N-4/A 1 a2203928zn-4a.txt N-4/A As filed with the Securities and Exchange Commission on May 11, 2011 1933 Act Registration No. 333-170529 1940 Act Registration No. 811-08517 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. 2 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 273 /X/ Lincoln Life Variable Annuity Account N (Exact Name of Registrant) Lincoln ChoicePlusSM Rollover 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: (260) 455-2000 Nicole S. Jones, Esquire The Lincoln National Life Insurance Company 1300 South Clinton Street Post Office Box 1110 Fort Wayne, IN 46801 (Name and Address of Agent for Service) Copy to: Mary Jo Ardington, Esquire The Lincoln National Life Insurance Company 1300 South Clinton Street Post Office Box 1110 Fort Wayne, IN 46801 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. Title of Securities being registered: Interests in a separate account under individual flexible payment deferred variable annuity contracts. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) shall determine. Lincoln ChoicePlusSM Rollover Lincoln Life Variable Annuity Account N Individual Variable Annuity Contracts Home Office: The Lincoln National Life Insurance Company 1300 South Clinton Street Fort Wayne, IN 46802 www.LincolnFinancial.com 1-888-868-2583 This prospectus describes an individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). This prospectus is primarily for use with qualified retirement plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time subject to certain conditions. These benefits may be a variable or fixed amount, if available, or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. In the alternative, you generally may choose to receive a death benefit upon the death of the annuitant. The minimum initial purchase payment for the contract is $10,000. In addition, the initial purchase payment must be an eligible rollover from a qualified plan and must have been invested in products or programs offered to the qualified plan by Lincoln Life (defined as Rollover Money). The applicable products and programs are listed later in this prospectus under Purchase Payments. Additional purchase payments may be made to the contract and must be at least $100 per payment ($25 if transmitted electronically), and at least $300 annually. Except as noted below, you choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. If any portion of your contract value is in the fixed account, we promise to pay you your principal and a minimum interest rate. For the life of your contract or during certain periods, we may impose restrictions on the fixed account. Also, an interest adjustment may be applied to any withdrawal, surrender or transfer from the fixed account before the expiration date of a guaranteed period. We do offer variable annuity contracts that have lower fees. You should carefully consider whether or not this contract is the best product for you. All purchase payments for benefits on a variable basis will be placed in Lincoln Life Variable Annuity Account N (variable annuity account [VAA]). The VAA is a segregated investment account of Lincoln Life. You take all the investment risk on the contract value and the retirement income for amounts placed into one or more of the contract's variable options. If the subaccounts you select make money, your contract value goes up; if they lose money, it goes down. How much it goes up or down depends on the performance of the subaccounts you select. We do not guarantee how any of the variable options or their funds will perform. Also, neither the U.S. Government nor any federal agency insures or guarantees your investment in the contract. The contracts are not bank deposits and are not endorsed by any bank or government agency. The available funds are listed below: AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Thematic Growth Portfolio AllianceBernstein VPS International Value Portfolio AllianceBernstein VPS Small/Mid Cap Value Portfolio BlackRock Variable Series Funds, Inc. (Class III): BlackRock Global Allocation V.I. Fund Delaware VIP (Reg. TM) Trust (Service Class): Delaware VIP (Reg. TM) Diversified Income Series Delaware VIP (Reg. TM) Emerging Markets Series Delaware VIP (Reg. TM)Limited-Term Diversified Income Series Delaware VIP (Reg. TM) REIT Series Delaware VIP (Reg. TM) Small Cap Value Series Delaware VIP (Reg. TM) Smid Cap Growth Series Delaware VIP (Reg. TM) U.S. Growth Series Delaware VIP (Reg. TM) Value Series DWS Variable Series II (Class B): DWS Alternative Asset Allocation Plus VIP Portfolio Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio Fidelity (Reg. TM) VIP Growth Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Franklin Templeton Variable Insurance Products Trust (Class 2): FTVIPT Franklin Income Securities Fund FTVIPT Mutual Shares Securities Fund 1 Lincoln Variable Insurance Products Trust (Service Class): LVIP Baron Growth Opportunities Fund LVIP BlackRock Inflation Protected Bond Fund LVIP Capital Growth Fund LVIP Cohen & Steers Global Real Estate Fund LVIP Columbia Value Opportunities Fund LVIP Delaware Bond Fund LVIP Delaware Diversified Floating Rate Fund LVIP Delaware Social Awareness Fund LVIP Delaware Special Opportunities Fund LVIP Dimensional U.S. Equity Fund LVIP Dimensional Non-U.S. Equity Fund LVIP Global Income Fund LVIP Janus Capital Appreciation Fund LVIP JP Morgan High Yield Fund LVIP MFS International Growth Fund LVIP MFS Value Fund LVIP Mid-Cap Value Fund LVIP Mondrian International Value Fund LVIP Money Market Fund LVIP SSgA Bond Index Fund LVIP SSgA Conservative Index Allocation Fund LVIP SSgA Conservative Structured Allocation Fund LVIP SSgA Developed International 150 Fund LVIP SSgA Emerging Markets 100 Fund LVIP SSgA Global Tactical Allocation Fund LVIP SSgA International Index Fund LVIP SSgA Large Cap 100 Fund LVIP SSgA Moderate Index Allocation Fund LVIP SSgA Moderate Structured Allocation Fund LVIP SSgA Moderately Aggressive Index Allocation Fund LVIP SSgA Moderately Aggressive Structured Allocation Fund LVIP SSgA S&P 500 Index Fund* LVIP SSgA Small-Cap Index Fund LVIP SSgA Small/Mid Cap 200 Fund LVIP T. Rowe Price Growth Stock Fund LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP Templeton Growth Fund LVIP Total Bond Fund LVIP Turner Mid-Cap Growth Fund LVIP Vanguard Domestic Equity ETF Fund LVIP Vanguard International Equity ETF Fund LVIP Wells Fargo Intrinsic Value Fund LVIP Conservative Profile Fund LVIP Moderate Profile Fund LVIP Moderately Aggressive Profile Fund Lincoln Variable Insurance Products Trust (Service Class II): LVIP American Global Growth Fund LVIP American Global Small Capitalization Fund LVIP American Growth Fund LVIP American Growth-Income Fund LVIP American International Fund MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Growth Series MFS (Reg. TM) VIT Utilities Series PIMCO Variable Insurance Trust (Advisor Class): PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio *"S&P 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing the product. (Please see the Statement of Additional Information which sets forth additional disclaimers and limitations of liability on behalf of S&P.) This prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectuses for the funds and keep all prospectuses for future reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI is incorporated by reference into this prospectus and is legally part of this prospectus. For a free copy of the SAI, write: The Lincoln National Life Insurance Company, PO Box 2348, Fort Wayne, IN 46801-2348, or call 1-888-868-2583. The SAI and other information about Lincoln Life and the VAA are also available on the SEC's website (http://www.sec.gov). There is a table of contents for the SAI on the last page of this prospectus. May 11, 2011 2 Table of Contents
Item Page Special Terms 4 Expense Tables 6 Summary of Common Questions 11 The Lincoln National Life Insurance Company 14 Variable Annuity Account (VAA) 15 Investments of the Variable Annuity Account 15 Charges and Other Deductions 20 The Contracts 26 Purchase Payments 27 Transfers On or Before the Annuity Commencement Date 28 Surrenders and Withdrawals 30 Death Benefit 31 Investment Requirements 34 Living Benefit Riders 36 Lincoln Lifetime IncomeSM Advantage 2.0 36 Lincoln SmartSecurity (Reg. TM) Advantage 45 i4LIFE (Reg. TM) Advantage 50 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 53 Annuity Payouts 57 Fixed Side of the Contract 65 Distribution of the Contracts 67 Federal Tax Matters 68 Additional Information 73 Voting Rights 73 Return Privilege 74 Other Information 74 Legal Proceedings 74 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 75
3 Special Terms In this prospectus, the following terms have the indicated meanings: Account or variable annuity account (VAA) - The segregated investment account, Account N, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus. Account Value - Under i4LIFE (Reg. TM) Advantage, the initial Account Value is the contract value on the valuation date that i4LIFE (Reg. TM) Advantage is effective (or initial purchase payment if i4LIFE (Reg. TM) Advantage is purchased at contract issue), less any applicable premium taxes. During the Access Period, the Account Value on a valuation date equals the total value of all of the contractowner's accumulation units plus the contractowner's value in the fixed account, reduced by regular income payments, Guaranteed Income Benefit payments, and withdrawals. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date and to calculate the i4LIFE (Reg. TM) Advantage Account Value during the Access Period. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout - An amount paid at regular intervals after the annuity commencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person you choose to receive any death benefit paid if you die before the annuity commencement date. Contractowner (you, your, owner) - The person who can exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the contractowner is the annuitant. Contract value (may be referenced to as account value in marketing materials) - At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract, if any. Contract year - Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit - Before the annuity commencement date, the amount payable to your designated beneficiary if the contractowner dies or, if selected, to the contractowner if the annuitant dies. See The Contracts - Death Benefit for a description of the various death benefit options. Good Order - The actual receipt at our Home Office of the requested transaction in writing or by other means we accept, along with all information and supporting legal documentation necessary to effect the transaction. The forms we provide will identify the necessary documentation. We may, in our sole discretion, determine whether any particular transaction request is in good order, and we reserve the right to change or waive any good order requirements at any time. Guaranteed Income Benefit - An option that provides a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. The calculation of the Guaranteed Income Benefit or the features applicable to the Guaranteed Income Benefit may vary based on the rider provisions applicable to certain contractowners. i4LIFE (Reg. TM) Advantage - An income program which combines periodic variable lifetime income payments with the ability to make withdrawals during a defined period. Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company. Lincoln Lifetime IncomeSM Advantage 2.0 - Provides minimum guaranteed lifetime periodic withdrawals that may increase based on automatic enhancements and age-based increases to the withdrawal amount, regardless of the investment performance of the contract and provided certain conditions are met. Lincoln SmartSecurity (Reg. TM) Advantage - Provides minimum guaranteed periodic withdrawals for life, regardless of the investment performance of the contract and provided certain conditions are met, that may increase due to subsequent purchase payments and step-ups. Living Benefit - A general reference to certain riders that may be available for purchase that provide some type of a minimum guarantee while you are alive. These riders are the Lincoln SmartSecurity (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage 2.0, and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit). If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you may be subject to Investment Requirements. Purchase payments - Amounts paid into the contract. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE 4 is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 5 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options, and/or (if available) the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: Surrender charge (as a percentage of purchase payments surrendered/withdrawn):1 7.00% We also may apply an interest adjustment to amounts being withdrawn, surrendered or transferred from a guaranteed period account (except for dollar cost averaging, withdrawals up to the Maximum Annual Withdrawal amount under Lin- coln SmartSecurity (Reg. TM) Advantage and regular income payments under i4LIFE (Reg. TM) Advantage). See Fixed Side of the Contract.
1 The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. Purchase payments consisting of Rollover Money will not be subject to surrender charges. See Charges and Other Deductions - Surrender Charge. The next table describes the fees and expenses that you will pay periodically during the time that you own the contract, not including fund fees and expenses. Periodic Charges for the Base Contract: Annual Account Fee:1 $35 Separate Account Annual Expenses (as a percentage of average daily net assets in the subaccounts): Guarantee of Principal Death Benefit Mortality and Expense Risk Charge 0.95% Administrative Charge 0.10% Total Separate Account Expenses 1.05% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Mortality and Expense Risk Charge 1.20% Administrative Charge 0.10% Total Separate Account Expenses 1.30%
1 The account fee will be waived if your contract value is $100,000 or more at the end of any particular contract year. This account fee may be less in some states and will be waived after the fifteenth contract year. Optional Living Benefit Rider Charges are set forth below.
