request for Qualified Retirement Account Transfer/Direct Rollover" 2. Old policy/contract, if applicable (if lost, please indicate in section 2 below) 3. State replacement form (if required by the state) 4. American Legacy Variable Annuity Application if funds are for an initial purchase payment ================================================================================ 1 Current Plan Information _______________________________________________ [_][_][_] [_][_][_]-[_][_][_][_] Current financial institution Telephone number ___________________________________ ____________________________________________ Address City State ZIP ___________________________________ Policy/account owner name _______________________________________________ Owner's Social Security number or Tax ID Number ____________________________________________ Name of participant/annuitant (if different) ____________________________________________ Policy/account number Transfer/rollover FROM type of plan: [_]401(k) [_]401(a) Type___________________ Transfer/rollover TO type of plan: [_]401(k) [_]401(a) Type___________________ [_] SEP-IRA [_] IRA [_] 403(b) [_] Other (specify)______________________________ [_] SEP-IRA [_] IRA [_] 403(b) [_] Other (specify)______________________________ ================================================================================ 2 Qualified Transfer/Direct Rollover Instructions Transfer the proceeds: [_] Immediately [_] When indicated (date must be within 30 days): [_][_] [_][_] [_][_] Month Day Year Check one for each of the following three sections: 1. The amount requested and directed for payment represents a: [_] Full transfer or [_] Partial transfer of $______________________________ 2. [_] Apply proceeds to a new contract [_] Apply proceeds to existing contract number _____________________________ Note: Age 70 1/2 restrictions apply to a retirement account transfer: If you are age 70 1/2 or older this year, you may not transfer or roll over required minimum distribution amounts. If necessary, instruct your present trustee/custodian, prior to effecting this transfer, to either: (1) pay your own required minimum distribution to you now or (2) retain that amount for distribution to you later. IF APPLICABLE: 3. [_] I have enclosed this annuity contract [_] I certify that the annuity contract has been lost or destroyed. After due search and inquiry, to the best of my knowledge, it is not in the possession or control of any other person. ================================================================================ 3 Signatures I, the undersigned Owner/Trustee of the above-named contract/account(s), request that you directly transfer the amount specified above to Lincoln Life. Please do not withhold any amount for taxes from the proceeds. It is may intention that this surrender and payment shall not constitute either actual or constructive receipt of income for federal income tax purposes and would therefore qualify as a transfer/rollover of assets. I request that my name not appear as a joint payee on the check nor shall any endorsement thereon be necessary for transfer or deposit. I request that the funds be made payable to Lincoln Life. If my name is to be used, it must be preceded by the term FBO or "for the benefit of." _________________________________________________ [_][_] [_][_] [_][_] Contract Owner/Trustee signature and title Month Day Year ___________________________________________________ [_][_] [_][_] [_][_] Co-Owner/Trustee signature and title (if applicable) Month Day Year _________________________________________________ [_][_] [_][_] [_][_] Irrevocable beneficiary signature (if applicable) Month Day Year ================================================================================ 4 Acceptance of Transfer (to be completed by the accepting company) Please liquidate the above-referenced policy/account. Do not withhold taxes from the proceeds. Please make the check payable to Lincoln Life, attach a copy of this form to the check and send to the address below. ______________________________________________ Authorized signature ______________________________________________ Date [_][_] [_][_] [_][_] Title Month Day Year Mail to: Lincoln Life, P.O. Box 2348, Fort Wayne, IN 46801-2348 [8][0][0] [4][4][3]-[8][1][3][7] ________________________________________ New policy/contract number ================================================================================ Send completed application and this form to your investment dealer's home office or to: By Express Mail: Lincoln Life Lincoln Life P.O. Box 2348 Attention: American Legacy Operations Fort Wayne, IN 46801-2348 1300 South Clinton Street Fort Wayne, IN 46802 American Legacy III Request for 1035 Exchange (Nonqualified) ================================================================================ Instructions: A. Please type or print. B. Owner's and any joint owner's signatures are required on this form. C. The following items must be mailed to Lincoln Life to process a 1035 exchange: 1. This form, "Request for 1035 Exchange (Nonqualified)" 2. Old policy/contract, to be exchanged (if lost, please indicate in section 2 below) 3. State replacement form (if required by the state) 4. American Legacy Variable Annuity Application ================================================================================ 1 Surrendering Company Information ____________________________________________ [_][_][_] [_][_][_]-[_][_][_][_] Surrendering Insurance company Telephone number ________________________________ ____________________________________________ Address City State ZIP ================================================================================ 2 Policy/Contract Information ____________________________________________ Policy/contract number Transfer the proceeds: [_] Immediately [_] When indicated (date must be within 30 days): [_][_] [_][_] [_][_] Month Day Year The policy/contract is: [_] Enclosed [_] Lost or destroyed (I certify that the policy/contract has been lost or destroyed. In addition, I certify that the policy/contract has not been assigned or pledged as collateral.) __________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________ Owner name Social Security Number Tax ID number __________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________ Joint owner name Social Security Number Tax ID number __________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________ Annuitant name(s) Social Security Number Tax ID number ================================================================================ 3 Accepting Company Information Lincoln Life ____________________________________________ [8][0][0] [4][4][3]-[8][1][3][7] Accepting Insurance company Telephone number P.O. Box 2348 Fort Wayne IN 46801-2348 ________________________________ ____________________________________________ Address City State ZIP ================================================================================ 4 Signatures I hereby make a complete and absolute assignment and transfer to the Accepting Insurance Company of all right, title and interest to the above- listed policy/contract in an exchange intended to qualify under Section 1035 of the Internal Revenue Code. I understand that if the Accepting Insurance Company underwrites and issues a new life Insurance policy/contract or annuity on the life of the policy/contract owner named above, then the Accepting Insurance Company intends to surrender the assigned policy/contract. I understand that the policy/contract to be issued by the Accepting Insurance Company shall have the same designated insured(s), Annuitant(s), and Owner(s) as the above-listed policy/contract. I certify that the above-listed policy/contract is currently in force and not subject to any prior assignments, any legal or equitable claims, liens or trusts. I further certify that there are no proceedings in bankruptcy pending against me. I understand and agree that I will be responsible for keeping the above-listed policy/contract in force by paying any premiums as they become due until such time as I have been issued a new life Insurance or annuity policy/contract. I represent and agree that the Accepting Insurance Company is participating in this transaction at my request and as an accommodation to me. I understand that the Accepting Insurance Company assumes no responsibility or liability for my tax treatment under Internal Revenue Code Section 1035. I agree that if the Accepting Insurance Company, in its sole discretion, determines that it is unlikely to receive timely payment of the full contract cash surrender values, the Accepting Insurance Company may reassign ownership of the contract back to me. I agree that any such reassignment shall be considered accepted by me upon my receipt of a reassignment form duly executed by the Accepting Insurance Company. Signed at ___________________________this__________day of ____________19_____ City ____________________________________ _______________________________________ Owner signature Joint owner or spousal (if community property) signature ____________________________________ _______________________________________ Insured signature (life only) Irrevocable beneficiary signature ================================================================================ 5 Acceptance of Assignment The Accepting Insurance Company, as assignee, accepts this assignment and hereby requests full surrender of the above-referenced policy/contract. The surrender represents a transfer of funds to the Accepting Insurance Company to qualify as a Section 1035(a) exchange. When the surrender is completed, please provide the Accepting Insurance Company a report of the pre- and post- TEFRA cost basis in the policy/contract. ____________________________________ _______________________________________ Authorized signature Title Date [_][_] [_][_] [_][_] Month Day Year _____________________________________________________________________________ New policy/contract number ================================================================================ Send completed application and this form to your investment dealer's home office or to: By Express Mail: Lincoln Life Lincoln Life P.O. Box 2348 Attention: American Legacy Operations Fort Wayne, IN 46801-2348 1300 South Clinton Street Fort Wayne, IN 46802 EX-99.8.A 6 FUND PARTICIPATION AGREEMENT EXHIBIT 8(a) FUND PARTICIPATION AGREEMENT ----------------------------- THIS AGREEMENT, effective this 12th day of July, 1989 among THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana for itself and on behalf of SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Account"), a separate account established by Lincoln National in accordance with the laws of the State of Indiana, and AMERICAN VARIABLE INSURANCE SERIES ("Series"), an open-end management company organized under the laws of the State of Massachusetts. WITNESSETH WHEREAS, the Account has been established by Lincoln National pursuant to the Indiana Insurance Code in connection with certain variable annuity contracts ("Contracts") proposed to be issued to the public by Lincoln National; and WHEREAS, the Account has been registered as a unit investment trust under the Investment Company Act of 1940; and WHEREAS, the income, gains and losses, whether or not realized, from assets allocated to the Account are, in accordance with the applicable Contracts, to be credited to or charged against such Account without regard to other income, gains or losses of Lincoln National; and WHEREAS, the Account is subdivided into various subaccounts ("Subaccounts") under which income, gains and losses, whether or not realized, from assets allocated to each such Subaccount are, in accordance with the applicable Contracts, to be credited to or charged against such Subaccounts without regard to other income, gains or losses of other Subaccounts or of Lincoln National; and WHEREAS, the Series is divided into various funds ("Funds"), each Fund being subject to certain fundamental investment policies and restrictions which may not be changed without a majority vote of the shareowners of such Fund; and WHEREAS, certain Funds will serve as the underlying investment medium for certain Subaccounts; and WHEREAS, American Funds Distributors, Inc., the principal underwriter for the Contracts to be funded by the Account, is a broker-dealer registered as such under the Securities Exchange Act of 1934; NOW THEREFORE, in consideration of the foregoing and of mutual covenants and conditions set forth herein and for other good and valuable consideration, Lincoln National, the Account, and the Series, hereby agree as follows: 1. The Contracts funded through the Account will provide for the allocation of net amounts among certain Subaccounts for investment in such shares of the Funds as may be offered from time to time in the prospectus of the Contracts. The selection of the particular Subaccount is to be made by the Contract Owner and such selection may be changed in accordance with the terms of the Contracts. 