Optional Living Benefit Rider Charges - Other Than i4LIFE (Reg. TM) Advantage: Only one Living Benefit rider may be elected from this grouping. These charges are added to the periodic charges for the base contract described above. Single Life Joint Life Lincoln Lifetime IncomeSM Advantage 2.0:1 Guaranteed Maximum Charge 2.00% 2.00% Current Charge 1.05% 1.25% Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option:2 Guaranteed Maximum Charge 1.50% 1.50% Current Charge 0.65% 0.80%
1 As an annualized percentage of the Income Base (initial purchase payment or contract value at the time of election), as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and decreased by Excess Withdrawals. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 charge for a discussion of these charges to the Income Base. This charge is deducted from the contract value on a quarterly basis. 2 As an annualized percentage of the Guaranteed Amount (initial purchase payment or contract value at the time of election), as increased for subsequent purchase payments and step-ups and decreased for withdrawals. This charge is deducted from the contract value on a quarterly basis. See Charges and Other Deductions - Lincoln SmartSecurity (Reg. TM) Advantage Charge for further information. 6
Optional Living Benefit Rider Charges - i4LIFE (Reg. TM) Advantage. i4LIFE (Reg. TM) Advantage can be elected with or without one of the fol- lowing Guaranteed Income Benefits. It cannot be elected with any other Living Benefit rider except as set forth below. i4LIFE (Reg. TM) Advantage Without Guaranteed Income Benefit (version 4):* These charges replace the Separate Account Annual Expenses for the base contract. Guarantee of Principal Death Benefit 1.45% Enhanced Guaranteed Minimum Death Benefit (EGMDB) 1.70%
* As an annualized percentage of Account Value (initial purchase payment or contract value depending on the effective date of i4LIFE (Reg. TM) Advantage), computed daily. This charge is assessed only on and after the periodic income commencement date. See Charges and Other Deductions - i4LIFE (Reg. TM)Advantage Rider Charge for further information.
i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4):* These charges replace the Separate Account Annual Expenses for the base contract. Single Life Joint Life Guarantee of Principal Death Benefit Guaranteed Maximum Charge 3.45% 3.45% Current Charge 2.10% 2.30% Enhanced Guaranteed Minimum Death Benefit (EGMDB) Guaranteed Maximum Charge 3.70% 3.70% Current Charge 2.35% 2.55%
* As an annualized percentage of Account Value, computed daily. This charge is assessed only on and after the periodic income commencement date. The percentage charge will change to the current charge in effect at the time of an automatic step-up of the Guaranteed Income Benefit, not to exceed the guaranteed maximum charge percentage. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Charge for further information.
i4LIFE (Reg. TM) Advantage With Guaranteed Income Benefit (version 4) for purchasers who previously purchased Lincoln Lifetime IncomeSM Advantage 2.0: These charges replace the Separate Account Annual Expenses for the base contract. Single Life Joint Life Guarantee of Principal Death Benefit* 1.05% 1.05% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Guaranteed Plus 2.00% Plus 2.00% Maximum Charge** Enhanced Guaranteed Minimum Death Benefit (EGMDB)* 1.30% 1.30% Plus i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) Guaranteed Plus 2.00% Plus 2.00% Maximum Charge**
* As a percentage of average daily net assets in the subaccounts. This charge is assessed on and after the periodic income commencement date. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. ** As an annualized percentage of the greater of the Income Base carried over from Lincoln Lifetime IncomeSM Advantage 2.0 (less the Guaranteed Annual Income amounts paid since the last Step-Up) or contract value prior to electing i4LIFE (Reg. TM) Advantage. For previous purchasers of Lincoln Lifetime IncomeSM Advantage 2.0, the current charges for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) are 1.05% for the single life and 1.25% for the joint life option. This charge is deducted from contract value on a quarterly basis and only on and after the periodic income commencement date. The charge may be increased upon an automatic annual step-up and decreased upon an Excess Withdrawal. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. The next table describes the separate account annual expenses (as a percentage of average daily net assets in the subaccounts) you pay on and after the annuity commencement date: Periodic Charges on and after the Annuity Commencement Date
Mortality and expense risk charge and administrative charge 1.00%
The next table describes the maximum Unscheduled Payment charge for the Lincoln SmartIncomeSM Inflation on and after the annuity commencement date: 7
Maximum Lincoln SmartIncomeSMInflation Unscheduled Payment charge (as a percentage of the Unscheduled Payment) 7.0%
The Unscheduled Payment charge percentage is reduced over time. The later the Unscheduled Payment occurs, the lower the charge with respect to that Unscheduled Payment. A new Rider Year starts on each Rider Date anniversary. The charge is applied only to amounts in excess of the annual 10% Reserve Value free amount. See Charges and Other Deductions - Charges for Lincoln SmartIncomeSM Inflation. See The Contracts - Annuity Payouts for a detailed description of Lincoln SmartIncomeSMInflation. The next item shows the minimum and maximum total annual operating expenses charged by the funds that you may pay periodically during the time that you own the contract. The expenses are for the year ended December 31, 2010. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Minimum Maximum --------- -------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses): 0.55% 2.58% Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 0.55% 2.14%
* 42 of the funds have entered into contractual waiver or reimbursement arrangements that may reduce fund management and other fees and/or expenses during the period of the arrangement. These arrangements vary in length, but no arrangement will terminate before April 30, 2012. The following table shows the expenses charged by each fund for the year ended December 31, 2010: (as a percentage of each fund's average net assets):
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + AllianceBernstein VPS Global Thematic Growth Portfolio 0.75 % 0.25 % 0.24 % AllianceBernstein VPS International Value Portfolio 0.75 0.25 0.10 AllianceBernstein VPS Small/Mid Cap Value Portfolio 0.75 0.25 0.09 BlackRock Global Allocation V.I. Fund 0.65 0.25 0.06 Delaware VIP (Reg. TM) Diversified Income Series(1) 0.60 0.30 0.10 Delaware VIP (Reg. TM) Emerging Markets Series(1) 1.25 0.30 0.15 Delaware VIP (Reg. TM) Limited-Term Diversified Income Series(1) 0.50 0.30 0.10 Delaware VIP (Reg. TM) REIT Series(1) 0.75 0.30 0.12 Delaware VIP (Reg. TM) Small Cap Value Series(1) 0.73 0.30 0.10 Delaware VIP (Reg. TM) Smid Cap Growth Series(1) 0.75 0.30 0.14 Delaware VIP (Reg. TM) U.S. Growth Series(1) 0.65 0.30 0.10 Delaware VIP (Reg. TM) Value Series(1) 0.65 0.30 0.10 DWS Alternative Asset Allocation Plus VIP Portfolio(2) 0.24 0.25 0.70 Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio(3) 0.56 0.25 0.09 Fidelity (Reg. TM) VIP Growth Portfolio 0.56 0.25 0.11 Fidelity (Reg. TM) VIP Mid Cap Portfolio(4) 0.56 0.25 0.10 FTVIPT Franklin Income Securities Fund 0.45 0.25 0.02 FTVIPT Mutual Shares Securities Fund 0.60 0.25 0.14 LVIP American Global Growth Fund(5) 0.53 0.55 0.48 LVIP American Global Small Capitalization Fund(5) 0.71 0.55 0.45 LVIP American Growth Fund(5) 0.32 0.55 0.15 LVIP American Growth-Income Fund(5) 0.27 0.55 0.19 LVIP American International Fund(5) 0.49 0.55 0.27 LVIP Baron Growth Opportunities Fund(6) 1.00 0.25 0.09 Total Expenses Total (after Expenses Total Contractu (before Contractual ua Acquired any waivers/ waivers/ Fund waivers/ reimburse- reimburse Fees and reimburse- ments e- Expenses = ments) (if any) ments) AllianceBernstein VPS Global Thematic Growth Portfolio 0.00 % 1.24 % AllianceBernstein VPS International Value Portfolio 0.00 1.10 AllianceBernstein VPS Small/Mid Cap Value Portfolio 0.00 1.09 BlackRock Global Allocation V.I. Fund 0.02 0.98 Delaware VIP (Reg. TM) Diversified Income Series(1) 0.00 1.00 -0.05 % 0.95 % Delaware VIP (Reg. TM) Emerging Markets Series(1) 0.00 1.70 -0.05 1.65 Delaware VIP (Reg. TM) Limited-Term Diversified Income Series(1) 0.00 0.90 -0.05 0.85 Delaware VIP (Reg. TM) REIT Series(1) 0.00 1.17 -0.05 1.12 Delaware VIP (Reg. TM) Small Cap Value Series(1) 0.00 1.13 -0.05 1.08 Delaware VIP (Reg. TM) Smid Cap Growth Series(1) 0.00 1.19 -0.05 1.14 Delaware VIP (Reg. TM) U.S. Growth Series(1) 0.00 1.05 -0.05 1.00 Delaware VIP (Reg. TM) Value Series(1) 0.00 1.05 -0.05 1.00 DWS Alternative Asset Allocation Plus VIP Portfolio(2) 1.39 2.58 -0.44 2.14 Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio(3) 0.00 0.90 Fidelity (Reg. TM) VIP Growth Portfolio 0.00 0.92 Fidelity (Reg. TM) VIP Mid Cap Portfolio(4) 0.00 0.91 FTVIPT Franklin Income Securities Fund 0.00 0.72 FTVIPT Mutual Shares Securities Fund 0.00 0.99 LVIP American Global Growth Fund(5) 0.00 1.56 -0.35 1.21 LVIP American Global Small Capitalization Fund(5) 0.00 1.71 -0.31 1.40 LVIP American Growth Fund(5) 0.00 1.02 -0.03 0.99 LVIP American Growth-Income Fund(5) 0.00 1.01 -0.07 0.94 LVIP American International Fund(5) 0.00 1.31 -0.13 1.18 LVIP Baron Growth Opportunities Fund(6) 0.00 1.34 -0.05 1.29
8
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + LVIP BlackRock Inflation Protected Bond Fund 0.45 % 0.25 % 0.10 % LVIP Capital Growth Fund 0.72 0.25 0.09 LVIP Cohen & Steers Global Real Estate Fund(7) 0.95 0.25 0.15 LVIP Columbia Value Opportunities Fund(8) 1.05 0.25 0.21 LVIP Delaware Bond Fund 0.32 0.35 0.07 LVIP Delaware Diversified Floating Rate Fund 0.60 0.25 0.18 LVIP Delaware Social Awareness Fund 0.39 0.35 0.08 LVIP Delaware Special Opportunities Fund 0.40 0.35 0.08 LVIP Dimensional Non-U.S. Equity Fund(9) 0.25 0.25 0.55 LVIP Dimensional U.S. Equity Fund(9) 0.25 0.25 0.55 LVIP Global Income Fund(10) 0.65 0.25 0.15 LVIP Janus Capital Appreciation Fund(12) 0.75 0.25 0.09 LVIP J.P. Morgan High Yield Fund(11) 0.65 0.25 0.21 LVIP MFS International Growth Fund(13) 0.90 0.25 0.15 LVIP MFS Value Fund 0.64 0.25 0.07 LVIP Mid-Cap Value Fund(14) 0.94 0.25 0.14 LVIP Mondrian International Value Fund 0.74 0.25 0.11 LVIP Money Market Fund 0.36 0.25 0.06 LVIP SSgA Bond Index Fund(15) 0.40 0.25 0.09 LVIP SSgA Conservative Index Allocation Fund(16) 0.25 0.25 0.50 LVIP SSgA Conservative Structured Allocation Fund(16) 0.25 0.25 0.18 LVIP SSgA Developed International 150 Fund(17) 0.75 0.25 0.18 LVIP SSgA Emerging Markets 100 Fund(18) 1.09 0.25 0.21 LVIP SSgA Global Tactical Allocation Fund 0.25 0.25 0.14 LVIP SSgA International Index Fund(19) 0.40 0.25 0.24 LVIP SSgA Large Cap 100 Fund(20) 0.52 0.25 0.07 LVIP SSgA Moderate Index Allocation Fund(21) 0.25 0.25 0.27 LVIP SSgA Moderate Structured Allocation Fund(21) 0.25 0.25 0.07 LVIP SSgA Moderately Aggressive Index Allocation Fund(21) 0.25 0.25 0.21 LVIP SSgA Moderately Aggressive Structured Allocation Fund(21) 0.25 0.25 0.10 LVIP SSgA Small/Mid Cap 200 Fund(22) 0.69 0.25 0.12 LVIP SSgA S&P 500 Index Fund 0.22 0.25 0.08 LVIP SSgA Small-Cap Index Fund 0.32 0.25 0.12 LVIP T. Rowe Price Growth Stock Fund 0.71 0.25 0.08 LVIP T. Rowe Price Structured Mid-Cap Growth Fund 0.74 0.25 0.09 LVIP Templeton Growth Fund 0.73 0.25 0.10 LVIP Total Bond Fund(23) 0.25 0.25 0.55 LVIP Turner Mid-Cap Growth Fund(24) 0.88 0.25 0.18 LVIP Vanguard Domestic Equity ETF Fund(25) 0.25 0.25 0.55 LVIP Vanguard International Equity ETF Fund(25) 0.25 0.25 0.55 LVIP Wells Fargo Intrinsic Value Fund(26) 0.75 0.25 0.09 LVIP Conservative Profile Fund 0.25 0.25 0.05 LVIP Moderate Profile Fund 0.25 0.25 0.03 Total Expenses Total (after Expenses Total Contractu (before Contractual ua Acquired any waivers/ waivers/ Fund waivers/ reimburse- reimburse Fees and reimburse- ments e- Expenses = ments) (if any) ments) LVIP BlackRock Inflation Protected Bond Fund 0.02 % 0.82 % LVIP Capital Growth Fund 0.00 1.06 LVIP Cohen & Steers Global Real Estate Fund(7) 0.00 1.35 -0.22 % 1.13 % LVIP Columbia Value Opportunities Fund(8) 0.00 1.51 -0.09 1.42 LVIP Delaware Bond Fund 0.00 0.74 LVIP Delaware Diversified Floating Rate Fund 0.00 1.03 LVIP Delaware Social Awareness Fund 0.00 0.82 LVIP Delaware Special Opportunities Fund 0.00 0.83 LVIP Dimensional Non-U.S. Equity Fund(9) 0.48 1.53 -0.50 1.03 LVIP Dimensional U.S. Equity Fund(9) 0.29 1.34 -0.50 0.84 LVIP Global Income Fund(10) 0.00 1.05 -0.05 1.00 LVIP Janus Capital Appreciation Fund(12) 0.00 1.09 -0.08 1.01 LVIP J.P. Morgan High Yield Fund(11) 0.00 1.11 -0.04 1.07 LVIP MFS International Growth Fund(13) 0.00 1.30 -0.05 1.25 LVIP MFS Value Fund 0.00 0.96 LVIP Mid-Cap Value Fund(14) 0.00 1.33 -0.04 1.29 LVIP Mondrian International Value Fund 0.00 1.10 LVIP Money Market Fund 0.00 0.67 LVIP SSgA Bond Index Fund(15) 0.01 0.75 -0.09 0.66 LVIP SSgA Conservative Index Allocation Fund(16) 0.16 1.16 -0.55 0.61 LVIP SSgA Conservative Structured Allocation Fund(16) 0.17 0.85 -0.23 0.62 LVIP SSgA Developed International 150 Fund(17) 0.00 1.18 -0.38 0.80 LVIP SSgA Emerging Markets 100 Fund(18) 0.00 1.55 -0.72 0.83 LVIP SSgA Global Tactical Allocation Fund 0.63 1.27 LVIP SSgA International Index Fund(19) 0.00 0.89 -0.03 0.86 LVIP SSgA Large Cap 100 Fund(20) 0.00 0.84 -0.18 0.66 LVIP SSgA Moderate Index Allocation Fund(21) 0.17 0.94 -0.32 0.62 LVIP SSgA Moderate Structured Allocation Fund(21) 0.17 0.74 -0.12 0.62 LVIP SSgA Moderately Aggressive Index Allocation Fund(21) 0.18 0.89 -0.26 0.63 LVIP SSgA Moderately Aggressive Structured Allocation Fund(21) 0.18 0.78 -0.15 0.63 LVIP SSgA Small/Mid Cap 200 Fund(22) 0.00 1.06 -0.29 0.77 LVIP SSgA S&P 500 Index Fund 0.00 0.55 LVIP SSgA Small-Cap Index Fund 0.00 0.69 LVIP T. Rowe Price Growth Stock Fund 0.00 1.04 LVIP T. Rowe Price Structured Mid-Cap Growth Fund 0.00 1.08 LVIP Templeton Growth Fund 0.00 1.08 LVIP Total Bond Fund(23) 0.19 1.24 -0.50 0.74 LVIP Turner Mid-Cap Growth Fund(24) 0.00 1.31 -0.08 1.23 LVIP Vanguard Domestic Equity ETF Fund(25) 0.14 1.19 -0.50 0.69 LVIP Vanguard International Equity ETF Fund(25) 0.26 1.31 -0.50 0.56 LVIP Wells Fargo Intrinsic Value Fund(26) 0.00 1.09 -0.05 1.04 LVIP Conservative Profile Fund 0.65 1.20 LVIP Moderate Profile Fund 0.73 1.26
9
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + LVIP Moderately Aggressive Profile Fund 0.25 % 0.25 % 0.04 % MFS (Reg. TM) VIT Growth Series 0.75 0.25 0.10 MFS (Reg. TM) VIT Utilities Series 0.73 0.25 0.08 PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio(27) 0.74 0.25 0.04 Total Expenses Total (after Expenses Total Contractu (before Contractual ua Acquired any waivers/ waivers/ Fund waivers/ reimburse- reimburse Fees and reimburse- ments e- Expenses = ments) (if any) ments) LVIP Moderately Aggressive Profile Fund 0.76 % 1.30 % MFS (Reg. TM) VIT Growth Series 0.00 1.10 MFS (Reg. TM) VIT Utilities Series 0.00 1.06 PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio(27) 0.12 1.15 -0.12 % 1.03 %