2. Fund shares to be made available to certain Subaccounts shall be sold by the respective Funds and purchased by Lincoln National for the corresponding Subaccount at the net asset value (without the imposition of a sales load) next computed after receipt of each order, as established in accordance with the provisions of the then current prospectus of the Series. Shares of particular Funds shall be ordered in such quantities and at such times as determined by Lincoln National to be necessary to meet the requirements of the Contracts. Orders or payments for shares purchased will be sent promptly to the Series and will be made in the manner established from time to time by the Series. The Series reserves the right to delay transfer of its shares until the payment check has cleared. The Series reserves the right to suspend sales if the Board of Trustees of the Series deems it appropriate and in the best interests of the Series or in response to the order of an appropriate regulatory authority. 3. Transfer of the Series' shares will be by book entry only. No stock certificates will be issued to the Account. Shares ordered from a particular Fund will be recorded in an appropriate title for the corresponding Subaccount by Lincoln National. 4. The Series shall furnish notice promptly to Lincoln National of any dividend or distribution payable on any shares underlying Subaccounts. All of such dividends and distributions as are payable on shares of a Fund recorded in the title for the corresponding Subaccount shall be automatically reinvested in additional shares of that Fund. The Series shall notify Lincoln National of the number of shares so issued. Lincoln National will provide the Series a list of Contract owners upon written notice from the Series' Board. 5. The Series shall pay all expenses incidental to its performance under this Agreement. The Series shall see to it that all of its shares are registered and authorized for issue in accordance with applicable federal and state laws prior to their purchase for the Subaccount. The Series shall bear the expenses for the cost of registration of its shares, preparation of its prospectuses, proxy materials and reports, the printing and distribution of such items to each Contract owner who has allocated net amounts to any Subaccount, the preparation of all statements and notices required by any federal or state law, or taxes on the issue or transfer of the Series' shares subject to this Agreement. 6. Lincoln National shall make no representations concerning the Series' shares except those contained in the then current prospectus of the Series and in printed information subsequently issued on behalf of the Series as supplemental to such prospectus. 7. Shares of the Series may be offered to separate accounts of various insurance companies in addition to Lincoln National. The parties to this Agreement recognize that, due to differences in tax treatment or other considerations, the interests of various Contract (or policy) owners participating in one or more Funds might, at some time, be in conflict. Each party shall report to the other party any potential or existing conflict of which it becomes aware. The Board of Trustees of the Series shall promptly notify Lincoln National of the existence of an irreconcilable material conflict and its implications. If such a conflict exists, Lincoln National will, at its own expense, take whatever action it deems necessary to remedy such conflict; in any case, Contract owners will not be required to bear such expenses. 8. Lincoln National shall be responsible for assuring that the Account calculates pass-through voting privileges of Contract owners in a manner consistent with the method of calculating pass-through voting privileges set forth in the current Contract prospectuses. 9. The Series agrees to comply with the diversification requirements of IRC 817(h) and any regulations therefor. 10. This Agreement shall terminate: a. at the option of Lincoln National or of the Series upon six months' advance written notice to the other; b. at the option of Lincoln National upon institution of formal proceedings against the Series by the Securities and Exchange Commission; c. Upon requisite vote of the Contract owners having an interest in a particular Subaccount to substitute the shares of another investment company for the corresponding Series shares in accordance with the terms of the Contracts for which those Series shares had been selected to serve as the underlying investment medium. Lincoln National will give 30 days' prior written notice to the Series of the date of any proposed vote to replace Series' shares; and d. In the event the Series' shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as an underlying investment for the Contracts issued or to be issued by Lincoln National; in such event prompt notice shall be given by Lincoln National or the Series to the other. 11. If this Agreement terminates, any provision of this Agreement necessary to the orderly windup of business under it will remain in effect as to that business, after termination. 12. The obligations of the Series under this Agreement are not binding upon any of the Trustees, officers, employees or shareholders of the Series individually, but bind only the Series' assets. When seeking satisfaction for any liability of the Series in respect of this Agreement, Lincoln National and the Account agree not to seek recourse against said Trustees, officers, employees or shareholders, or any of them, or any of their personal assets for such satisfaction. 13. This Agreement shall be construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested as of the date first above written. THE LINCOLN NATIONAL LIFE INSURANCE COMPANY FOR ITSELF AND ON BEHALF OF SEPARATE ACCOUNT H Attest: /s/ Kelly D. Clevenger By: /s/ Robert A. Nikels - ----------------------- ---------------------- AMERICAN VARIABLE INSURANCE SERIES Attest: /s/ Michael Downer By: /s/ Hoyt J. Turner - ----------------------- ---------------------- K56676 EX-99.8.B 7 AMENDMENT TO PARTICIPATION AGREEMENT EXHIBIT 8(b) AMENDMENT TO FUND PARTICIPATION AGREEMENT ----------------------------------------- This amendment (this "Amendment"), dated as of March _____, 1997, to a Fund Participation Agreement effective July 12, 1989 (the "Original Agreement"), is executed by and among LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana, on behalf of itself and SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (the "Account"), a separate account established by Lincoln National pursuant to the Indiana Insurance Code, and AMERICAN VARIABLE INSURANCE SERIES (the "Series"), an open-end management investment company organized under the laws of the Commonwealth of Massachusetts (collectively, the "Parties"). WITNESSETH: WHEREAS, the Series, as originally established, authorized the issuance of a single class of shares corresponding to each Fund of the Series; and WHEREAS, the Series has reclassified its shares for each Fund into two classes, Class 1 and Class 2 shares, and has redesignated all outstanding shares as Class 1 shares; and WHEREAS, the Series intends that Class 2 shares shall differ from Class 2 shares in that, among other things, Class 2 shares shall be subject to expenses charged against Fund assets attributable to Class 2 shares under a distribution plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940; and WHEREAS, Lincoln National desires to continue purchasing Class 1 shares for the Contracts described in the Original Agreement, and desires to commence purchasing Class 2 shares for another class of variable annuity contracts for which a registration statement has been filed with the Securities and Exchange Commission (the "Commission") and which will be marketed under the name "American Legacy III Contracts"; and WHEREAS, the Parties desire to extend the terms and conditions of the Original Agreement to cover the Class 2 shares of the Funds of the Series; NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants and conditions contained herein and in the Original Agreement, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Lincoln National, the Account and the Series hereby agree as follows: 1. Class 1 Shares. Class 1 shares of each Fund shall continue to remain available for purchase by the subaccounts of the Account on the same basis and subject to the same terms and conditions as set forth in the Original Agreement. 2. Class 2 Shares. Class 2 shares of each Fund shall be made available to subaccounts of the Account on the same basis and subject to the same terms and conditions as set forth in the Original Agreement, except as otherwise provided in Section 5 of this Amendment. 3. Defined Terms. Unless the context otherwise requires and except as provided otherwise in Section 5 of this Amendment, all references in the Original Agreement, as amended hereby, to the "Contracts" shall include the American Legacy III Contracts; all references therein to "Shares" shall include Class 1 and Class 2 shares of the Funds of the Series; and all references therein to "Subaccounts" shall include subaccounts of the Account established to invest in Class 2 shares of the Funds of the Series. 4. Orders. All redemption and purchase orders for shares shall specify the applicable class of shares. 5. Special Terms and Conditions for the Class 2 Shares of the Funds of the American Variable Insurance Series. The following terms and conditions shall apply with respect to the Class 2 Shares of the Funds of the Series. a. Effective Date. The rights and obligations, representations and warranties, and other undertakings of the Parties under the Original Agreement shall not take effect with respect to the Class 2 shares of the Funds until the post-effective amendment to the Series' registration statement relating to the establishment of the Class 2 shares has either been declared effective by the Commission or becomes effective automatically and the registration statement for the American Legacy III Contracts has been declared effective by the Commission. b. 12b-1 Plan. The Series shall take all necessary and appropriate actions to ensure that the plan of distribution adopted by the Class 2 shares of the Funds pursuant to rule 12b-1 under the Investment Company Act of 1940 is administered and operated in accordance with all applicable rules and regulations promulgated by the Commission which are either currently in effect or which may be adopted from time to time. 6. Counterparts. This Amendment may be executed in two or more counterparts, each of which, when so executed, shall be deemed to be an original, but such counterparts taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be duly executed and attested as follows: The Lincoln National Life Insurance Company on behalf of itself and Separate Account H of the Lincoln National Life Insurance Company Attest: By: - ---------------------- -------------------------------- Attest: American Variable Insurance Series By: - ---------------------- -------------------------------- EX-99.8.C 8 AMENDMENT TO THE INDEMNIFICATION AGREEMENT EXHIBIT 8(c) AMENDMENT TO THE INDEMNIFICATION AGREEMENT This amendment (this "Amendment") to an Indemnification Agreement (the "Original Agreement") is executed by and between LINCOLN NATIONAL LIFE INSURANCE COMPANY ("LNL"), on its own behalf and on behalf of LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H ("Account H"), and CAPITAL RESEARCH and MANAGEMENT COMPANY ("CRMC") (collectively, the "Parties"). The effective date of this Amendment is the date on which the Securities and Exchange Commission (the "SEC") shall declare effective the initial registration statement on Form N-4 (SEC File No. 333-18419) for certain variable annuity contracts to be issued through Account H (the "American Legacy III Contracts") and providing for investment of purchase payments in the American Variable Insurance Series (the "Series"). RECITALS A. The Series, as originally established, authorized the issuance of a single class of shares corresponding to each Fund of the Series (the "Original Shares") which have been made available for purchase payments received under certain variable annuity contracts issued through the Account and marketed under the name "American Legacy II Contracts." B. The Series has reclassified its shares for each Fund of the Series into two classes, Class 1 and Class 2 shares, and has redesignated all outstanding Original Shares as Class 1 shares. C. CRMC desires that LNL continue utilizing Class 1 shares of the Funds of the Series as the underlying investment vehicle for purchase payments received under the American Legacy II Contracts, and commence utilizing the Class 2 shares of the Funds of the Series as the underlying investment vehicle for purchase payments received under the American Legacy III Contracts. D. LNL is willing to utilize the Class 1 and Class 2 shares of the Funds of the Series as the underlying investment vehicles so long as CRMC undertakes to indemnify LNL on the same basis and subject to the same terms and conditions as CRMC has agreed to so indemnify LNL with respect to the Original Shares as set forth in the Original Agreement. AGREEMENT NOW THEREFORE, for good and sufficient consideration, the receipt of which is hereby acknowledged, the Parties agree as follows: 1. CRMC agrees that the indemnification obligation provided for in the Original Agreement shall apply to the Class 1 and Class 2 shares, subject to the same terms and conditions as apply to the Original Shares in the Original Agreement as though set forth in full herein. For this purpose, all references in the Original Agreement, as amended hereby, to "Contracts" shall include the American Legacy III Contracts; and all references therein to "Series" shall include the Class 1 and Class 2 shares of the Funds of the American Variable Insurance Series. 2. This Amendment may be executed in two or more counterparts, each of which, when so executed, shall be deemed to be an original, but such counterparts taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly executed and attested as of the effective date provided for above. THE LINCOLN NATIONAL LIFE INSURANCE COMPANY FOR ITSELF AND ON BEHALF OF SEPARATE ACCOUNT H Attest: By: - ------------------- ------------------------------------ CAPITAL RESEARCH AND MANAGEMENT COMPANY Attest: By: - ------------------- ------------------------------------ EX-99.9 9 CONSENT OF JEREMY SACHS LINCOLN NATIONAL LIFE INSURANCE COMPANY Law Division 7C03 1300 South Clinton Fort Wayne, Indiana 46802 Phone: (219) 455-3018 Fax: (219) 455-5135 Exhibit 9 VIA EDGAR - --------- March 26, 1997 Securities and Exchange Commission Division of Insurance Management Office of Insurance Products 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Lincoln National Variable Annuity Account H (American Legacy III) File Nos. 333-18419; 811-5721 Opinion and Consent of Counsel Ladies and Gentlemen: I have recently made such examination of law and have examined such records and documents as I have deemed necessary to render the opinion expressed below. I am of the opinion that upon acceptance by Lincoln National Variable Annuity Account H (the "Account"), a segregated account of Lincoln National Life Insurance Company (Lincoln Life), of contributions from a person pursuant to an insurance policy issued in accordance with the prospectus contained in this amended Registration Statement on Form N-4, and upon compliance with applicable law, such person will have a legally issued interest in his or her individual account with the Account, and the securities issued will represent binding obligations of Lincoln Life. I consent to the filing of this Opinion as an exhibit to the Account's Pre- Effective Amendment No. 1 to the Registration Statement on Form N-4. Very truly yours, /s/ Jeremy Sachs Jeremy Sachs Senior Counsel Enclosure EX-99.10 10 CONSENT OF ERNST & YOUNG LLP Exhibit 10 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Independent Auditors" in the Post Effective Amendment No. 10 to the Registration Statement (Form N-4 No. 33-27783), the Pre Effective Amendment No. 1 to the Registration Statement (Form No. 333-18419), and the related Statement of Additional Information appearing therein and pertaining to Lincoln National Variable Annuity Account H, and to the use therein of our reports dated (a) February 6, 1997, with respect to the statutory-basis financial statements of The Lincoln National Life Insurance Company for each of the three years in the period ended December 31, 1996; (b) February 7, 1996, with respect to the consolidated financial statements of The Lincoln National Life Insurance Company for each of the three years in the period ended December 31, 1995; and (c) March 14, 1997, with respect to the financial statements of Lincoln National Variable Annuity Account H. /s/ Ernst & Young LLP Fort Wayne, Indiana March 27, 1997 EX-99.13 11 COMPUTATION OF PERFORMANCE QUOTATIONS Exhibit 13 Lincoln National Life Account H SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS A. STANDARDIZED PERFORMANCE The Average Annual Total Return for each period was determined by finding the average annual compounded rate of return over each period that would equate the initial amount invested to the ending redeemable value for that period, according to the following formula: n P * ( 1 + T ) = ERV Where: P = a hypothetical initial purchase payment of $1,000 T = average annual total return for the period in question n = number of years ERV = redeemable value (as of the end of the period in question) of a hypothetical $1,000 purchase payment made at the beginning of the 1- year, 5-year, or 10-year period in question (or fractional portion thereof). The formula assumes that : 1) all recurring fees have been charged to Contract Owner accounts; 2) all applicable non-recurring charges are deducted at the end of the period in questions; 3) there will be a complete redemption at the end of the period in question. The performance figures shown in the table above relate to the contract form containing the highest level of charges. B. NON-STANDARDIZED QUOTATIONS This schedule present the formulas and calculation employed in producing the performance quotations set out in the SAI, under the heading, "NON-STANDARDIZED INVESTMENT RESULTS--SUN-ACCOUNTS OF ACCOUNT H". Amount and Compound Growth Rate calculations are shown for all base periods disclosed. The formula for calculating the current Amount of an originally invested $10,000 for a particular base period is: CP = ( X / Y ) * $10,000 where: CP = Amount at End of Base Period X = Accumulation Unit Value at End of Base Period Y = Accumulation Unit Value at Beginning of Base Period The formula for calculating the Compound Growth Rate for a particular base period is: ( 1 / N ) GR = ( X / Y ) - 1 where: GR = Annualized Return X = Accumulation Unit Value at End of Base Period Y = Accumulation Unit Value at Beginning of Base Period N = Number of Years of Fund Performance Being Evaluated Separate Account H - Standardized 1 Year Returns
- ----------------------------------------------------------------------------------------------------- ONE YEAR RETURNS PERIOD ENDING 12/31/1996: - ----------------------------------------------------------------------------------------------------- Growth Growth High Yield Cash Gov't Asset International Series Income Bond Allocation - ----------------------------------------------------------------------------------------------------- Fund Value $1,109.99 $1,159.61 $1,112.90 $1.033.73 $1,014.25 $1,133.13 $1,142.86 Fee $ 0.62 $ 0.64 $ 0.62 $ 0.60 $ 0.59 $ 0.63 $ 0.63 Surr Charge $ 60.00 $ 60.00 $ 60.00 $ 60.00 $ 60.00 $ 60.00 $ 60.00 Final Value $1,049.37 $1,098.97 $1,052.28 $ 973.13 $ 953.66 $1,072.51 $1,082.23 Annual Return 4.94% 9.90% 5.23% -2.69% -4.63% 7.25% 8.22% - -----------------------------------------------------------------------------------------------------
Calculation of Annual Return Final Value = 1,000* (31-Dec-96 Unit Value/31-Dec-95 Unit Value) - Annual Fee - Surrender Charge Annual Return = Final Value/1,000 - 1 Unit Values
- ---------------------------------------------------------------------------------------------- Growth Growth High Yield Cash Gov't Asset International Date Series Income Bond Allocation - ---------------------------------------------------------------------------------------------- 31-Dec-95 1.986187 1.822127 1.755828 1.211566 1.512413 1.735523 1.505391 31-Dec-96 2.204645 2.112956 1.954056 1.252429 1.533965 1.966582 1.720458 - ----------------------------------------------------------------------------------------------
Separate Account H - Standardized 5 Year Returns
- ------------------------------------------------------------------------------------------------------------------------- FIVE YEAR RETURNS PERIOD ENDING 12/31/1996: - ------------------------------------------------------------------------------------------------------------------------- Growth Growth High Yield Cash Gov't Asset International Series Income Bond Allocation - ------------------------------------------------------------------------------------------------------------------------- One Year $1,089.77 $1,061.70 $1,106.43 $1,015.36 $1,058.49 $1,067.32 $975.38 Fee $0.77 $0.76 $0.78 $0.75 $0.76 $0.76 $0.73 Final Value $1,089.00 $1,060.94 $1,105.65 $1,014.61 $1,057.73 $1,066.56 $974.65 Two Year $1,246.19 $1,172.07 $1,266.37 $1,024.66 $1,156.78 $1,158.53 $1,288.21 Fee $0.85 $0.81 $0.86 $0.74 $0.80 $0.81 $0.82 Final Value $1,245.34 $1,171.26 $1,265.50 $1,023.92 $1,155.98 $1,157.72 $1,287.39 Three Year $1,231.00 $1,176.03 $1,163.32 $1,046.21 $1.087.67 $1,135.54 $1,290.70 Fee $0.90 $0.85 $0.88 $0.75 $0.81 $0.83 $0.93 Final Value $1,230.10 $1,175.18 $1,162.44 $1,045.46 $1,086.85 $1,134.71 $1,289.76 Four Year $1,620.63 $1,548.86 $1,393.51 $1.085.45 $1,233.65 $1,453.97 $1,446.40 Fee $0.94 $0.90 $0.85 $0.71 $0.77 $0.86 $0.91 Final Value $1,619.69 $1,547.96 $1,392.66 $1,084.74 $1,232.88 $1,453.11 $1,445.50 Five Year $1,797.84 $1,795.03 $1,549.89 $1,121.33 $1,250.45 $1,646.57 $1,652.01 Fee $1.01 $0.98 $0.87 $0.65 $0.73 $0.91 $0.91 Surr Charge $20.00 $20.00 $20.00 $20.00 $20.00 $20.00 $20.00 Final Value $1,776.83 $1,774.04 $1,529.03 $1,100.68 $1,229.72 $1,625.66 $1,631.10 Annual Return 12.18% 12.15% 8.86% 1.94% 4.22% 10.21% 10.28% - -------------------------------------------------------------------------------------------------------------------------
Calculation of Annual Return
Final Value Year Two = 1,000 * (31-Dec-92 Unit Value/31-Dec-91 Unit Value) - Annual Fee Year Two Final Value Year Three = 1,000 * (31-Dec-93 Unit Value/31-Dec-92 Unit Value) - Annual Fee Year Three Final Value Year Four = 1,000 * (31-Dec-94 Unit Value/31-Dec-93 Unit Value) - Annual Fee Year Four Final Value Year Five = 1,000 * (31-Dec-95 Unit Value/31-Dec-94 Unit Value) - Annual Fee Year Five - Surrender Charge Final Value Year Five = 1,000 * (31-Dec-96 Unit Value/31-Dec-95 Unit Value) - Annual Fee Year Five - Surrender Charge
Annual Return = (Final Value Year Five/ 1000) (1/5) - 1 Unit Values