(1) The Service Class shares are subject to a 12b-1 fee of 0.30% of average daily net assets. The Series' distributor, Delaware Distributors, L.P., has contracted to limit the 12b-1 fees to no more than 0.25% of average daily net assets from April 29, 2011 to April 30, 2012. (2) Through April 30, 2012, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses of the fund to the extent necessary to maintain the fund's operating expenses at 0.75% for Class B shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and acquired funds (underlying funds) fees and expenses (estimated at 1.39%). The agreement may be terminated with the consent of the fund's Board. (3) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.90% for Service Class 2. These offsets may be discontinued at any time. (4) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the funds' custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.91% for Service Class 2. These offsets may be discontinued at any time. (5) The amounts set forth under "Management Fee" and "Other Expenses" reflect the aggregate expenses of the Feeder Fund and the Master Fund. Other Expenses are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class II to the extent that the Other Expenses of the Feeder Fund exceed 0.10% of average daily net assets. The agreement will continue at least through April 30, 2012. (6) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.29% of the average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (7) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.22% of the first $250 million of average net assets of the fund and 0.32% of the excess over $250 million of average daily nets assets of the fund. The agreement will continue at least through April 30, 2012. (8) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.09% on the first $60 million of average daily net assets of the Fund. The agreement will continue at least through April 30, 2012. (9) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (10) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (11) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.07% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (12) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.15% on the first $100 million of average daily net assets of the Fund; and 0.10% on the next $150 million of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (13) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% on the first $400 million of average daily net assets of the Fund. The agreement will continue at least through April 30, 2012. (14) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.05% of the first $25 million of average net assets of the Fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the Fund's Service Class to the extent that the Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (15) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.07% on the first $500 million of average daily net assets of the fund and 0.12% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2012. (16) Other Expenses and AFFE are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.45% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (17) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.35% on the first $100 million of average daily net assets of the fund and 0.43% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (18) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.69% on the first $100 million of average daily net assets of the Fund and 0.76% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (19) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.03% on the first $500 million of average daily net assets of the fund and 0.05% of average daily net assets of the fund in excess of $500 million. The agreement will continue at least through April 30, 2012. 10 (20) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.12% on the first $100 million of average daily net assets of the fund and 0.22% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (21) Other Expenses and AFFE are based on estimated amounts for the current fiscal year. Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.45% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. (22) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.29% on the first $100 million of average daily net assets of the fund and 0.39% of average daily net assets of the fund in excess of $100 million. The agreement will continue at least through April 30, 2012. (23) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (24) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund; 0.10% on the first $25 million of average daily net assets of the fund and 0.05% on the next $50 million of average daily net assets. The agreement will continue at least through April 30, 2012. (25) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to reimburse the fund's Service Class to the extent that the Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses) exceed 0.55% of average daily net assets of the fund. The agreement will continue at least through April 30, 2012. Other Expenses are based on estimated amounts for the current fiscal year. (26) Lincoln Investment Advisors Corporation (LIA) has contractually agreed to waive the following portion of its advisory fee for the fund: 0.03% on the first $250 million of average daily net assets of the fund; 0.08% on the next $500 million and 0.13% of average daily net assets in excess of $750 million. The agreement will continue at least through April 30, 2012. (27) PIMCO has contractually agreed to waive the Portfolio's advisory fee and the supervisory and administrative fee in an amount equal to the management fee and administration services fee, respectively, paid by the PIMCO Cayman Commodity Portfolio I Ltd. (the "Subsidiary") to PIMCO. The Subsidiary pays PIMCO a management fee and an administrative services fee at the annual rates of 0.49% and 0.20%, respectively, of its net assets. This waiver may not be terminated by PIMCO and will be in effect through at least May 1, 2012 and will remain in effect as long as PIMCO's contract with the Subsidiary is in place. Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase ("redemption fees") which are not reflected in the table above. As of the date of this prospectus, none have done so. See The Contracts - Market Timing for a discussion of redemption fees. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. EXAMPLES This Example is intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include contractowner transaction expenses, contract fees, separate account annual expenses, and fund fees and expenses. The Example assumes that you invest $10,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year, the maximum fees and expenses of any of the funds and that the EGMDB death benefit and Lincoln Lifetime IncomeSM Advantage 2.0 at the guaranteed maximum charge are in effect. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ----------- --------- --------- --------- $1,291 $2,391 $3,516 $6,194
2) If you annuitize or do not surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years -------- --------- --------- --------- $591 $1,791 $3,016 $6,194
For more information, see Charges and Other Deductions in this prospectus, and the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income payments or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage, Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage, and Annuity Payouts, including Lincoln SmartIncomeSM Inflation. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. Summary of Common Questions What kind of contract am I buying? This contract is an individual deferred flexible premium variable annuity contract between you and Lincoln Life. You may allocate your purchase payments to the VAA or to the fixed account. It is designed to be an Individual Retirement Annuity (IRA) purchased with Rollover Money. This prospectus primarily describes the variable side of the contract. See The Contracts. The contract and certain riders, benefits, service features and enhancements may not be available in all states, and the 11 charges may vary in certain states. You should refer to your contract for any state specific provisions. Please check with your investment representative regarding their availability. Who can purchase this contract? This contract is available to individuals who will purchase an IRA contract with Rollover Money from a qualified plan. To be eligible to purchase this contract, the money must have been invested in one of the following products or programs sold by Lincoln Life to the qualified plan: Lincoln DirectorSM contract, Lincoln Alliance (Reg. TM) Program, Lincoln Smart FutureSM Program, Group Variable Annuity or Multifund (Reg. TM) variable annuities. What is the variable annuity account (VAA)? It is a separate account we established under Indiana insurance law, and registered with the SEC as a unit investment trust. VAA assets are allocated to one or more subaccounts, according to your investment choices. VAA assets are not chargeable with liabilities arising out of any other business which we may conduct. See Variable Annuity Account. What are Investment Requirements? If you elect one of the following riders: Lincoln Lifetime IncomeSM Advantage 2.0, Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, you will be subject to certain requirements for your subaccount investments. You will be limited in how much you can invest in certain subaccounts and the fixed account will not be available except for dollar cost averaging purposes. See The Contracts - Investment Requirements. What are my investment choices? This contract is an individual deferred flexible premium variable annuity contract between you and Lincoln Life. You may allocate your purchase payments to the VAA or to the fixed account. Based upon your instruction for purchase payments, the VAA applies your purchase payments to buy shares in one or more of the investment options. In turn, each fund holds a portfolio of securities consistent with its investment policy. See Investments of the Variable Annuity Account - Description of the Funds. You may also allocate purchase payments to the fixed account. Who invests my money? Several different investment advisers manage the investment options. See Investments of the Variable Annuity Account - Description of the Funds. How does the contract work? If we approve your application, we will send you a contract. When you make purchase payments during the accumulation phase, you buy accumulation units. If you decide to receive an annuity payout, your accumulation units are converted to annuity units. Your annuity payouts will be based on the number of annuity units you receive and the value of each annuity unit on payout days. See The Contracts. What charges do I pay under the contract? We apply a charge to the daily net asset value of the VAA that consists of a mortality and expense risk charge according to the death benefit you select. There is an administrative charge in addition to the mortality and expense risk charge. The charges for any riders applicable to your contract will also be deducted from your contract value or Account Value if i4LIFE (Reg. TM) Advantage is elected. See Charges and Other Deductions. If you withdraw purchase payments, you pay a surrender charge from 0% to 7.00% of the surrendered or withdrawn purchase payment, depending upon how long those payments have been invested in the contract. We may waive surrender charges in certain situations. The portion of purchase payments made with Rollover Money is not subject to a surrender charge. See Charges and Other Deductions-Surrender Charge. We will deduct any applicable premium tax from purchase payments or contract value, unless the governmental entity dictates otherwise, at the time the tax is incurred or at another time we choose. See Expense Tables and Charges and Other Deductions for additional fees and expenses in these contracts. The funds' investment management fees, expenses and expense limitations, if applicable, are more fully described in the prospectuses for the funds. The surrender, withdrawal or transfer of value from a fixed account guaranteed period may be subject to the interest adjustment, if applicable. See Fixed Side of the Contract. Charges may also be imposed during the regular income or annuity payout period, including i4LIFE (Reg. TM) Advantage, if elected. See The Contracts and Annuity Payouts. For information about the compensation we pay for sales of contracts, see The Contracts - Distribution of the Contracts. What purchase payments do I make, and how often? Subject to the minimum and maximum payment amounts, your payments are completely flexible. See The Contracts - Purchase Payments. How will my annuity payouts be calculated? If you decide to annuitize, you may select an annuity option and start receiving annuity payouts from your contract as a fixed option or variable option or a combination of both. See Annuity Payouts - Annuity Options. Remember that participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios. What happens if I die before I annuitize? Your beneficiary will receive death benefit proceeds based upon the death benefit you select. Your beneficiary has options as to how the death benefit is paid. In the alternative, you may choose to receive a death benefit on the death of the annuitant. See The Contracts - Death Benefit. 12 May I transfer contract value between variable options and between the variable and fixed sides of the contract? Yes, subject to currently effective restrictions. For example, transfers made before the annuity commencement date are generally restricted to no more than twelve (12) per contract year. If permitted by your contract, we may discontinue accepting transfers into the fixed side of the contract at any time. See The Contracts - Transfers On or Before the Annuity Commencement Date and Transfers After the Annuity Commencement Date. See also the Fixed Side of the Contract and Guaranteed Periods. Transfers from the fixed account may be subject to an interest adjustment. What are Living Benefit Riders? Living Benefit riders are optional riders available to purchase for an additional fee. These riders provide different types of minimum guarantees if you meet certain conditions. These riders are the Lincoln SmartSecurity (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage 2.0 (withdrawal benefit riders) , and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit) (which is an annuity payout rider). If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit (especially during times of poor investment performance), and you will be subject to Investment Requirements (unless you elect i4LIFE (Reg. TM) Advantage without the Guaranteed Income Benefit). Excess withdrawals under certain Living Benefit Riders may result in a reduction or premature termination of those benefits or of those riders. If you are not certain how an excess withdrawal will reduce your future guaranteed amounts, you should contact either your registered representative or us prior to requesting a withdrawal to find out what, if any, impact the excess withdrawal will have on any guarantees under the living benefit rider. These riders are discussed in detail in this prospectus. In addition, an overview of these riders is provided as an appendix to this prospectus. What is Lincoln Lifetime IncomeSM Advantage 2.0? Lincoln Lifetime IncomeSM Advantage 2.0 is a rider that you may purchase for an additional charge and which provides on an annual basis guaranteed lifetime periodic withdrawals up to a guaranteed amount based on an Income Base, a 5% Enhancement to the Income Base or automatic annual step-ups to the Income Base, and age-based increases to the guaranteed periodic withdrawal amount. Withdrawals may be made up to the Guaranteed Annual Income amount as long as that amount is greater than zero. The Income Base is not available as a separate benefit upon death or surrender and is increased by subsequent purchase payments, 5% Enhancements to the Income Base, automatic annual step-ups to the Income Base and is decreased by certain withdrawals in accordance with provisions described in the prospectus. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage 2.0 and another one of the Living Benefit riders. By electing this rider you will be subject to Investment Requirements. See The Contracts - Investment Requirements. What is the Lincoln SmartSecurity (Reg. TM) Advantage? This benefit, which may be available for purchase at an additional charge, provides a Guaranteed Amount equal to the initial purchase payment (or contract value at the time of election) as adjusted. You may access this benefit through periodic withdrawals. Excess withdrawals will adversely affect the Guaranteed Amount. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage. You cannot simultaneously elect Lincoln SmartSecurity (Reg. TM) Advantage with any other Living Benefit rider. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - Investment Requirements. What is i4LIFE (Reg. TM) Advantage? i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable lifetime income payments, a death benefit, and the ability to make withdrawals during a defined period of time (Access Period). For an additional charge, you may purchase a minimum payout floor, the Guaranteed Income Benefit. We assess a charge, imposed only during the i4LIFE (Reg. TM) Advantage payout phase, based on the i4LIFE (Reg. TM) Advantage death benefit you choose and whether or not the Guaranteed Income Benefit is in effect. What is the Guaranteed Income Benefit? The Guaranteed Income Benefit provides a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - Investment Requirements. The i4LIFE (Reg. TM) Guaranteed Income Benefit is purchased when you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period subject to terms and conditions at that time. The minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. The i4LIFE (Reg. TM) Guaranteed Income Benefit minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. As an alternative, you may use your Guaranteed Amount from Lincoln SmartSecurity (Reg. TM) Advantage or your Income Base from Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit at the time you terminate Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, and Lincoln Lifetime IncomeSM Advantage 2.0 - i4LIFE (Reg. TM) Advantage option. What is Lincoln SmartIncomeSM Inflation? Lincoln SmartIncomeSM Inflation is a fixed annuity payout option that provides periodic annuity payouts that may increase or decrease each year based on changes in a consumer price index that measures inflation. Lincoln SmartIncomeSM Inflation also provides a guaranteed minimum payout, a death benefit and access to a reserve value from which unscheduled payments may be taken. See The Contracts - Annuity Payouts - Lincoln SmartIncomeSM Inflation. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See The Contracts - Surrenders and Withdrawals. If you surrender the contract or make a withdrawal, certain charges may apply. See Charges and Other Deductions. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. 13 Do I get a free look at this contract? Yes. You can cancel the contract within ten days (in some states longer) of the date you first receive the contract. You need to return the contract, postage prepaid, to our Home Office. In most states you assume the risk of any market drop on purchase payments you allocate to the variable side of the contract. See Return Privilege. Where may I find more information about accumulation unit values? Because the subaccounts which are available under the contracts did not begin operation before the date of this prospectus, financial information for the subaccounts is not included in this prospectus or in the SAI. Investment Results At times, the VAA may compare its investment results to various unmanaged indices or other variable annuities in reports to shareholders, sales literature and advertisements. The results will be calculated on a total return basis for various periods, with or without contingent deferred sales charges. Results calculated without contingent deferred sales charges will be higher. Total returns include the reinvestment of all distributions, which are reflected in changes in unit value. The money market subaccount's yield is based upon investment performance over a 7-day period, which is then annualized. Note that there can be no assurance that any money market fund will be able to maintain a stable net asset value per share. During extended periods of low interest rates, and due in part to the contract fees and expenses, the yields of any subaccount investing in a money market fund may also become extremely low and possibly negative. The money market yield figure and annual performance of the subaccounts are based on past performance and do not indicate or represent future performance. The Lincoln National Life Insurance Company The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905, is an Indiana-domiciled insurance company, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln Life is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, such as those associated with death benefit options and Living Benefit riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. With respect to the issuance of the contracts, Lincoln Life does not file periodic financial reports with the SEC pursuant to the exemption for life insurance companies provided under Rule 12h-7 of the Securities Exchange Act of 1934. We issue other types of insurance policies and financial products as well, and we also pay our obligations under these products from our assets in the general account. Moreover, unlike assets held in the VAA, the assets of the general account are subject to the general liabilities of the Company and, therefore, to the Company's general creditors. In the event of an insolvency or receivership, payments we make from our general account to satisfy claims under the contract would generally receive the same priority as our other contractowner obligations. Our Financial Condition. Among the laws and regulations applicable to us as an insurance company are those which regulate the investments we can make with assets held in our general account. In general, those laws and regulations determine the amount and type of investments which we can make with general account assets. In addition, state insurance regulations require that insurance companies calculate and establish on their financial statements, a specified amount of reserves in order to meet the contractual obligations to pay the claims of our policyholders. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product. State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer's operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value. How to Obtain More Information. We encourage both existing and prospective policyholders to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would 14 like a free copy of the SAI, please write to us at: PO Box 2348, Fort Wayne, IN 46801-2348 , or call 1-888-868-2583. In addition, the Statement of Additional Information is available on the SEC's website at http://www.sec.gov. You may obtain our audited statutory financial statements and any unaudited statutory financial statements that may be available by visiting our website at www.LincolnFinancial.com. You also will find on our website information on ratings assigned to us by one or more independent rating organizations. These ratings are opinions of an operating insurance company's financial capacity to meet the obligations of its insurance and annuity contracts based on its financial strength and/or claims-paying ability. Additional information about rating agencies is included in the Statement of Additional Information. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Through its affiliates, Lincoln Financial Group offers annuities, life, group life and disability insurance, 401(k) and 403(b) plans, and comprehensive financial planning and advisory services. Variable Annuity Account (VAA) On November 3, 1997, 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 VAA is a segregated investment account, meaning that its assets may not be charged with liabilities resulting from any other business that we may conduct. Income, gains and losses, whether realized or not, from assets allocated to the VAA are, in accordance with the applicable annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln Life. We are the issuer of the contracts and the obligations set forth in the contract, other than those of the contractowner, are ours. The VAA satisfies the definition of a separate account under the federal securities laws. We do not guarantee the investment performance of the VAA. Any investment gain or loss depends on the investment performance of the funds. You assume the full investment risk for all amounts placed in the VAA. The VAA is used to support other annuity contracts offered by us in addition to the contracts described in this prospectus. The other annuity contracts supported by the VAA generally invest in the same funds as the contracts described in this prospectus. These other annuity contracts may have different charges that could affect the performance of their subaccounts, and they offer different benefits. Financial Statements The December 31, 2010 financial statements of the VAA and the December 31, 2010 consolidated financial statements of Lincoln Life are located in the SAI. If you would like a free copy of the SAI, complete and mail the request on the last page of this prospectus, or call 1-888-868-2583. Investments of the Variable Annuity Account You decide the subaccount(s) to which you allocate purchase payments. There is a separate subaccount which corresponds to each class of each fund. You may change your allocation without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The funds are required to redeem fund shares at net asset value upon our request. Investment Advisers As compensation for its services to the fund, the investment adviser receives a fee from the fund which is accrued daily and paid monthly. This fee is based on the net assets of each fund, as defined in the prospectus for the fund. Certain Payments We Receive with Regard to the Funds With respect to a fund, including affiliated funds, the adviser and/or distributor, or an affiliate thereof, may make payments to us (or an affiliate). It is anticipated that such payments will be based on a percentage of assets of the particular fund attributable to the contracts along with certain other variable contracts issued or administered by us (or an affiliate). These percentages are negotiated and vary with each fund. Some funds may pay us significantly more than other funds and the amount we receive may be substantial. These percentages currently range up to 0.25%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services 15 that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings. The AllianceBernstein, BlackRock, Delaware, DWS, Fidelity, Franklin Templeton, Lincoln, MFS and PIMCO Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.55% based on the amount of assets invested in those funds. Payments made out of the assets of the fund will reduce the amount of assets that otherwise would be available for investment, and will reduce the fund's investment return. The dollar amount of future asset-based fees is not predictable because these fees are a percentage of the fund's average net assets, which can fluctuate over time. If, however, the value of the fund goes up, then so would the payment to us (or our affiliates). Conversely, if the value of the funds goes down, payments to us or our affiliates would decrease. Description of the Funds Each of the subaccounts of the VAA is invested solely in shares of one of the funds available under the contract. Each fund may be subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund. We select the funds offered through the contract based on several factors, including, without limitation, asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, and the capability and qualification of each sponsoring investment firm. Another factor we consider during the initial selection process is whether the fund or an affiliate of the fund will make payments to us or our affiliates. We review each fund periodically after it is selected. Upon review, we may remove a fund or restrict allocation of additional purchase payments to a fund if we determine the fund no longer meets one or more of the factors and/or if the fund has not attracted significant contractowner assets. Finally, when we develop a variable annuity product in cooperation with a fund family or distributor (e.g., a "private label" product), we generally will include funds based on recommendations made by the fund family or distributor, whose selection criteria may differ from our selection criteria. Certain funds offered as part of this contract have similar investment objectives and policies to other portfolios managed by the adviser. The investment results of the funds, however, may be higher or lower than the other portfolios that are managed by the adviser or sub-adviser. There can be no assurance, and no representation is made, that the investment results of any of the funds will be comparable to the investment results of any other portfolio managed by the adviser or sub-adviser, if applicable. Certain funds invest substantially all of their assets in other funds. As a result, you will pay fees and expenses at both fund levels. This will reduce your investment return. These arrangements are referred to as funds of funds or master-feeder funds. Funds of funds or master-feeder structures may have higher expenses than funds that invest directly in debt or equity securities. Certain funds may employ hedging strategies to provide for downside protection during sharp downward movements in equity markets. The cost of these hedging strategies could limit the upside participation of the fund in rising equity markets relative to other funds. The death benefits and Living Benefit riders offered under the contract also provide protection in the event of a market downturn. Likewise, there are additional costs associated with the death benefits and Living Benefit riders, which can limit the contract's upside participation in the markets. You should consult with your financial representative to determine which combination of investment choices and death benefit and/or rider purchases (if any) are appropriate for you. Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for each fund. You should read each fund prospectus carefully before investing. Prospectuses for each fund are available by contacting us. In addition, if you receive a summary prospectus for a fund, you may obtain a full statutory prospectus by referring to the contact information for the fund company on the cover page of the summary prospectus. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein VPS Global Thematic Growth Portfolio: Long-term growth of capital. o AllianceBernstein VPS International Value Portfolio: Long-term growth of capital. o AllianceBernstein VPS Small/Mid Cap Value Portfolio: Long-term growth of capital. BlackRock Variable Series Funds, Inc.,advised by BlackRock Advisors, LLC and subadvised by BlackRock Investment Management, LLC o BlackRock Global Allocation V.I. Fund: High total investment return. Delaware VIP (Reg. TM) Trust, advised by Delaware Management Company* o Diversified Income Series: Long-term total return. o Emerging Markets Series: Long-term capital appreciation. o Limited-Term Diversified Income Series: Long-term total return. o REIT Series: Total return. 16 o Small Cap Value Series: Capital appreciation. o Smid Cap Growth Series: Long-term capital appreciation. o U.S. Growth Series: Long-term capital appreciation. o Value Series: Capital appreciation. DWS Variable Series II, advised by Deutsche Investment Management Americas, Inc. and subadvised by RREEF America L.L.C. o DWS Alternative Asset Allocation Plus VIP Portfolio: Capital appreciation Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company and subadvised by FMR CO., Inc. o Contrafund (Reg. TM) Portfolio: Long-term capital appreciation. o Growth Portfolio: Capital appreciation. o Mid Cap Portfolio: Long-term growth of capital. Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund and by Franklin Mutual Advisers, LLC for the Mutual Shares Securities Fund. o Franklin Income Securities Fund: Maximize income. o Mutual Shares Securities Fund: Capital appreciation. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP American Global Growth Fund: Long-term growth; a master-feeder fund. o LVIP American Global Small Capitalization Fund: Long-term growth; a master-feeder fund. o LVIP American Growth Fund: Long-term growth; a master-feeder fund. o LVIP American Growth-Income Fund: Long-term growth and income; a master-feeder fund. o LVIP American International Fund: Long-term growth; a master-feeder fund. o LVIP Baron Growth Opportunities Fund: Capital appreciation. (Subadvised by BAMCO, Inc.) o LVIP BlackRock Inflation Protected Bond Fund: Maximize real return. (Subadvised by BlackRock Financial Management, Inc.) o LVIP Capital Growth Fund: Capital growth. (Subadvised by Wellington Management) o LVIP Cohen & Steers Global Real Estate Fund: Total Return. (Subadvised by Cohen & Steers Capital Management) o LVIP Columbia Value Opportunities Fund: Long-term capital appreciation. (Subadvised by Columbia Management Advisors, LLC) o LVIP Delaware Bond Fund: Current income. (Subadvised by Delaware Management Company)* o LVIP Delaware Diversified Floating Rate Fund: Total return. (Subadvised by Delaware Management Company)* o LVIP Delaware Social Awareness Fund: Capital appreciation. (Subadvised by Delaware Management Company)* o LVIP Delaware Special Opportunities Fund: Capital appreciation. (Subadvised by Delaware Management Company)* o LVIP Dimensional U.S. Equity Fund: Capital appreciation; a fund of funds. o LVIP Dimensional Non-U.S. Equity Fund: Capital appreciation; a fund of funds. o LVIP Global Income Fund: Current income consistent with preservation of capital. (Subadvised by Mondrian Investment Partners Limited and Franklin Advisors, Inc.) o LVIP Janus Capital Appreciation Fund: Long-term growth. (Subadvised by Janus Capital Management LLC) o LVIP J.P. Morgan High Yield Fund: High level of current income. (Subadvised by J.P. Morgan Investment Management, Inc.) 17 o LVIP MFS International Growth Fund: Long-term capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP MFS Value Fund: Capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP Mid-Cap Value Fund: Long-term capital appreciation. (Subadvised by Wellington Management) o LVIP Mondrian International Value Fund: Long-term capital appreciation. (Subadvised by Mondrian Investment Partners Limited) o LVIP Money Market Fund: Current income/Preservation of capital. (Subadvised by Delaware Management Company)* o LVIP SSgA Bond Index Fund: Replicate Barclays Aggregate Bond Index (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Conservative Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Conservative Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Developed International 150 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Emerging Markets 100 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Global Tactical Allocation Fund: Long-term growth of capital; a fund of funds. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA International Index Fund: Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Large Cap 100 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Moderate Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderate Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderately Aggressive Index Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Moderately Aggressive Structured Allocation Fund: Current income with growth of capital; a fund of funds. o LVIP SSgA Small-Mid Cap 200 Fund: Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA S&P 500 Index Fund: Replicate S&P 500 Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small-Cap Index Fund: Replicate Russell 2000 Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP T. Rowe Price Growth Stock Fund: Long-term growth of capital. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP T. Rowe Price Structured Mid-Cap Growth Fund: Maximum capital appreciation. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP Templeton Growth Fund: Long-term growth of capital. (Subadvised by Templeton Investment Counsel, LLC) o LVIP Total Bond Fund: Total return consistent with capital appreciation. o LVIP Turner Mid-Cap Growth Fund: Capital appreciation. (Subadvised by Turner Investment Partners, Inc.) o LVIP Vanguard Domestic Equity ETF Fund: Capital appreciation; a fund of funds. o LVIP Vanguard International Equity ETF Fund: Capital appreciation; a fund of funds. o LVIP Wells Fargo Intrinsic Value Fund: Income. (Subadvised by Metropolitan West Capital Management, LLC) o LVIP Conservative Profile Fund: Current income; a fund of funds. o LVIP Moderate Profile Fund: Growth and income; a fund of funds. o LVIP Moderately Aggressive Profile Fund: Growth and income; a fund of funds. 18 MFS (Reg. TM) Variable Insurance TrustSM, advised by Massachusetts Financial Services Company o Growth Series: Capital appreciation. o Utilities Series: Total return. PIMCO Variable Insurance Trust, advised by PIMCO o PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio: Maximum real return. *Investments in Delaware Investments VIP Series, Delaware Funds, LVIP Delaware Funds or Lincoln Life accounts managed by Delaware Investment Advisors, a series of Delaware Management Business Trust, are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46008 583 542 and its holding companies, including their subsidiaries or related companies, and are subject to investment risk, including possible delays in prepayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Series or Funds or accounts, the repayment of capital from the Series or Funds or account, or any particular rate of return. Fund Shares We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. Redeemed shares are retired, but they may be reissued later. Shares of the funds are not sold directly to the general public. They are sold to us, and may be sold to other insurance companies, for investment of the assets of the subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts. When a fund sells any of its shares both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When a fund sells any of its shares to separate accounts of unaffiliated life insurance companies, it is said to engage in shared funding. The funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various contractowners participating in a fund could conflict. Each of the fund's Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. The funds do not foresee any disadvantage to contractowners arising out of mixed or shared funding. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a fund. This might force a fund to sell portfolio securities at disadvantageous prices. See the prospectuses for the funds. Reinvestment of Dividends and Capital Gain Distributions All dividends and capital gain distributions of the funds are automatically reinvested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as additional units, but are reflected as changes in unit values. Addition, Deletion or Substitution of Investments We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. 19 Charges and Other Deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, portfolio rebalancing, and automatic withdrawal services - See Additional Services and the SAI for more information on these programs); o maintaining records; o administering annuity payouts; o furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values); o reconciling and depositing cash receipts; o providing contract confirmations; o providing toll-free inquiry services; and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts, including Lincoln SmartIncomeSM Inflation payouts, under contracts live longer than we assumed when we calculated our guaranteed rates (these rates are incorporated in the contract and cannot be changed); o the risk that death benefits paid will exceed the actual contract value; o the risk that more owners than expected will qualify for waivers of the surrender charge; o the risk that lifetime payments to individuals from Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 will exceed the contract value; o the risk that, if the i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit is in effect, the required income payments will exceed the account value; and o the risk that our costs in providing the services will exceed our revenues from contract charges (which we cannot change). The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the description of the charge. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts. Deductions from the VAA We apply to the average daily net asset value of the subaccounts a charge which is equal to an annual rate of:
Enhanced Guaranteed Guarantee of Minimum Death Principal Death Benefit (EGMDB) Benefit --------------------- ---------------- o Mortality and expense risk charge 1.20% 0.95% o Administrative charge 0.10% 0.10% ---- ---- o Total annual charge for each subaccount 1.30% 1.05%
Surrender Charge A surrender charge applies (except as described below) to surrenders and withdrawals of purchase payments that have been invested for the periods indicated as follows:
Number of contract anniversaries since purchase payment was invested ---------------------------------------------- 0 1 2 3 4 5 6 7+ Surrender charge as a percentage of the surrendered or 7 % 7 % 6 % 6 % 5 % 4 % 3 % 0 withdrawn purchase payments
A surrender charge does not apply to: 20 o A surrender or withdrawal of Rollover Money; o A surrender or withdrawal of a purchase payment beyond the seventh anniversary since the purchase payment was invested; o Withdrawals of contract value during a contract year to the extent that the total contract value withdrawn during the current contract year does not exceed the free amount which is equal to 10% of the greater of total purchase payments or the current contract value. The free amount is available only if it exceeds the available Rollover Money in a particular contract year. The free amount does not apply upon surrender of the contract; o When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (however, the surrender charge schedule of the original contract will continue to apply to the spouse's contract); o A surrender or withdrawal of any purchase payments as a result of admittance of the contractowner into an accredited nursing home or equivalent health care facility, where the admittance into such facility occurs after the effective date of the contract and the owner has been confined for at least 90 consecutive days; o A surrender of the contract as a result of the death of the contractowner, joint owner or annuitant, provided the annuitant has not been changed for any reason other than the death of a prior named annuitant; o Purchase payments when used in the calculation of the initial periodic income payment and the initial Account Value under the i4LIFE (Reg. TM) Advantage option or the contract value applied to calculate the benefit amount under any annuity payout option made available by us; o Regular income payments made under i4LIFE (Reg. TM) Advantage including any payments to provide the i4LIFE (Reg. TM) Guaranteed Income Benefits or periodic payments made under any annuity payout option made available by us; o A surrender or withdrawal of any purchase payments after the onset of a permanent and total disability of the contractowner as defined in Section 22(e)(3) of the tax code, if the disability occurred after the effective date of the contract and before the 65th birthday of the contractowner. For contracts issued in the State of New Jersey, a different definition of permanent and total disability applies; o A surrender or withdrawal of any purchase payments as a result of the diagnosis of a terminal illness that is after the effective date of the contract and results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; o Withdrawals up to the Maximum Annual Withdrawal amount under Lincoln SmartSecurity (Reg. TM) Advantage, or the Guaranteed Annual Income amount under Lincoln Lifetime IncomeSM Advantage 2.0, subject to certain conditions. For purposes of calculating the surrender charge on withdrawals, we assume that: 1. Rollover Money is withdrawn first. 2. After the Rollover Money is withdrawn, the free amount will be withdrawn from purchase payments other than Rollover Money on a "first in-first out (FIFO)" basis. 3. Prior to the seventh anniversary of the contract, any amount withdrawn above the Rollover Money or free amount during a contract year will be withdrawn in the following order: o from earnings until exhausted; then o from purchase payments that are not Rollover Money. 4. On or after the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then o from earnings until exhausted; then o from purchase payments (on a FIFO basis) to which a surrender charge still applies until exhausted. Example of surrender charge calculation: Rollover Money $100,000 Additional purchase payment on day 1 $ 50,000 Contract value at end of year 4 $220,000 Contract gain at end of year 4 $ 70,000 Withdrawal at end of year 4 (no prior withdrawals) $130,000
Free amount is 10% of greater of $150,000 (purchase payments) or $220,000 contract value = $22,000. (is not applicable because the free amount does not exceed the Rollover Money). $130,000 withdrawal is not subject to surrender charges because $100,000 is Rollover Money and $30,000 falls within the $70,000 gain in the contract. The free amount is not applicable because the free amount does not exceed the Rollover Money. If the withdrawal had been $200,000, the surrender charge would be $1,800 (6% of $30,000); $100,000 is the Rollover Money that has not yet been withdrawn, $70,000 is gain and $30,000 is purchase payment subject to surrender charge. 21 We apply the surrender charge as a percentage of purchase payments, which means that you would pay the same surrender charge at the time of surrender regardless of whether your contract value has increased or decreased. The surrender charge is calculated separately for each purchase payment. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. Account Fee During the accumulation period, we will deduct $35 from the contract value on each contract anniversary to compensate us for the administrative services provided to you; this $35 account fee will also be deducted from the contract value upon surrender. This fee may be lower in certain states, if required, and will be waived after the fifteenth contract year. The account fee will be waived for any contract with a contract value that is equal to or greater than $100,000 on the contract anniversary. Rider Charges A fee or expense may also be deducted in connection with any benefits added to the contract by rider or endorsement. Lincoln Lifetime IncomeSM Advantage 2.0 Charge. While this rider is in effect, there is a charge for the Lincoln Lifetime IncomeSM Advantage 2.0, if elected. The rider charge is currently equal to an annual rate of 1.05% (0.2625% quarterly) for the Lincoln Lifetime IncomeSM Advantage 2.0 single life option and 1.25% (0.3125% quarterly) for the Lincoln Lifetime IncomeSM Advantage 2.0 joint life option. The charge is applied to the Income Base (initial purchase payment if purchased at contract issue, or contract value at the time of election) as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and decreased for Excess Withdrawals. We will deduct the cost of this rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the rider's effective date. This deduction will be made in proportion to the value in each subaccount and any fixed account of the contract on the valuation date the rider charge is assessed. The amount we deduct will increase or decrease as the Income Base increases or decreases, because the charge is based on the Income Base. Refer to the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base section for a discussion and example of the impact of the changes to the Income Base. The annual rider percentage charge may increase each time the Income Base increases as a result of the Automatic Annual Step-up, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. Therefore, your percentage charge for this rider could increase every Benefit Year anniversary. If your percentage charge is increased, you may opt out of the Automatic Annual Step-up by giving us notice within 30 days after the Benefit Year anniversary if you do not want your percentage charge to change. If you opt out of the step-up, your current charge will remain in effect and the Income Base will be returned to the prior Income Base. This opt out will only apply for this particular Automatic Annual Step-up. You will need to notify us each time the percentage charge increases if you do not want the Automatic Annual Step-up. By opting out of an Automatic Annual Step-up, you will continue to be eligible for the 5% Enhancement through the end of the current Enhancement Period, but the percentage charge could increase to the then current charge on 5% Enhancements after the 10th Benefit Year anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. During the first ten Benefit Years an increase in the Income Base as a result of the 5% Enhancement will not cause an increase in the annual rider percentage charge but will increase the dollar amount of the charge. After the 10th Benefit Year anniversary the annual rider percentage charge may increase each time the Income Base increases as a result of the 5% Enhancement, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. If your percentage charge is increased, you may opt-out of the 5% Enhancement by giving us notice within 30 days after the Benefit Year anniversary if you do not want your percentage charge to change. If you opt out of the 5% Enhancement, your current charge will remain in effect and the Income Base will be returned to the prior Income Base. This opt-out will only apply for this particular 5% Enhancement. You will need to notify us each time thereafter (if an Enhancement would cause your percentage charge to increase) if you do not want the 5% Enhancement. The rider percentage charge will increase to the then current rider percentage charge, if after the first Benefit Year anniversary, cumulative purchase payments added to the contract after the first Benefit Year, equal or exceed $100,000. You may not opt-out of this rider charge increase. See The Contracts Living Benefit Riders - Lincoln Lifetime IncomeSM Advantage 2.0 - Income Base. The rider charge will be discontinued upon termination of the rider. The pro-rata amount of the rider charge will be deducted upon termination of the rider (except for death) or surrender of the contract. If the contract value is reduced to zero while the contractowner is receiving a Guaranteed Annual Income, no rider charge will be deducted. Lincoln SmartSecurity (Reg. TM) Advantage Charge. While this Rider is in effect, there is a charge for the Lincoln SmartSecurity (Reg. TM) Advantage, if elected. The Rider charge is currently equal to an annual rate of: 22 1) 0.65% of the Guaranteed Amount (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - Single Life option; or 2) 0.80% of the Guaranteed Amount (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - Joint Life option. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. The charge is applied to the Guaranteed Amount (initial purchase payment, if purchased at contract issue, or contract value at the time of election) as increased for subsequent purchase payments and step-ups and decreased for withdrawals. We will deduct the cost of this Rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of the Rider. This deduction will be made in proportion to the value in each subaccount of the contract on the valuation date the Rider charge is assessed. The charge may be deducted in proportion to the value in the fixed account as well. The amount we deduct will increase or decrease as the Guaranteed Amount increases or decreases, because the charge is based on the Guaranteed Amount. Refer to the Lincoln SmartSecurity (Reg. TM) Advantage, Guaranteed Amount section, for a discussion and example of the impact of changes to the Guaranteed Amount. Under the Lincoln SmartSecurity (Reg. TM) Advantage - the annual Rider percentage charge will not change upon each automatic step-up of the Guaranteed Amount for the 10-year period. If you elect to step-up the Guaranteed Amount for another step-up period (including if we administer the step-up election for you or if you make a change from a Joint Life to a Single Life option after a death or divorce), a pro-rata deduction of the Rider charge based on the Guaranteed Amount immediately prior to the step-up will be made on the valuation date of the step-up. This deduction covers the cost of the Rider from the time of the previous deduction to the date of the step-up. After a contractowner's step-up, we will deduct the Rider charge for the stepped-up Guaranteed Amount on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the step-up. At the time of the elected step-up, the Rider percentage charge will change to the current charge in effect at that time (if the current charge has changed), but it will never exceed the guaranteed maximum annual percentage charge of 1.50% of the Guaranteed Amount. If you never elect to step-up your Guaranteed Amount, your Rider percentage charge will never change, although the amount we deduct will change as the Guaranteed Amount changes. The Rider charge will be discontinued upon the earlier of the annuity commencement date, election of i4LIFE (Reg. TM) Advantage or termination of the Rider. The pro-rata amount of the Rider charge will be deducted upon termination of the Rider or surrender of the contract. i4LIFE (Reg. TM) Advantage Charge. i4LIFE (Reg. TM) Advantage is subject to a charge, computed daily of the Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective (or initial purchase payment if i4LIFE (Reg. TM) Advantage is purchased at contract issue), less any applicable premium taxes. During the Access Period, the Account Value equals the total value of all of the contractowner's accumulation units plus the contractowner's value in the fixed account and will be reduced by regular income payments and Guaranteed Income Benefits made as well as any withdrawals taken. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.45% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 1.70% for the i4LIFE (Reg. TM) Advantage EGMDB. This charge consists of a mortality and expense risk and administrative charge (charges for the Guaranteed Income Benefit are not included and are listed below). If i4LIFE (Reg. TM) Advantage is elected at issue of the contract, i4LIFE (Reg. TM) Advantage and the charge will begin on the contract's effective date. Otherwise, i4LIFE (Reg. TM) Advantage and the charge will begin on the periodic income commencement date which is the valuation date on which the regular income payment is determined and the beginning of the Access Period. Refer to the i4LIFE (Reg. TM) Advantage section for explanations of the Access Period, Account Value and Periodic Income Commencement Date. If you dropped Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4), the charges that you will pay will be different. See the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 Charge. i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit Charge. The Guaranteed Income Benefit (version 4) which is available for purchase with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.65% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.10% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.35% for the i4LIFE (Reg. TM) Advantage EGMDB. If you elect the joint life option, the charge for the Guaranteed Income Benefit (version 4) which is purchased with i4LIFE (Reg. TM) Advantage will be subject to a current annual charge of 0.85% of the Account Value which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.30% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.55% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless there is an automatic step up of the Guaranteed Income Benefit (version 4) during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). At the time of the step-up the Guaranteed Income Benefit percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 2.00% (version 4) of the Account Value (the i4LIFE (Reg. TM) Advantage charge will not change). If we automatically administer the step-up for you and your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date on which the step-up occurred. If we receive notice of your request to reverse the step-up, on a going forward basis, we will decrease the percentage charge to the percentage charge in effect before the step-up occurred. Any increased 23 charges paid between the time of the step-up and the date we receive your notice to reverse the step-up will not be reimbursed. Future step-ups will continue even after you decline a current step-up. We will provide you with written notice when a step-up will result in an increase to the current charge so that you may give us timely notice if you wish to reverse a step-up. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate, but the i4LIFE (Reg. TM) Advantage charge will continue. i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers who previously purchased Lincoln Lifetime IncomeSM Advantage 2.0. If you drop Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit (version 4) under i4LIFE (Reg. TM) Advantage you will pay a quarterly charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase) starting with the first three month anniversary of the effective date of i4LIFE (Reg. TM) Advantage and every three months thereafter. The initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is equal to an annual rate of 1.05% of the greater of the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base (less the Guaranteed Annual Income amounts paid since the last step-up) or contract value (immediately prior to the election of i4LIFE (Reg. TM) Advantage), (0.2625% quarterly) for the single life option and 1.25% (0.3125% quarterly) for the joint life option. Refer to Lincoln Lifetime IncomeSM Advantage 2.0 for a description of the Income Base. Purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed that in the future the guaranteed maximum initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) will be the guaranteed maximum charge then in effect at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. This is the charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit. This charge is in addition to the daily mortality and expense risk and administrative charge for your death benefit option set out under Deductions from the VAA. The charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 will not change unless there is an automatic step-up of the Guaranteed Income Benefit (described later in the i4LIFE (Reg. TM) Advantage section of the prospectus). At such time, the charge will increase by an amount equal to the prior charge multiplied by the percentage increase to the Guaranteed Income Benefit and by the percentage increase, if any, to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge. This means that the charge may change annually. The following example shows how the initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 is calculated as well as adjustments due to increases to the Guaranteed Income Benefit and the Lincoln Lifetime IncomeSM Advantage 2.0 charge. The example is a nonqualified contract and assumes the contractowner is 60 years old on the effective date of electing the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers of Lincoln Lifetime IncomeSM Advantage 2.0. Pursuant to the provisions of the Guaranteed Income Benefit (version 4) the initial Guaranteed Income Benefit is set at 4% of the Income Base based upon the contractowner's age (see Guaranteed Income Benefit (version 4) for a more detailed description). The example also assumes that the current charge for Lincoln Lifetime IncomeSM Advantage 2.0 is 1.05%. The first example assumes an increase to the initial charge based upon an increase to the Guaranteed Income Benefit due to the automatic step-up: 1/1/10 Contract value as of the last valuation date under Lincoln Lifetime IncomeSM $ 100,000 Advantage 2.0 1/1/10 Income Base as of the last valuation date under Lincoln Lifetime IncomeSM $ 125,000 Advantage 2.0 1/1/10 Initial Annual Charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit $1,312.50 (version 4) ($125,000 * 1.05% current charge for Lincoln Lifetime IncomeSM Advantage 2.0) 1/2/10 i4LIFE (Reg. TM) Advantage Account Value $ 100,000 1/2/10 Amount of initial i4LIFE (Reg. TM) Advantage Regular Income Payment $ 5,051 1/2/10 Initial Guaranteed Income Benefit (4% * $125,000 Income Base) $ 5,000 1/2/11 Recalculated Regular Income Payment (due to Account Value increase) $ 6,900 1/2/11 New Guaranteed Income Benefit (75% * $6,900 Regular Income Payment) $ 5,175 1/2/11 Annual Charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version $1,358.44 4) ($1,312.50 * ($5,175/$5,000)) Prior charge * [ratio of increased Guaranteed Income Benefit to prior Guaranteed Income Benefit]
If the Lincoln Lifetime IncomeSM Advantage 2.0 charge has also increased, subject to a maximum charge of 2.00%, the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) charge will increase upon a step-up. Continuing the above example: 1/2/11 Annual Charge for Lincoln Lifetime IncomeSM Advantage 2.0 $1,358.44 1/2/12 Recalculated Regular Income Payment $ 7,400 1/2/12 New Guaranteed Income Benefit (75% * $7,400 Regular Income Payment) $ 5,550 Assume the Lincoln Lifetime IncomeSM Advantage 2.0 charge increases from 1.05% to 1.15%.