- ------------------------------------------------------------------------------------------------------------------------ Growth Growth High Yield Cash Gov't Asset International Date Series Income Bond Allocation - ------------------------------------------------------------------------------------------------------------------------ 31-Dec-91 1.222965 1.173922 1.257308 1.113764 1.223318 1.191085 1.038587 31-Dec-92 1.332750 1.246358 1.391118 1.130871 1.294868 1.271271 1.013017 31-Dec-93 1.525124 1.376907 1.593334 1.142068 1.416131 1.380900 1.338925 31-Dec-94 1.507567 1.382521 1.464678 1.166927 1.332445 1.354439 1.342363 31-Dec-95 1.986187 1.822127 1.755828 1.211566 1.512413 1.735523 1.505391 31-Dec-96 2.204645 2.112956 1.954056 1.252429 1.533965 1.966582 1.720458 - ------------------------------------------------------------------------------------------------------------------------
Separate Account H - Standardized 10 Year/Lifetime Returns - -------------------------------------------------------------------------------- 10 YEAR/LIFETIME RETURNS PERIOD ENDING 12/31/1996: - --------------------------------------------------------------------------------
Growth Growth High Yield Cash Gov't Series Income Bond - -------------------------------------------------------------------------------- Year One $1,063.76 $ 989.81 $1,031.55 $1,043.49 $ 968.24 Fee $0.72 $0.70 $0.71 $0.72 $0.69 Final Value $1,063.04 $ 989.11 $1,030.84 $1,042.78 $ 967.55 - -------------------------------------------------------------------------------- Year Two $1,198.04 $1,113.44 $1,162.46 $1,097.97 $1,028.71 Fee $0.79 $0.74 $0.77 $0.75 $0.70 Final Value $1,197.25 $1,112.71 $1,161.69 $1,097.22 $1,028.02 - -------------------------------------------------------------------------------- Year Three $1,545.47 $1,372.96 $1,262.57 $1,174.09 $1,120.43 Fee $0.96 $0.87 $0.85 $0.79 $0.75 Final Value $1,544.51 $1,372.09 $1,262.72 $1,173.30 $1,119.67 - -------------------------------------------------------------------------------- Year Four $1,452.87 $1,315.24 $1,288.78 $1,245.34 $1,194.16 Fee $1.05 $0.94 $0.89 $0.85 $0.81 Final Value $1,451.83 $1,314.30 $1,287.88 $1,244.49 $1,193.35 - -------------------------------------------------------------------------------- Year Five $1,903.64 $1,604.38 $1,603.77 $1,292.26 $1,361.13 Fee $1.17 $1.02 $1.01 $0.89 $0.89 Final Value $1,902.46 $1,603.36 $1,602.76 $1,291.37 $1,360.24 - -------------------------------------------------------------------------------- Year Six $2,073.25 $1,702.30 $1,773.33 $1,311.20 $1,439.80 Fee $1.47 $1.22 $1.25 $0.96 $1.04 Final Value $2,071.78 $1,701.07 $1,772.09 $1,310.24 $1,438.76 - -------------------------------------------------------------------------------- Year Seven $2,370.82 $1,879.25 $2,029.68 $1,323.21 $1,573.50 Fee $1.61 $1.30 $1.38 $0.96 $1.09 Final Value $2,369.21 $1,877.95 $2,028.30 $1,322.26 $1,572.40 - -------------------------------------------------------------------------------- Year Eight $2,341.94 $1,885.61 $1,864.52 $1,351.04 $1,479.48 Fee $1.71 $1.36 $1.41 $0.97 $1.11 Final Value $2,340.23 $1,884.24 $1,863.11 $1,350.07 $1,478.38 - -------------------------------------------------------------------------------- Year Nine $3,083.20 $2,483.38 $2,233.46 $1,401.71 $1,678.06 Fee $1.80 $1.45 $1.36 $0.91 $1.05 Final Value $3,081.40 $2,481.94 $2,232.10 $1,400.80 $1,677.01 - -------------------------------------------------------------------------------- Year Ten $3,420.32 $2,878.08 $2,484.10 $1,448.05 $1,700.91 Fee $1.91 $1.58 $1.39 $0.84 $0.99 Surr Charge $0.00 $0.00 $0.00 $0.00 $0.00 Final Value $3,418.41 $2,876.50 $2,482.72 $1,447.21 $1,699.91 Period 10 10 10 10 10 Annual Return 13.08% 11.14% 9.52% 3.77% 5.45% - --------------------------------------------------------------------------------
- ------------------------------------------------------- Asset Intenational Bond Fund Allocation - ------------------------------------------------------- Year One $ 999.40 $1,002.35 $1,041.22 Fee $0.70 $0.70 $0.60 Final Value $ 998.70 $1,001.65 $1,040.62 - ------------------------------------------------------- Year Two $1,108.78 $1,073.40 Fee $0.74 $0.73 Final Value $1,108.04 $1,072.68 - ------------------------------------------------------- Year Three $1,245.26 $1,101.58 Fee $0.82 $0.80 Final Value $1,244.44 $1,100.77 - ------------------------------------------------------- Year Four $1,333.32 $1,357.48 Fee $0.95 $0.89 Final Value $1,332.36 $1,356.59 - ------------------------------------------------------- Year Five $1,355.47 $1,373.66 Fee $0.98 $0.99 Final Value $1,354.49 $1,372.67 - ------------------------------------------------------- Year Six $1,583.30 $1,590.76 Fee $1.07 $0.98 Final Value $1,582.24 $1,589.78 - ------------------------------------------------------- Year Seven $1,779.40 $1,713.49 Fee $1.11 $0.97 Final Value $1,778.28 $1,712.52 - ------------------------------------------------------- Year Eight $1,957.24 Fee $1.10 Final Value $1,956.14 - ------------------------------------------------------- Year Nine Fee Final Value - ------------------------------------------------------- Year Ten Fee Surr Charge $10.00 $10.00 $60.00 Final Value $1,956.14 $1,702.52 $ 980.62 Period 7.416438 6.6684932 0.994536 Annual Return 9.47% 8.31% -1.94% - -------------------------------------------------------
Separate Account H - Standardized 10 Year/Lifetime Returns
Calculation of Annual Return (Excluding Asset Allocation and International Funds) Final Value Year Two=1,000*(31-Dec-87 Unit Value/31-Dec-86 Unit Value)-Annual Fee Year Two Final Value Year Three=1,000*(31-Dec-88 Unit Value/31-Dec-87 Unit Value)-Annual Fee Year Three Final Value Year Four=1,000*(31-Dec-89 Unit Value/31-Dec-88 Unit Value)-Annual Fee Year Four Final Value Year Five=1,000*(31-Dec-90 Unit Value/31-Dec-89 Unit Value)-Annual Fee Year Five Final Value Year Six=1,000*(31-Dec-91 Unit Value/31-Dec-90 Unit Value)-Annual Fee Year Six Final Value Year Seven=1,000*(31-Dec-92 Unit Value/31-Dec-91 Unit Value)-Annual Fee Year Seven Final Value Year Eight=1,000*(31-Dec-93 Unit Value/31-Dec-92 Unit Value)-Annual Fee Year Eight Final Value Year Nine=1,000*(31-Dec-94 Unit Value/31-Dec-93 Unit Value)-Annual Fee Year Nine Final Value Year Ten =1,000*(31-Dec 95 Unit Value/31-Dec-94 Unit Value)-Annual Fee Year Ten-Surrender Charge Final Value Year Ten=1,000*(31-Dec-96 Unit Value/31-Dec-95 Unit Value)-Annual Fee Year Ten-Surrender Charge
Calculation of Annual Return for Asset Allocation Fund
Final Value Year One=1,000*(01-Aug-90 Unit Value/01-Aug-89 Unit Value)-Annual Fee Year One Final Value Year Two=1,000*(01-Aug-91 Unit Value/01-Aug-90 Unit Value)-Annual Fee Year Two Final Value Year Three=1,000*(01-Aug-92 Unit Value/01-Aug-91 Unit Value)-Annual Fee Year Three Final Value Year Four=1,000*(01-Aug-93 Unit Value/01-Aug-92 Unit Value)-Annual Fee Year Four Final Value Year Five=1,000*(01-Aug-94 Unit Value/01-Aug-93 Unit Value)-Annual Fee Year Five Final Value Year Six=1,000*(01-Aug-95 Unit Value/01-Aug-94 Unit Value)-Annual Fee Year Six Final Value Year Seven=1,000*(01-Aug-96 Unit Value/01-Aug-95 Unit Value)-Annual Fee Year Seven Final Value Year Seven=1,000*(31-Dec-96 Unit Value/01-Aug-96 Unit Value)-Annual Fee Year Eight-Surrender Charge
Calculation of Annual Return for International Fund
Final Value Year One=1,000*(01-May-91 Unit Value/01-May-90 Unit Value)-Annual Fee Year One Final Value Year Two=1,000*(01-May-92 Unit Value/01-May-91 Unit Value)-Annual Fee Year Two Final Value Year Three=1,000*(01-May-93 Unit Value/01-May-92 Unit Value)-Annual Fee Year Three Final Value Year Four=1,000*(01-May-94 Unit Value/01-May-93 Unit Value)-Annual Fee Year Four Final Value Year Five=1,000*(01-May-95 Unit Value/01-May-94 Unit Value)-Annual Fee Year Five Final Value Year Six=1,000*(01-May-96 Unit Value/01-May-95 Unit Value)-Annual Fee Year-Six Final Value Year Seven=1,000*(31-Dec-96 Unit Value/01-May-96 Unit Value)-Annual Fee Year Seven-Surrender Charge
Calculation of Annual Return for Bond Fund
Final Value Year One=1,000*(31-Dec -96 Unit Value/02-Jan-96 Unit Value)-Annual Fee Year One-Surrender Charge
Annual Return=(Final Value/1,000) (1/period)-1 Separate Account H - Standardized 10 Year/Lifetime Returns Unit Values
- ----------------------------------------------------------------------------------------------------------------------------------- Growth Growth High Yield Cash Gov't Asset International Bond Fund Series Income Bond Allocation - ----------------------------------------------------------------------------------------------------------------------------------- 31-Dec-86 0.640714 0.729714 0.781844 0.859529 0.896291 31-Dec-87 0.681568 0.722278 0.806513 0.896913 0.867827 30-Dec-88 0.768126 0.813066 0.909485 0.944386 0.922683 01-Aug-89 1.000000 31-Dec-89 0.991530 1.003234 1.988465 0 010547 1.005656 01-Aug-90 1.999396 01-May-90 0.999955 31-Dec-90 0.932705 0.96167 1.009661 0.072598 1.072524 01-Aug-91 1.109554 01-May-91 1.002306 31-Dec-91 1.222965 1.173922 1.257308 0.113764 1.223318 01-Aug-92 1.246964 01-May-92 1.074107 30-Dec-92 1.332750 1.246358 1.391118 0.130871 1.294868 01-Aug-93 1.336022 01-May-93 1.103043 31-Dec-93 1.525124 1.376907 1.593334 0.142068 1.416131 01-Aug-94 1.359192 01-May-94 1.360279 31-Dec-94 1.507567 1.382521 1.464678 0.166927 1.332445 01-Aug-95 1.588794 01-May-95 1.377395 31-Dec-95 1.986187 1.822127 1.755828 0.211566 1.512413 01-Aug-96 1.786772 01-May-96 1.596240 02-Jan-96 1.000000 31-Dec-96 2.204645 2.112956 1.954056 0.252429 1.533965 31-Dec-96 1.966582 31-Dec-96 1.720458 31-Dec-96 1.041222 - -----------------------------------------------------------------------------------------------------------------------------------
Non-standardized Performance-Separate Account H Amount
- ---------------------------------------------------------------------------------------------------------------------------------- Base Period Growth Growth High Yield Cash Gov't Asset International Bond Fund Years Start Date End Date Series Income Bond Allocation - ----------------------------------------------------------------------------------------------------------------------------------- 1 31-Dec-95 31-Dec-96 11,100 11,596 11,129 10,337 10,142 11,331 11,429 2 31-Dec-94 31-Dec-96 14,624 15,283 13,341 10,733 11,512 14,520 12,817 3 31-Dec-93 31-Dec-96 14,456 15,346 12,264 10,966 10,832 14,241 12,850 4 31-Dec-92 31-Dec-96 16,542 16,953 14,047 11,075 11,846 15,469 16,984 5 31-Dec-91 31-Dec-96 18,027 17,999 15,542 11,245 12,539 16,511 16,565 Life See Below 31-Dec-96 52,461 50,594 39,403 17,155 20,142 19,666 17,205 10,412 - ------------------------------------------------------------------------------------------------------------------------------------
Amount=(End Date Unit Value/Start Date Unit Value)*10,000 Compound Growth Rate
- ------------------------------------------------------------------------------------------------------------------------------------ Base Period Growth Growth High Yield Cash Gov't Asset International Bond Fund Years Start Date End Date Series Income Bond Allocation - ------------------------------------------------------------------------------------------------------------------------------------ 1 31-Dec-95 31-Dec-96 11.00% 15.96% 11.29% 3.37% 1.42% 13.31% 14.29% 2 31-Dec-94 31-Dec-96 20.93% 23.63% 15.50% 3.60% 7.30% 20.50% 13.21% 3 31-Dec-93 31-Dec-96 13.07% 15.34% 7.04% 3.12% 2.70% 12.51% 8.72% 4 31-Dec-92 31-Dec-96 13.41% 14.11% 8.87% 2.59% 4.33% 11.52% 14.16% 5 31-Dec-91 31-Dec-96 12.51% 12.47% 9.22% 2.37% 4.63% 10.55% 10.62% Life See Below 31-Dec-96 13.71% 13.39% 11.21% 4.27% 6.50% 9.54% 8.47% 4.12% - ------------------------------------------------------------------------------------------------------------------------------------ One Year Return=(31-Dec-96 Unit Value/31-Dec-95 Unit Value)-1 Two Year Return=(31-Dec-96 Unit Value/31-Dec-94 Unit Value) /greater than/ (1/2)-1 Three Year Return=(31-Dec-96 Unit Value/31-Dec-93 Unit Value) /greater than/ (1/3)-1 Four Year Return=(31-Dec-96 Unit Value/31-Dec-92 Unit Value) /greater than/ (1/4)-1 Five Year Return=(31-Dec-96 Unit Value/31-Dec-91 Unit Value) /greater than/ (1/5)-1 Life Return=(31-Dec-96 Unit Value/Inception Date Unit Value) /greater than/ (1/period)-1
Non-standardized Performance-Separate Account H
- ------------------------------------------------------------------------------------------------------------------------------------ Unit Values Growth Growth High Yield Cash Gov't Asset International Bond Fund Series Income Bond Allocation - ------------------------------------------------------------------------------------------------------------------------------------ 31-Dec-96 2.204645 2.112956 1.954056 1.252429 1.533965 1.966582 1.720458 1.0412221 31-Dec-95 1.986187 1.822127 1.755828 1.211566 1.512413 1.735523 1.505391 31-Dec-94 1.507567 1.382521 1.464678 1.166927 1.332445 1.354439 1.342363 31-Dec-93 1.525124 1.376907 1.593334 1.142068 1.416131 1.380900 1.338925 31-Dec-92 1.332750 1.246358 1.391118 1.130871 1.294868 1.271271 1.013017 31-Dec-91 1.222965 1.173922 1.257308 1.113764 1.223318 1.191085 1.038587 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Life Returns Growth Growth High Yield Cash Gov't Asset International Bond Fund Series Income Bond Allocation - ------------------------------------------------------------------------------------------------------------------------------------ Inception/Start Date 02/08/84 02/08/84 02/08/84 02/08/84 11/19/85 08/01/89 05/01/90 01/02/96 Unit Value 0.420248 0.41763 0.495917 0.730058 0.761581 1.000000 1.000000 1.000000 Period (years) 12.90 12.90 12.90 12.90 11.12 7.42 6.67 0.997260 - ------------------------------------------------------------------------------------------------------------------------------------
EX-99.14.A 12 ORGANIZATIONAL CHART EXHIBIT ORGANIZATIONAL CHART OF THE LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM All the members of the holding company system are corporations, with the exception of American States Lloyds Insurance Company, Delaware Distributors, L.P., Founders CBO, L.P., and Lincoln National Mezzanine Fund, L.P. For purposes of compliance with securities laws, this chart also shows Lincoln National Life Insurance Company Separate Accounts. These are not independent, legal entities; they are accounting entries under state insurance law, and are used to support variable annuity and variable insurance products. - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | ---------------------------------------- |--| American States Financial Corporation| | | 83.3% - Indiana - Holding Company | | ---------------------------------------- | | | | --------------------------------------- | --| American States Insurance Company | | | 100% - Indiana - Property/Casualty | | --------------------------------------- | | | ---------------------------------------- | |--| American Economy Insurance Company | | | | 100% - Indiana - Property/Casualty | | | ---------------------------------------- | | | ---------------------------------------------- | | |--| American States Insurance Company of Texas | | | | 100% - Texas - Property/Casualty | | | ---------------------------------------------- | | -------------------------------------------- | |--| American States Life Insurance Company | | | | 100% - Indiana - Life/Health | | | -------------------------------------------- | | ------------------------------------------------- | |--| American States Lloyds Insurance Company | | | | Lloyds Plan - * - Texas - Property/Casualty | | | ------------------------------------------------ | | ------------------------------------------------- | |--| American States Preferred Insurance Company | | | | 100% - Indiana - Property/Casualty | | | ------------------------------------------------- | | --------------------------------- | |--| City Insurance Agency, Inc. | | | | 100% - Indiana | | | --------------------------------- | | ------------------------------------------------- | |--| Insurance Company of Illinois | | | 100% - Illinois - Fire & Casualty Insurance | | ------------------------------------------------- | --------------------------------------------------------- |--| Aseguradora InverLincoln, S.A. Compania de Seguros Y | | | Reaseguros, Grupo Financiero InverMexico | | | 49% - Mexico - Life, Property and Casualty Insurance | | --------------------------------------------------------- 1 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | -------------------------------------------------- |--| The Insurers' Fund, Inc. # | | | 100% - Maryland - Inactive | | -------------------------------------------------- | -------------------------------------------------- |--| LNC Administrative Services Corporation | | | 100% - Indiana - Third Party Administrator | | -------------------------------------------------- | | ---------------------------------------- |--| The Richard Leahy Corporation | | | 100% - Indiana - Insurance Agency | | ---------------------------------------- | | ----------------------------------- | |--| The Financial Alternative, Inc. | | | | 100% - Utah- Insurance Agency | | | ----------------------------------- | | ----------------------------------------- | |--| Financial Alternative Resources, Inc. | | | | 100% - Kansas - Insurance Agency | | | ----------------------------------------- | | ------------------------------------------- | |--| Financial Choices, Inc. | | | | 100% - Pennsylvania - Insurance Agency | | | ------------------------------------------- | | ------------------------------------------------- | | | Financial Investment Services, Inc. | | |--| (formerly Financial Services Department, Inc.)| | | | 100% - Indiana - Insurance Agency | | | ------------------------------------------------- | | ------------------------------------------- | | | Financial Investments, Inc. | | |--| (formerly Insurance Alternatives, Inc.) | | | | 100% - Indiana - Insurance Agency | | | ------------------------------------------- | | --------------------------------------------- | |--| The Financial Resources Department, Inc. | | | | 100% - Michigan - Insurance Agency | | | --------------------------------------------- | | ------------------------------------------- | |--| Investment Alternatives, Inc. | | | | 100% - Pennsylvania - Insurance Agency | | | ------------------------------------------- | | ---------------------------------------- | |--| The Investment Center, Inc. | | | | 100% - Tennessee - Insurance Agency | | | ---------------------------------------- | | ---------------------------------------- | |--| The Investment Group, Inc. | | | | 100% - New Jersey - Insurance Agency | | | ---------------------------------------- | | -------------------------------------- | |--| Personal Financial Resources, Inc. | | | | 100% - Arizona - Insurance Agency | | | -------------------------------------- | | ------------------------------------------ | |--| Personal Investment Services, Inc. | | | 100% - Pennsylvania - Insurance Agency | | ------------------------------------------ 2 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | ------------------------------------------------- |--|LincAm Properties, Inc. | | |50% - Delaware - Real Estate Investment | | ------------------------------------------------- | ------------------------------------------------- | | Lincoln Financial Group, Inc. | |--| (formerly Lincoln National Sales Corporation) | | | 100% - Indiana - Insurance Agency | | ------------------------------------------------- | | | | ------------------------------------ | |--| LNC Equity Sales Corporation | | | | 100% - Indiana - Broker-Dealer | | | ------------------------------------ | | | | ---------------------------------------------------------------- | | | Corporate agencies: Lincoln Financial Group, Inc. ("LFG") | | |--| has subsidiaries of which LFG owns from 80%-100% of the | | | | common stock (see Attachment #1). These subsidiaries serve | | | | as the corporate agency offices for the marketing and | | | | servicing of products of The Lincoln National Life Insurance | | | | Company. Each subsidiary's assets are less than 1% of the | | | | total assets of the ultimate controlling person. | | | ---------------------------------------------------------------- | | | | -------------------------------------------------- | |--| Professional Financial Planning, Inc. | | | 100% - Indiana - Financial Planning Services | | -------------------------------------------------- | | ----------------------------------------- |--| Lincoln Life Improved Housing, Inc. | | | 100% - Indiana | | ----------------------------------------- | | ------------------------------------------------- |--| Lincoln National (China) Inc. | | | 100% - Indiana - China Representative Office | | ------------------------------------------------- | ------------------------------------------------- |--|Lincoln National (India) Inc. | | |100% - Indiana - India Representative Office | | ------------------------------------------------- | ---------------------------------------------- |--|Lincoln National Intermediaries, Inc. | | |100% - Indiana - Reinsurance Intermediary | |---------------------------------------------- | | ---------------------------------------------- |--|Lincoln National Investments, Inc. | | |(fka Lincoln National Investment Companies, | | |Inc.) 100% - Indiana - Holding Company | | ---------------------------------------------- | ---------------------------------------------- |--|Lincoln National Investment Companies, Inc. | | |(fka Lincoln National Investment Companies, | | |Inc.) 100% - Indiana - Holding Company | | ---------------------------------------------- | | ------------------------------------ | |--|Delaware Management Holdings, Inc.| | | |100% - Delaware - Holding Company | | | ------------------------------------ | | | ------------------------------------- | | |--|DMH Corp. | | | |100% - Delaware - Holding Company | | | ------------------------------------- | | | --------------------------------------- | | |--|Delaware Distributors, Inc. | | | | |100% - Delaware - General Partner | | | | --------------------------------------- | | 3 ------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | ------------------------------- | | -------------------------------------------------- |__| Lincoln National Investment Companies, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | -------------------------------------------------- | | | | -------------------------------------------- | |--| Lincoln National Investment Companies, Inc.| | | | (fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | | -------------------------------------------- | | | ----------------------------------- | | |--| Delaware Management Holdings, Inc.| | | | | 100% - Delaware - Holding, Company| | | | ----------------------------------- | | | | ---------------------------------- | | | |--| DMH Corp. | | | | | | 100% - Delaware - Holding Company| | | | ---------------------------------- | | | | ----------------------------------- | | | |--| Delaware Distributors, Inc. | | | | | | 100% - Delaware - General Partner | | | | | ----------------------------------- | | | | ----------------------------------------------------- | | | |--| Delaware Distributors, L.P. | | | | | | 100% - Delaware - Mutual Fund Distributor & Broker/ | | | | | | Dealer | | | | | ----------------------------------------------------- | | | | --------------------------------------- | | | |--| Delaware International Advisers Ltd. | | | | | | 81.1% - England - Investment Advisor | | | | | --------------------------------------- | | | | ------------------------------------------------- | | | |--| Delaware Capitol Management, Inc. | | | | | | (formerly Delaware Investment Counselors, Inc.) | | | | | | 100% - Delaware - Investment Advisor | | | | | ------------------------------------------------- | | | | ------------------------------------------------ | | | |--| Delaware Investment & Retirement Services, Inc.