24 $1,595.63 1/2/12 Annual Charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) ($1,358.44 * ($5,550/$5,175) * (1.15%/1.05%))
The new annual charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is $1,595.63 which is equal to the current annual charge of $1,358.44 multiplied by the percentage increase of the Guaranteed Income Benefit ($5,550/$5,175) times the percentage increase to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge (1.15%/1.05%). If the Lincoln Lifetime IncomeSM Advantage 2.0 percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date on which the step-up occurred. If we receive this notice, we will decrease the percentage charge, on a going forward basis, to the percentage charge in effect before the step-up occurred. If the Guaranteed Income Benefit increased due to the step-up we would decrease the Guaranteed Income Benefit to the Guaranteed Income Benefit in effect before the step-up occurred. Future step-ups as described in the rider would continue. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, i4LIFE (Reg. TM) Advantage will also be terminated and the i4LIFE (Reg. TM) Advantage and Guaranteed Income Benefit Charges will cease. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value, unless the governmental entity dictates otherwise, when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium tax rates generally depend upon the law of your state of residence. The tax rates range from zero to 3.5%. Other Charges and Deductions The surrender, withdrawal or transfer of value from a fixed account guaranteed period may be subject to the interest adjustment if applicable. See Fixed Side of the Contract. The mortality and expense risk and administrative charge of 1.00% of the value in the VAA will be assessed on all variable annuity payouts (except for the i4LIFE (Reg. TM) Advantage, which has a different charge), including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the services will exceed our revenues from contract charges. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. Charges for Lincoln SmartIncomeSM Inflation. There is no charge for Lincoln SmartIncomeSM Inflation unless Unscheduled Payments are taken. The following table describes the Unscheduled Payment charge for the Lincoln SmartIncomeSM Inflation on and after the Annuity Commencement Date. See The Contracts - Annuity Payouts for a complete description of Lincoln SmartIncomeSM Inflation. Lincoln SmartIncomeSM Inflation Unscheduled Payment charge (as a percentage of the Unscheduled Payment)*
Rider Year 1 2 3 4 5 6 7 8 -------------- ---- ---- ---- ---- ---- ---- ---- --- Charge 7% 7% 7% 6% 5% 4% 3% 0%
*A new Rider Year starts on each Rider Date anniversary. The charge is applied only to amounts in excess of the annual 10% Reserve Value free amount. See The Contracts - Annuity Payouts, Annuity Options for a detailed description of Reserve Value. Unscheduled Payments of up to 10% of the then current Reserve Value may be taken each Rider Year without charge, as long as the then current Reserve Value is greater than zero. The Unscheduled Payment charge is assessed against Unscheduled Payments in excess of 10% of the then current Reserve Value in a Rider Year. Unscheduled Payments that do not exceed on a cumulative basis more than 10% of the then current Reserve Value each year are not subject to an Unscheduled Payment charge. If an Unscheduled Payment is subject to an Unscheduled Payment charge, the charge will be deducted from the Unscheduled Payment so that you will receive less than the amount requested. If the annuitant or secondary life is diagnosed with a terminal illness or confined to an extended care facility after the first Rider Year, then no Unscheduled Payment charges are assessed on any Unscheduled Payment. The Unscheduled Payment charge is also waived upon payment of a death benefit as described in the Lincoln SmartIncomeSM Inflation section of this prospectus. 25 Additional Information The charges described previously may be reduced or eliminated for any particular contract. However, these reductions may be available only to the extent that we anticipate lower distribution and/or administrative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges, or when required by law. Lower distribution and administrative expenses may be the result of economies associated with: o the use of mass enrollment procedures, o the performance of administrative or sales functions by the employer, o the use by an employer of automated techniques in submitting deposits or information related to deposits on behalf of its employees, or o any other circumstances which reduce distribution or administrative expenses. The exact amount of charges and fees applicable to a particular contract will be stated in that contract. The Contracts Purchase of Contracts If you wish to purchase a contract, you must apply for it through a sales representative authorized by us. Certain broker-dealers may not offer all of the features discussed in this prospectus. The completed application is sent to us and we decide whether to accept or reject it. If the application is accepted, a contract is prepared and executed by our legally authorized officers. The contract is then sent to you through your sales representative. See Distribution of the Contracts. When a completed application and all other information necessary for processing a purchase order is received in good order at our Home office, an initial purchase payment will be priced no later than two business days after we receive the order. If you submit your application and/or initial purchase payment to your agent, we will not begin processing your purchase order until we receive the application and initial purchase payment from your agent's broker-dealer. While attempting to finish an incomplete application, we may hold the initial purchase payment for no more than five business days unless we receive your consent to our retaining the payment until the application is completed. If the incomplete application cannot be completed within those five days and we have not received your consent, you will be informed of the reasons, and the purchase payment will be returned immediately. Once the application is complete, we will allocate your initial purchase payment within two business days. Who Can Invest To apply for a contract, you must be of legal age in a state where the contracts may be lawfully sold and also be eligible to participate in any of the qualified and nonqualified plans for which the contracts are designed. At the time of issue, the contractowner, joint owner and annuitant must be under age 86. Certain death benefit options may not be available at all ages. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver's license, photo i.d. or other identifying documents. In accordance with money laundering laws and federal economic sanction policy, the Company may be required in a given instance to reject a purchase payment and/or freeze a contractowner's account. This means we could refuse to honor requests for transfers, withdrawals, surrenders or death benefits. Once frozen, monies would be moved from the VAA to a segregated interest-bearing account maintained for the contractowner, and held in that account until instructions are received from the appropriate regulator. Do not purchase this contract if you plan to use it, or any of its riders, for speculation, arbitrage, viatical arrangement, or other similar investment scheme. The contract may not be resold, traded on any stock exchange, or sold on any secondary market. Since you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. In addition, this contract may be more expensive than the product that was previously purchased in your qualified plan, even if the underlying investments are similar. By rolling out of the qualified plan and purchasing this IRA contract, you will no longer have the plan trustee to look after your interests and certain features, such as loans, will not be available to you. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract and/or a new surrender charge period may be imposed with the purchase of, or transfer into, this contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. 26 Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000 and must be made using Rollover Money from a qualified plan. The Rollover Money must have been invested in one of the following products and programs purchased by a qualified plan from Lincoln Life: Lincoln DirectorSM group variable annuity, Lincoln Alliance (Reg. TM) Program, Lincoln Smart FutureSM Program, Group Variable Annuity or Multifund (Reg. TM) variable annuities. Additional purchase payments may be made with (IRA) money from any source. The minimum annual amount for additional purchase payments is $300. The minimum payment to the contract at any one time must be at least $100 ($25 if transmitted electronically). If a purchase payment is submitted that does not meet the minimum amount, we will contact you to ask whether additional money will be sent, or whether we should return the purchase payment to you. Purchase payments totaling $2 million or more are subject to home office approval. If you stop making purchase payments, the contract will remain in force ,however, we may terminate the contract as allowed by your state's non-forfeiture law for individual deferred annuities. Purchase payments may be made or, if stopped, resumed at any time until the annuity commencement date, the surrender of the contract, or the death of the contractowner, whichever comes first. Upon advance written notice, we reserve the right to limit purchase payments made to the contract. Valuation Date Accumulation and annuity units will be valued once daily at the close of trading (normally, 4:00 p.m., New York time) on each day the New York Stock Exchange is open (valuation date). On any date other than a valuation date, the accumulation unit value and the annuity unit value will not change. Allocation of Purchase Payments Purchase payments allocated to the variable account are placed into the VAA's subaccounts, according to your instructions. You may also allocate purchase payments in the fixed account, if available. The minimum amount of any purchase payment which can be put into any one subaccount is $20. The minimum amount of any purchase payment which can be put into a fixed account guaranteed period is $2,000, subject to state approval. If we receive your purchase payment from you or your broker-dealer in good order at our Home Office prior to 4:00 p.m., New York time, we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If we receive your purchase payment in good order at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valuation date. If you submit your purchase payment to your representative, we will generally not begin processing the purchase payment until we receive it from your representative's broker-dealer. If your broker-dealer submits your purchase payment to us through the Depository Trust and Clearing Corporation (DTCC) or, pursuant to terms agreeable to us, uses a proprietary order placement system to submit your purchase payment to us, and your purchase payment was placed with your broker-dealer prior to 4:00 p.m., New York time, then we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If your purchase payment was placed with your broker-dealer at or after 4:00 p.m. New York time, then we will use the accumulation unit value computed on the next valuation date. The number of accumulation units determined in this way is not impacted by any subsequent change in the value of an accumulation unit. However, the dollar value of an accumulation unit will vary depending not only upon how well the underlying fund's investments perform, but also upon the expenses of the VAA and the underlying funds. Valuation of Accumulation Units Purchase payments allocated to the VAA are converted into accumulation units. This is done by dividing the amount allocated by the value of an accumulation unit for the valuation period during which the purchase payments are allocated to the VAA. The accumulation unit value for each subaccount was or will be established at the inception of the subaccount. It may increase or decrease from valuation period to valuation period. Accumulation unit values are affected by investment performance of the funds, fund expenses, and the contract charges. The accumulation unit value for a subaccount for a later valuation period is determined as follows: 1. The total value of the fund shares held in the subaccount is calculated by multiplying the number of fund shares owned by the subaccount at the beginning of the valuation period by the net asset value per share of the fund at the end of the valuation period, and adding any dividend or other distribution of the fund if an ex-dividend date occurs during the valuation period; minus 2. The liabilities of the subaccount at the end of the valuation period; these liabilities include daily charges imposed on the subaccount, and may include a charge or credit with respect to any taxes paid or reserved for by us that we determine result from the operations of the VAA; and 3. The result is divided by the number of subaccount units outstanding at the beginning of the valuation period. The daily charges imposed on a subaccount for any valuation period are equal to the daily mortality and expense risk charge and the daily administrative charge multiplied by the number of calendar days in the valuation period. Contracts with different features have different daily charges, and therefore, will have different corresponding accumulation unit values on any given day. In certain circumstances (for example, when separate account assets are less than $1,000), and when permitted by law, it may be prudent for us to 27 use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method. Transfers On or Before the Annuity Commencement Date After the first 30 days from the effective date of your contract, you may transfer all or a portion of your investment from one subaccount to another. A transfer involves the surrender of accumulation units in one subaccount and the purchase of accumulation units in the other subaccount. A transfer will be done using the respective accumulation unit values determined at the end of the valuation date on which the transfer request is received. Transfers (among the variable subaccounts and as permitted between the variable and fixed accounts) are limited to twelve (12) per contract year unless otherwise authorized by us. Currently, there is no charge for a transfer. This limit does not apply to transfers made under the automatic transfer programs of dollar cost averaging or portfolio rebalancing elected on forms available from us. See Additional Services and the SAI for more information on these programs. These transfer rights and restrictions also apply during the i4LIFE (Reg. TM) Advantage Access Period (the time period during which you may make withdrawals from the i4LIFE (Reg. TM) Advantage Account Value). See i4LIFE (Reg. TM) Advantage. The minimum amount which may be transferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total balance of the subaccount. A transfer request may be made to our Home Office using written, telephone, fax, or electronic instructions, if the appropriate authorization is on file with us. Our address, telephone number, and Internet address are on the first page of this prospectus. In order to prevent unauthorized or fraudulent transfers, we may require certain identifying information before we will act upon instructions. We may also assign the contractowner a Personal Identification Number (PIN) to serve as identification. We will not be liable for following instructions we reasonably believe are genuine. Telephone requests will be recorded and written confirmation of all transfer requests will be mailed to the contractowner on the next valuation date. Please note that the telephone and/or electronic devices may not always be available. Any telephone or electronic device, whether it is yours, your service provider's, or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to limit these problems, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request by writing to our Home Office. Requests for transfers will be processed on the valuation date that they are received when they are received in good order at our Home Office before the end of the valuation date (normally 4:00 p.m. New York time). If we receive a transfer request in good order at or after 4:00p.m., New York time, we will process the request using the accumulation unit value computed on the next valuation date. If your contract offers a fixed account, you may also transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed account transfers is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Because of the 25% transfer limitation, it may take several years to transfer all of the contract value in the fixed accounts to the variable subaccounts. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. For a description of the interest adjustment, see the Fixed Side of the Contract - Guaranteed Periods and Interest Adjustment. Transfers may be delayed as permitted by the 1940 Act. See Delay of Payments. Market Timing Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our contractowners and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other contractowners or fund shareholders. 