| | | | | | 100% - Delaware - Registered Transfer Agent | | | | | ------------------------------------------------ | | | | ------------------------------------------- | | | |--| Delaware International Holdings, Ltd. | | | | | | 100% - Bermuda - Investment Advisor | | | | | ------------------------------------------- | | | | --------------------------------------- | | | |--| Delaware Management Company, Inc. | | | | | | 100% - Delaware - Investment Advisor | | | | | --------------------------------------- | | | | | -------------------------------------- | | | | |--| Founders Holdings, Inc. | | | | | | 100% - Delaware - General Partner | | | | | -------------------------------------- | | | | | ------------------------------------------ | | | | |--| Founders CBO, L.P. | | | | | | 100% - Delaware - Investment Partnership | | | | | ------------------------------------------ | | | | | ---------------------------------------------- | | | | |--| Founders CBO Corporation | | | | | | 100% - Delaware - Co-Issuer with Founders CBO| | | | | ---------------------------------------------- | | | | ------------------------------------ | | | |--|Delaware Management Trust Company | | | | | |100% - Pennsylvania - Trust Service | | | | | ------------------------------------ | | | | ----------------------------------------------------- | | | |--| Delaware Service Company, Inc. | | | | | | 100% - Delaware - Shareholder Services & Transfer | | | | | | Agent | | | | | ----------------------------------------------------- | | ---------------------------------------------------------- | | |Lincoln Investment Management, Inc. | | |--|(formerly Lincoln National Investment Management Company) | | | | 100% - Illinois - Mutual Fund Manager and | | | | Registered Investment Adviser | ---------------------------------------------------------- 4 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | ----------------------------------------------------- |--| Lincoln National Investment Companies, Inc. | | | (fka Lincoln National Investment Companies, Inc.) | | | 100% - Indiana - Holding Company | | ----------------------------------------------------- | | | | ----------------------------------------------------- | |--| Lincoln National Investment Companies, Inc. | | | | (fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | | ----------------------------------------------------- | | -------------------------------------------------------------- | |--| Lincoln Investment Management, Inc. | | | | (formerly Lincoln National Investment Management Company) | | | | 100% - Illinois - Mutual Fund Manager and | | | | Registered Investment Adviser | | | -------------------------------------------------------------- | | | ------------------------------------------------------------ | | | | Lincoln National Mezzanine Corporation | | | |--| 100% - Indiana - General Partner for Mezzanine Financing | | | | Limited Partnership | | | ------------------------------------------------------------ | | | ------------------------------------------------------------ | | |--| Lincoln National Mezzanine Fund, L.P. | | | | 50% - Delaware - Mezzanine Financing Limited Partnership | | | ------------------------------------------------------------ | ----------------------------------------------------- | | Lincoln National Investments, Inc. | |--| (fka Lincoln National Investment Companies, Inc.) | | | 100% - Indiana - Holding Company | | ----------------------------------------------------- | | ----------------------------------------------------- | |--| Lincoln National Investment Companies, Inc. | | | | (fka Lincoln National Investment Companies, Inc.) | | | | 100% - Indiana - Holding Company | | | ----------------------------------------------------- | | | ---------------------------------------------- | | |--| Lynch & Mayer, Inc. | | | | | 100% - Indiana - Investment Adviser | | | | ---------------------------------------------- | | | | ------------------------------------------- | | | |--| Lynch & Mayer Asia, Inc. | | | | | | 100% - Delaware - Investment Management | | | | | ------------------------------------------- | | | | --------------------------------------- | | | |--| Lynch & Mayer Securities Corp. | | | | | | 100% - Delaware - Securities Broker | | | | | --------------------------------------- | | | ------------------------------------------------------- | | |--| Vantage Global Advisors, Inc. | | | | | (formerly Modern Portfolio Theory Associates, Inc.) | | | | | 100% - Delaware - Investment Adviser | | | | ------------------------------------------------------- | ----------------------------------------------- |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | ----------------------------------------------- | | ---------------------------------------------- | |--| First Penn-Pacific Life Insurance Company | | | | 100% - Indiana | | | ---------------------------------------------- | | ----------------------------------------------- | | | Lincoln Life & Annuity Company of New York | | |--| 100% - New York | | | ----------------------------------------------- | | -------------------------------------------------- | | | Lincoln National Aggressive Growth Fund, Inc.+ | | |--| 100% - Maryland - Mutual Fund | | | -------------------------------------------------- | | | | ------------------------------------- | | | Lincoln National Bond Fund, Inc.+ | | |--| 100% - Maryland - Mutual Fund | | | ------------------------------------- 5 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | ------------------------------------------------- |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | ------------------------------------------------- | | ------------------------------------------------------ | |--| Lincoln National Capital Appreciation Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ------------------------------------------------------ | | ---------------------------------------------- | |--| Lincoln National Equity-Income Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ---------------------------------------------- | | --------------------------------------------------------- | |--| Lincoln National Global Asset Allocation Fund, Inc.+ | | | | (formerly Lincoln National Putnam Master Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | | | --------------------------------------------------------- | | --------------------------------------------------- | |--| Lincoln National Growth and Income Fund, Inc.+ | | | | (formerly Lincoln National Growth Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | | | --------------------------------------------------- | | ---------------------------------------------------------- | |--| Lincoln National Health & Casualty Insurance Company | | | | 100% - Indiana | | | ---------------------------------------------------------- | | ----------------------------------------------- | |--| Lincoln National International Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ----------------------------------------------- | | | | ----------------------------------------- | |--| Lincoln National Managed Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ----------------------------------------- | | ---------------------------------------------- | |--| Lincoln National Money Market Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ---------------------------------------------- | | ------------------------------------------------- | |--| Lincoln National Social Awareness Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ------------------------------------------------- | | ------------------------------------------------------- | |--| Lincoln National Special Opportunities Fund, Inc.+ | | | | 100% - Maryland - Mutual Fund | | | ------------------------------------------------------- | | ----------------------------------------- | |--| Lincoln National Reassurance Company | | | 100% - Indiana - Life Insurance | | ----------------------------------------- | | ------------------------------------------------- | |--| Special Pooled Risk Administrators, Inc. | | | 100% - New Jersey - Catastrophe Reinsurance | | | Pool Administrator | | ------------------------------------------------- | ----------------------------------------------------------- |--| Lincoln National Management Services, Inc. | | | 100% - Indiana - Underwriting and Management Services | | ----------------------------------------------------------- | | ----------------------------------------- |--| Lincoln National Realty Corporation | | | 100% - Indiana - Real Estate | | ----------------------------------------- | ------------------------------------------------------------- |--| Lincoln National Reinsurance Company (Barbados) Limited | | | 100% - Barbados | | ------------------------------------------------------------- 6 - ---------------------------------- | | | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | ------------------------------------------------ |--| Lincoln National Reinsurance Company Limited | | | (formerly Heritage Reinsurance, Ltd.) | | | 100% ** - Bermuda | | ------------------------------------------------ | | | | ------------------------------------------ | | --| Lincoln European Reinsurance Company | | | | 100% - Belgium | | | ------------------------------------------ | | | | ----------------------------------------------------------- | |--| Lincoln National Underwriting Serevices, Ltd. | | | | 90% - England/Wales - Life/Accident/Health Underwriter | | | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) | | | ----------------------------------------------------------- | | | | --------------------------------------------------------- | | | Servicios de Evaluacion de Riesgo, S. de R.L. de C.V. | | |--| 51% - Mexico - Reinsurance Underwriter | | | | (Remaining 49% owned by Lincoln National Corp.) | | --------------------------------------------------------- | | --------------------------------------------- |--|Lincoln National Risk Management, Inc. | | | 100% - Indiana - Risk Management Services | | --------------------------------------------- | | ------------------------------------------------ |--| Lincoln National Structured Settlement, Inc. | | | 100% - New Jersey | | ------------------------------------------------ | | ------------------------------------------ |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | ------------------------------------------ | | | | ------------------------------------------ | |--| Allied Westminster & Company Limited | | | | 100% - England/Wales - Sales Services | | | ------------------------------------------ | | | | ----------------------------------- | |--| Cannon Fund Managers Limited | | | | 100% - England/Wales - Inactive | | | ----------------------------------- | | | | -------------------------------------------------------- | |--| Culverin Property Services Limited | | | | 100% - England/Wales - Property Development Services | | | | ----------------------------------------------------- | | | | ----------------------------------------------------------- | |--| HUTM Limited | | | | 100% - England/Wales - Unit Trust Management (Inactive) | | | ----------------------------------------------------------- | | | | ------------------------------------------- | |--| ILI Supplies Limited | | | | 100% - England/Wales - Computer Leasing | | | ------------------------------------------- | | | | ----------------------------------------- | |--| Laurentian Financial Group PLC | | | | 100% - England/Wales - Holding Company | | | ------------------------------------------ | | | --------------------------------------------------- | | |--| Lincoln Financial Advisers Limited | | | | | (formerly: Laurentian Financial Advisers Ltd.) | | | | | 100% - England/Wales - Sales Company | | | | --------------------------------------------------- | | | ------------------------------------------------ | | |--| Lincoln Investment Management Limited | | | | | (formerly: Laurentian Fund Management Ltd.) | | | | | 100% - England/Wales - Investment Management | | | | ------------------------------------------------ | | | -------------------------------------------------------------- | | |--| Lincoln Independent Limited | | | | | (formerly: Laurentian Independent Financial Planning Ltd.) | | | | | 100% - England/Wales - Independent Financial Adviser | | | | -------------------------------------------------------------- 7 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | ------------------------------------------- | | Lincoln National (UK) PLC | |--| 100% - England/Wales - Holding Company | | ------------------------------------------- | | | | ------------------------------------------ | |--| Laurentian Financial Group PLC | | | | 100% - England/Wales - Holding Company | | | ------------------------------------------ | | | ----------------------------------------- | | |--| Laurentian Life PLC | | | | | 100% - England/Wales - Life Insurance | | | | ----------------------------------------- | | | | | | | | ----------------------------------------- | | | |--|Barnwood Property Group Limited | | | | | |100% - England/Wales - Holding Company | | | | | ----------------------------------------- | | | | | | | | | | --------------------------------------------- | | | | |--| Barnwood Developments Limited | | | | | | | 100% England/Wales - Property Development | | | | | | --------------------------------------------- | | | | | ---------------------------------------------- | | | | |--| Barnwood Properties Limited | | | | | | 100% - England/Wales - Property Investment | | | | | ---------------------------------------------- | | | | -------------------------------------------------------- | | | |--|IMPCO Properties Limited | | | | |100% - England/Wales - Property Investment (Inactive) | | | | -------------------------------------------------------- | | | --------------------------------------------- | | |--| Laurentian Management Services Limited | | | | | 100% - England/Wales - Management Services| | | | --------------------------------------------- | | | | -------------------------------------------------- | | | |--|Laurit Limited | | | | |100% - England/Wales - Data Processing Systems | | | | -------------------------------------------------- | | | ----------------------------------------- | | |--| Laurentian Milldon Limited | | | | | 100% - England/Wales - Sales Company | | | | ----------------------------------------- | | | ------------------------------------------------ | | |--| Laurentian Unit Trust Management Limited | | | | | 100% - England/Wales - Unit Trust Management | | | | ------------------------------------------------ | | | | ------------------------------------------- | | | |--| LUTM Nominees Limited | | | | | 100% - England/Wales - Nominee Services | | | | ------------------------------------------- | | | ------------------------------------------------------------ | | |--| Laurtrust Limited | | | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) | | | | ------------------------------------------------------------ | | | ----------------------------------------- | | |--| The Money Club Direct Company Limited | | | | 100% - Dormant | | | ----------------------------------------- | | | | ------------------------------------------ | |--| Liberty Life Assurance Limited | | | | 100% - England/Wales - Inactive | | | ------------------------------------------ | | ------------------------------------------------- | |--| Liberty Life Pension Trustee Company Limited | | | | 100% - England/Wales - Corporate Pension Fund | | | ------------------------------------------------- | | -------------------------------------------- | |--| Liberty Press Limited | | | | 100% - England/Wales - Printing Services | | | -------------------------------------------- 8 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | | ------------------------------------------ |--|Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | ------------------------------------------ | | | | ---------------------------------------------- | |--|Lincoln Assurance Limited | | | | 100% ** - England/Wales - Life Assurance | | | ---------------------------------------------- | | | | --------------------------------------------------- | |--| Lincoln Fund Managers Limited | | | | 100% - England/Wales - Unit Trust Management | | | --------------------------------------------------- | | | | ------------------------------------------------------ | |--| Lincoln Insurance Services Ltd. | | | | 100% - Holding Company | | | ------------------------------------------------------ | | | | | | ----------------------------------- | | |--| British National Life Sales Ltd.| | | | | 100% - Inactive | | | | ----------------------------------- | | | | | | ------------------------------------------------- | | |--| BNL Trustees Limited | | | | | 100% - England/Wales - Corporate Pension Fund | | | | ------------------------------------------------- | | | | | | --------------------------------------- | | |--| Chapel Ash Financial Services Ltd. | | | | | 100% - Direct Insurance Sales | | | | --------------------------------------- | | | | | | ------------------------------------------------ | | | | Lincoln General Insurance Co. Ltd. | | | | | 100% - Accident & Health Insurance | | | | ------------------------------------------------ | | | | | | ---------------------------- | | |--| P.N. Kemp-Gee & Co. Ltd. | | | | 100% - Inactive | | | ---------------------------- | | | | ---------------------------------------------------- | |--| Lincoln National Training Services Limited | | | | 100% - England/Wales - Training Company | | | ---------------------------------------------------- | | | | --------------------------------------------------- | |--| Lincoln Pension Trustees Limited | | | | 100% - England/Wales - Corporate Pension Fund | | | --------------------------------------------------- | | | | ----------------------------------------------------------- | |--| LIV Limited (formerly Lincoln Investment Management Ltd.)| | | | 100% - England/Wales - Investment Management Services | | | ----------------------------------------------------------- | | | | | | ------------------------------------------------- | | |--| CL CR Management Ltd. | | | | 50% - England/Wales - Administrative Services | | | ------------------------------------------------- | | | | --------------------------------------------------- | |--| LN Management Limited | | | | 100% - England/Wales - Administrative Services | | | ---------------------------------------------------- | | | | | | ------------------------------------- | | |--| UK Mortgage Securities Limited | | | | 100% - England/Wales - Inactive | | | ------------------------------------- | | 9 - ---------------------------------- | Lincoln National Corporation | | Indiana - Holding Company | - ---------------------------------- | | ------------------------------------------- |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | ------------------------------------------- | | | | -------------------------------------------- | |--| LN Securities Limited | | | | 100% - England/Wales - Nominee Company | | | -------------------------------------------- | | | | ----------------------------------------------- | |--| Niloda Limited | | | 100% - England/Wales - Investment Company | | ----------------------------------------------- | | ---------------------------------------------------- | | Linsco Reinsurance Company | |--| (formerly Lincoln National Reinsurance Company) | | | 100% - Indiana - Property/Casualty | | ---------------------------------------------------- | | ------------------------------------ |--| Old Fort Insurance Company, Ltd. | | | 100% ** - Bermuda | | ------------------------------------ | | | | ----------------------------------------------------------- | | | Lincoln National Underwriting Services, Ltd. | | |--| 10% - England/Wales - Life/Accident/Health Underwriter | | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) | | ----------------------------------------------------------- | | ------------------------------------------------------------ | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. | |--| 49% - Mexico - Reinsurance Underwriter | | | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) | | ------------------------------------------------------------ | | --------------------------------------------- |--| Underwriters & Management Services, Inc. | | 100% - Indiana - Underwriting Services | --------------------------------------------- Footnotes: - ---------- * The funds contributed by the Underwriters were, and continue to be subject to trust agreements between American States Insurance Company, the grantor, and each Underwriter, as trustee. ** Except for director-qualifying shares # Lincoln National Corporation has subscribed for and paid for 100 shares of Common Stock (with a par value of $1.00 per share) at a price of $10 per share, as part of the organizing of the fund. As such stock is further sold, the ownership of voting securities by Lincoln National Corporation will decline and fluctuate. + Ownership of the shares in the eleven funds is on behalf of variable life and/or annuity contract owners who own interests in Lincoln Life Separate Accounts established under IC 27-1-5-1, Class 1. These are: Variable Annuity Accounts A, C, E, H and L; Variable Universal Life Accounts D, F, G, J, and K. For Separate Account A [a/k/a Fund A] (Group) and Separate Account A [a/k/a Fund A] (Individual), Lincoln Life is the "insurance company", as that term is defined in Investment Company Act Form N-3. For Separate Accounts C,E,H and L the respective Separate Account is the "Registrant" and Lincoln Life is the "Depositor", as those terms are defined in Investment Company Act Form N-4. For Separate Accounts D,F,G,J and K the respective Separate Account is the "unit investment trust" or "trust", and Lincoln Life is the "Depositor", as those terms are defined in Investment Company Act Form N-8B-2. 10 ATTACHMENT #1 LINCOLN FINANCIAL GROUP, INC. CORPORATE AGENCY SUBSIDIARIES 1) Lincoln Financial Group, Inc. (AL) 2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ) 3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA) 3a) California Fringe Benefit and Insurance Marketing Corporation DBA/California Fringe Benefit Company (Walnut Creek, CA) 4) Colorado-Lincoln Financial Group, Inc. (Denver, CO) 5) Lincoln National Financial Services, Inc. (Lake Worth, FL) 6) CMP Financial Services, Inc. (Chicago, IL) 7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN) 8) Financial Planning Partners, Ltd. (Mission, KS) 9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA) 10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD) 11) Lincoln National Sales Corporation of Maryland (Baltimore, MD) (formerly: Morgan Financial Group, Inc.) 12) Lincoln Financial Services and Insurance Brokerage of New England, Inc. (formerly: Lincoln National of New England Insurance Agency, Inc.) (Worcester, MA) 13) Lincoln Financial Group of Michigan, Inc. (Troy, MI) 13a) Financial Consultants of Michigan, Inc. (Troy, MI) 14) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore & Associates, Inc.) (St. Louis, MO) 15) Beardslee & Associates, Inc. (Clifton, NJ) 16) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.) (Albuquerque, NM) 17) Lincoln Cascades, Inc. (Portland, OR) 18) Lincoln Financial Services, Inc. (Pittsburgh, PA) 19) Lincoln National Financial Group of Philadelphia, Inc. (Philadelphia, PA) 20) Lincoln Financial Group, Inc. (Salt Lake City, (UT) 11 EX-99.14.B 13 BOOKS AND RECORDS REPORT EXHIBIT 14(b) BOOKS AND RECORDS LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940 Records to Be Maintained by Registered Investment Companies, Certain Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions with Registered Investment Companies. Reg. 270.31a-1. (a) Every registered investment company, and every underwriter, broker, dealer, or investment advisor which is a majority-owned subsidiary of such a company, shall maintain and keep current the accounts, books, and other documents relating to its business which constitute the record forming the basis for financial statements required to be filed pursuant to Section 30 of the Investment Company Act of 1940 and of the auditor's reports relating thereto.
LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Annual Reports F&RM Eric Jones Permanently, the first two To Shareholders years in an easily accessible place Semi-Annual F&RM Eric Jones Permanently, the first two Reports years in an easily accessible place Form N-SAR F&RM Eric Jones Permanently, the first two years in an easily accessible place
(b) Every registered investment company shall maintain and keep current the following books, accounts, and other documents: Type of Record - -------------- (1) Journals (or other records of original entry) containing an itemized daily record in detail of all purchases and sales of securities (including sales and redemptions of its own securities), all receipts and deliveries of securities (including certificat e numbers if such detail is not recorded by custodian or transfer agent), all receipts and disbursements of cash and all other debits and credits. Such records shall show for each such transaction the name and quantity of securities, the unit and aggregate purchase or sale price, commission paid, the market on which effected, the trade date, the settlement date, and the name of the person through or from whom purchased or received or to whom sold or delivered. Purchases and Sales Journals - ---------------------------- Daily reports CSRM Nancy Alford Permanently, the first two of securities years in an easily accessible transactions place
Portfolio Securities - -------------------- Not Applicable. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Receipts and Deliveries of Securities (units) - --------------------------------------------- Not Applicable. Portfolio Securities - -------------------- Not Applicable. Receipts and Disbursements of Cash and other Debits and Credits - --------------------------------------------------------------- Daily Journals CSRM Nancy Alford Permanently, the first two F&RM Eric Jones years in an easily accessible place (2) General and auxiliary ledgers (or other record) reflecting all asset, liability, reserve, capital, income and expense accounts, including: (i) Separate ledger accounts (or other records) reflecting the following: (a) Securities in transfer; (b) Securities in physical possession; (c) Securities borrowed and securities loaned; (d) Monies borrowed and monies loaned (together with a record of the collateral therefore and substitutions in such collateral); (e) Dividends and interest received; (f) Dividends receivable and interest accrued. Instructions. (a) and (b) shall be stated in terms of securities quantities only; (c) and (d) shall be stated in dollar amounts and securities quantities as appropriate; (e) and (f) shall be stated in dollar amounts only. General Ledger - -------------- LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily series) accessible place Securities in Transfer - ---------------------- Not Applicable. Securities in Physical Possession - --------------------------------- Not Applicable. Securities Borrowed and Loaned - ------------------------------ Not Applicable. Monies Borrowed and Loaned - -------------------------- Not Applicable. Dividends and Interest Received - ------------------------------- LNL Trial Controllers Eric Jones Permanently, the first two Balance (5000 years in an easily series) accessible place LN-Record Location Person to Contact Retention Dividends Receivable and Interest Accrued
LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily accessible series) place
(ii) Separate ledger accounts (or other records) for each portfolio security, showing (as of trade dates), (a) the quantity and unit and aggregate price for each purchase, sale, receipt, and delivery of securities and commodities for such accounts, and (b) all other debits and credits for such accounts. Securities positions and money balances in such ledger accounts (or other records) shall be brought forward periodically but not less frequently than at the end of fiscal quarters. Any portfolio security, the salability of which is conditioned, shall be so noted. A memorandum record shall be available setting forth, with respect to each portfolio security accounts, the amount and declaration, ex-dividend, and payment dates of each dividend declared thereon. Ledger Account for each portfolio Security
Daily Report Not Permanently, the first two of Securities Applicable years in an easily accessible transactions place
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank or other person with or through which transactions in portfolio securities are affected, showing each purchase or sale of securities with or through such persons, including details as to the date of the purchase or sale, the quantity and unit and aggregate prices of such securities, and the commissions or other compensation paid to such persons. Purchases or sales effected during the same day at the same price may be aggregated. Not Applicable. (iv) Separate ledger accounts (or other records), which may be maintained by a transfer agent or registrar, showing for each shareholder of record of the investment company the number of shares of capital stock of the company held in respect of share accumulation accounts (arising from periodic investment plans, dividend reinvestment plans, deposit of issued shares by the owner thereof, etc.), details shall be available as to the dates and number of shares of each accumulation, and except with respect to already issued shares deposited by the owner thereof, prices of each such accumulation. Shareholder Accounts
Master file F&RM Eric Jones Permanently, the first two Record CSRM Nancy Alford years in an easily accessible place
(3) A securities record or ledger reflecting separately for each portfolio security as of trade date all "long" and "short" positions carried by the investment company for its own account and showing the location of all securities long and the off-setting position to all securities short. The record called for by this paragraph shall not be required in circumstances under which all portfolio securities are maintained by a bank or banks or a member or members of a national securities exchange as custodian under a custody agreement or as agent for such custodian. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Not Applicable (4) Corporate charters, certificates of incorporation or trust agreements, and bylaws, and minute books of stockholders' and directors' or trustees' meetings; and minute books of directors' or trustees' committee and advisory board or advisory committee meetings. Corporate Documents - ------------------- Not Applicable. (5) A record of each brokerage order given by or in behalf of the investment company for, or in connection with, the purchase or sale of securities, whether executed or unexecuted. Such record shall include the name of the broker, the terms and conditions of the order and of any modification or cancellation thereof, the time of entry or cancellation, the price at which executed, and the time of receipt of report of execution. The record shall indicate the name of the person who placed the order in behalf of the investment company. Order Tickets - ------------- UIT applica- CSRM Nancy Alford Six years, the first two tions and years in an easily accessible daily reports place of securities transactions (6) A record of all other portfolio purchase or sales showing details comparable to those prescribed in paragraph 5 above. Commercial Paper - ---------------- Not Applicable. (7) A record of all puts, calls, spreads, straddles, and other options in which the investment company has any direct or indirect interest or which the investment company has granted or guaranteed; and a record of any contractual commitments to purchase, sell, receive or deliver securities or other property (but not including open orders placed with broker-dealers for the purchase or sale of securities, which may be cancelled by the company on notices without penalty or cost of any kind); containing at least an identification of the security, the number of units involved, the option price, the date of maturity, the date of issuance, and the person to whom issued. Record of Puts, Calls, Spreads, Etc. - ------------------------------------- Not Applicable. (8) A record of the proof of money balances in all ledger accounts (except shareholder accounts), in the form of trial balances. Such trial balances shall be prepared currently at least once a month. LN-Record Location Person to Contact Retention - --------- --------------------------- --------- Trial Balance - ------------- LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily accessible series) place (9) A record for each fiscal quarter, which shall be completed within 10 days after the end of such quarter, showing specifically the basis or bases upon which the allocation of orders for the purchase and sale of portfolio securities to named brokers or dealers and the division of brokerage commissions or other compensation on such purchase and sale orders among named persons were made during such quarter. The record shall indicate the consideration given to (a) sales of shares of the investment company by brokers or dealers, (b) the supplying of services or benefits by brokers or dealers to the investment company, its investment advisor or principal underwriter or any persons affiliated therewith, and (c) any other considerations other than the technical qualifications of the brokers and the dealers as such. The record shall show the nature of their services or benefits made available, and shall describe in detail the application of any general or specific formula or other determinant used in arriving at such allocation of purchase and sales orders and such division of brokerage commissions or other compensation. The record shall also include the identifies of the person responsible for the determination of such allocation and such division of brokerage commissions or other compensation. Not Applicable. (10) A record in the form of an appropriate memorandum identifying the person or persons, committees, or groups authorizing the purchase or sale of portfolio securities. Where an authorization is made by a committee or group, a record shall be kept in the names of its members who participated in the authorization. There shall be retained a part of the record required by this paragraph any memorandum, recommendation, or instruction supporting or authorizing the purchase or sale of portfolio securities. The requirements of this paragraph are applicable to the extent they are not met by compliance with the requirements of paragraph 4 of this Rule 31a1(b). Advisory Law Division Sandy Lamp Six years, the first two Agreements years in an easily accessible place (11) Files of all advisory material received from the investment advisor, any advisory board or advisory committee, or any other persons from whom the investment company accepts investment advice publications distributed generally. Not Applicable. (12) The term "other records" as used in the expressions "journals (or other records of original entry)" and "ledger accounts (or other records)" shall be construed to include, where appropriate, copies of voucher checks, confirmations, or similar documents which reflect the information required by the applicable rule or rules in appropriate sequence and in permanent form, including similar records developed by the use of automatic data processing systems. Correspondence CSRM Nancy Alford Six years, the first two years in an easily accessible place LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Proxy State- CSRM Nancy Alford Six years, the first two ments and years in an easily accessible Proxy Cards place Pricing Sheets F&RM Eric Jones Permanently, the first two years in an easily accessible place Bank State- Treasurers Rusty Summers ments March 12, 1997 EX-27 14 FINANCIAL DATA SCHEDULE
6 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 8,326,651,960 9,849,280,515 0 0 0 9,849,280,515 0 0 11,185,955 11,185,955 0 6,960,538,174 5,462,045,594 4,894,830,800 1,226,504,025 0 128,423,806 0 1,522,628,555 9,838,094,560 671,953,566 0 0 113,786,063 558,167,503 46,801,547 1,225,286,412 1,830,255,462 0 0 0 0 1,693,596,940 1,126,382,149 0 2,818,787,917 288,501,054 43,972,798 0 0 0 0 113,786,063 8,428,700,602 0 0 0 0 0 0 0 0 0 0
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