28 In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. While we reserve the right to enforce these policies and procedures, contractowners and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual contractowners, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific contractowners who violate the excessive trading policies established by the fund. You should be aware that the purchase and redemption orders received by the funds generally are "omnibus" orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds' ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our contractowners) will not be harmed by transfer activity relating to the retirement plans and/or other insurance companies that may invest in the funds. In addition, if a fund believes that an omnibus order we submit may reflect one or more transfer requests from policy owners engaged in disruptive trading activity, the fund may reject the entire omnibus order. Our Market Timing Procedures detect potential "market timers" by examining the number of transfers made by contractowners within given periods of time. In addition, managers of the funds might contact us if they believe or suspect that there is market timing. If requested by a fund company, we may vary our Market Timing Procedures from subaccount to subaccount to comply with specific fund policies and procedures. We may increase our monitoring of contractowners who we have previously identified as market timers. When applying the parameters used to detect market timers, we will consider multiple contracts owned by the same contractowner if that contractowner has been identified as a market timer. For each contractowner, we will investigate the transfer patterns that meet the parameters being used to detect potential market timers. We will also investigate any patterns of trading behavior identified by the funds that may not have been captured by our Market Timing Procedures. Once a contractowner has been identified as a "market timer" under our Market Timing Procedures, we will notify the contractowner in writing that future transfers (among the subaccounts and/or the fixed account) will be temporarily permitted to be made only by original signature sent to us by U.S. mail, first-class delivery for the remainder of the contract year (or calendar year if the contract is an individual contract that was sold in connection with an employer sponsored plan). Overnight delivery or electronic instructions (which may include telephone, facsimile, or Internet instructions) submitted during this period will not be accepted. If overnight delivery or electronic instructions are inadvertently accepted from a contractowner that has been identified as a market timer, upon discovery, we will reverse the transaction within 1 or 2 business days. We will impose this "original signature" restriction on that contractowner even if we cannot identify, in the particular circumstances, any harmful effect from that contractowner's particular transfers. Contractowners seeking to engage in frequent, large, or short-term transfer activity may deploy a variety of strategies to avoid detection. Our ability to detect such transfer activity may be limited by operational systems and technological limitations. The identification of contractowners determined to be engaged in such transfer activity that may adversely affect other contractowners or fund shareholders involves judgments that are inherently subjective. We cannot guarantee that our Market Timing Procedures will detect every potential market timer. If we are unable to detect market timers, you may experience dilution in the value of your fund shares and increased brokerage and administrative costs in the funds. This may result in lower long-term returns for your investments. Our Market Timing Procedures are applied consistently to all contractowners. An exception for any contractowner will be made only in the event we are required to do so by a court of law. In addition, certain funds available as investment options in your contract may also be available as investment options for owners of other, older life insurance policies issued by us. Some of these older life insurance policies do not provide a contractual basis for us to restrict or refuse transfers which are suspected to be market timing activity. In addition, because other insurance companies and/or retirement plans may invest in the funds, we cannot guarantee that the funds will not suffer harm from frequent, large, or short-term transfer activity among subaccounts and the fixed accounts of variable contracts issued by other insurance companies or among investment options available to retirement plan participants. In our sole discretion, we may revise our Market Timing Procedures at any time without prior notice as necessary to better detect and deter frequent, large, or short-term transfer activity to comply with state or federal regulatory requirements, and/or to impose additional or alternate restrictions on market timers (such as dollar or percentage limits on transfers). If we modify our Market Timing Procedures, they will be applied uniformly to all contractowners or as applicable to all contractowners investing in underlying funds. Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund's investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer 29 or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date You may transfer all or a portion of your investment in one subaccount to another subaccount or to the fixed side of the contract, as permitted under your contract. Those transfers will be limited to three times per contract year. You may also transfer from a variable annuity payment to a fixed annuity payment. You may not transfer from a fixed annuity payment to a variable annuity payment. Once elected, the fixed annuity payment is irrevocable. These provisions also apply during the i4LIFE (Reg. TM) Advantage Lifetime Income Period. See i4LIFE (Reg. TM) Advantage. Ownership The owner on the date of issue will be the person or entity designated in the contract specifications. If no owner is designated, the annuitant(s) will be the owner. The owner may name a joint owner. As contractowner, you have all rights under the contract. According to Indiana law, the assets of the VAA are held for the exclusive benefit of all contractowners and their designated beneficiaries; and the assets of the VAA are not chargeable with liabilities arising from any other business that we may conduct. We reserve the right to approve all ownership and annuitant changes. Nonqualified contracts may not be sold, discounted, or pledged as collateral for a loan or for any other purpose. Qualified contracts are not transferable unless allowed under applicable law. Non-qualified contracts may not be collaterally assigned. An assignment affects the death benefit and living benefits calculated under the contract. We assume no responsibility for the validity or effect of any assignment. Consult your tax adviser about the tax consequences of an assignment. Joint Ownership If a contract has joint owners, the joint owners shall be treated as having equal undivided interests in the contract. Either owner, independently of the other, may exercise any ownership rights in this contract. Not more than two owners (an owner and joint owner) may be named and contingent owners are not permitted. Annuitant The following rules apply prior to the annuity commencement date. You may name only one annuitant [unless you are a tax-exempt entity, then you can name two joint annuitants]. You (if the contractowner is a natural person) have the right to change the annuitant at any time by notifying us of the change, however we reserve the right to approve all annuitant changes. The new annuitant must be under age 86 as of the effective date of the change. This change may cause a reduction in the death benefits or living benefits. See The Contracts - Death Benefit. A contingent annuitant may be named or changed by notifying us in writing. Contingent annuitants are not allowed on contracts owned by non-natural owners. On or after the annuity commencement date, the annuitant or joint annuitants may not be changed and contingent annuitant designations are no longer applicable. Surrenders and Withdrawals Before the annuity commencement date, we will allow the surrender of the contract or a withdrawal of the contract value upon your written request on an approved Lincoln distribution request form (available from the Home Office), subject to the rules discussed below. Surrender or withdrawal rights after the annuity commencement date depend on the annuity payout option selected. The amount available upon surrender/withdrawal is the contract value less any applicable charges, fees, and taxes at the end of the valuation period during which the written request for surrender/withdrawal is received in good order at the Home Office. If we receive a surrender or withdrawal request in good order at or after 4:00 p.m., New York time, we will process the request using the accumulation unit value computed on the next valuation date. The minimum amount which can be withdrawn is $300. Unless a request for withdrawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the fixed account in the same proportion that the amount of withdrawal bears to the total contract value. Surrenders and withdrawals from the fixed account may be subject to the interest adjustment. See Fixed Side of the Contract. Unless prohibited, surrender/withdrawal payments will be mailed within seven days after we receive a valid written request at the Home Office. The payment may be postponed as permitted by the 1940 Act. If you request a lump sum surrender and your surrender value is over $10,000, your money will be placed into a SecureLine (Reg. TM) account in your name. SecureLine (Reg. TM)is a service we offer to help you manage your surrender proceeds. With SecureLine (Reg. TM), an interest 30 bearing draft account is established from the proceeds payable on a policy or contract administered by us. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. Instead of mailing you a check, we will send a checkbook so that you will have access to the account by writing a check. You may choose to leave the proceeds in this account, or you may begin writing checks right away. If you decide you want the entire proceeds immediately, you may write one check for the entire account balance. The SecureLine (Reg. TM) account is part of our general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of our general account, it is subject to the claims of our creditors. We receive a benefit from all amounts left in the SecureLine (Reg. TM) account. You may request that surrender proceeds be paid directly to you instead of applied to a SecureLine (Reg. TM) account. Interest credited in the SecureLine (Reg. TM) account is taxable as ordinary income in the year such interest is credited, and is not tax deferred. We recommend that you consult your tax advisor to determine the tax consequences associated with the payment of interest on amounts in the SecureLine (Reg. TM) account. The balance in your SecureLine (Reg. TM) account starts earning interest the day your account is opened and will continue to earn interest until all funds are withdrawn. Interest is compounded daily and credited to your account on the last day of each month. The interest rate will be updated monthly and we may increase or decrease the rate at our discretion. The interest rate credited to your SecureLine (Reg. TM) account may be more or less than the rate earned on funds held in our general account. There are no monthly fees. You may be charged a fee if you stop a payment or if you present a check for payment without sufficient funds. There are charges associated with surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. If the charges are deducted from the remaining contract value, the amount of the total withdrawal will increase according to the impact of the applicable surrender charge percentage; consequently, the dollar amount of the surrender charge associated with the withdrawal will also increase. In other words, the dollar amount deducted to cover the surrender charge is also subject to a surrender charge. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS) and portfolio rebalancing. Currently, there is no charge for these services. However, we reserve the right to impose one after appropriate notice to contractowners. In order to take advantage of one of these services, you will need to complete the appropriate election form that is available from our Home Office. For further detailed information on these services, please see Additional Services in the SAI. Dollar-cost averaging allows you to transfer amounts from the DCA fixed account, if available, or certain variable subaccounts into the variable subaccounts on a monthly basis or in accordance with other terms we make available. We reserve the right to discontinue or modify this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of contract value allocated to each variable account subaccount. The rebalancing may take place monthly, quarterly, semi-annually or annually. Only one of the two additional services (DCA and portfolio rebalancing) may be used at one time. For example, you cannot have DCA and portfolio rebalancing running simultaneously. Death Benefit The chart below provides a brief overview of how the death benefit proceeds will be distributed if death occurs prior to i4LIFE (Reg. TM) Advantage elections or prior to the annuity commencement date. Refer to your contract for the specific provisions applicable upon death.
UPON DEATH OF: AND... AND... DEATH BENEFIT PROCEEDS PASS TO: contractowner There is a surviving joint owner The annuitant is living or deceased joint owner contractowner There is no surviving joint owner The annuitant is living or deceased designated beneficiary contractowner There is no surviving joint owner The annuitant is living or deceased contractowner's estate and the beneficiary predeceases the contractowner
31
UPON DEATH OF: AND... annuitant The contractowner is living annuitant The contractowner is living annuitant** The contractowner is a trust or other non-natural person UPON DEATH OF: AND... DEATH BENEFIT PROCEEDS PASS TO: annuitant There is no contingent annuitant The youngest contractowner becomes the contingent annuitant and the contract continues. The contractowner may waive* this continuation and receive the death benefit proceeds. annuitant The contingent annuitant is living contingent annuitant becomes the annuitant and the contract continues annuitant** No contingent annuitant allowed designated beneficiary with non-natural contractowner
* Notification from the contractowner to select the death benefit proceeds must be received within 75 days of the death of the annuitant. ** Death of annuitant is treated like death of the contractowner. If the contractowner (or a joint owner) or annuitant dies prior to the annuity commencement date, a death benefit may be payable. You can choose the death benefit. Only one death benefit may be in effect at any one time and this election terminates. Generally, the more expensive the death benefit the greater the protection. You should consider the following provisions carefully when designating the beneficiary, annuitant, any contingent annuitant and any joint owner, as well as before changing any of these parties. The identity of these parties under the contract may significantly affect the amount and timing of the death benefit or other amount paid upon a contractowner's or annuitant's death. You may designate a beneficiary during your lifetime and change the beneficiary by filing a written request with our 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. Upon the death of the contractowner, a death benefit will be paid to the beneficiary. Upon the death of a joint owner, the death benefit will be paid to the surviving joint owner. If the contractowner is a corporation or other non-individual (non-natural person), the death of the annuitant will be treated as death of the contractowner. If an annuitant who is not the contractowner or joint owner dies, then the contingent annuitant, if named, becomes the annuitant and no death benefit is payable on the death of the annuitant. If no contingent annuitant is named, the contractowner (or younger of joint owners) becomes the annuitant. Alternatively, a death benefit may be paid to the contractowner (and joint owner, if applicable, in equal shares). Notification of the election of this death benefit must be received by us within 75 days of the death of the annuitant. The contract terminates when any death benefit is paid due to the death of the annuitant. Only the contract value as of the valuation date we approve the payment of the death claim is available as a death benefit if a contractowner, joint owner or annuitant was added or changed subsequent to the effective date of this contract unless the change occurred because of the death of a prior contractowner, joint owner or annuitant. If your contract value equals zero, no death benefit will be paid. Guarantee of Principal Death Benefit. If you do not select a death benefit, the Guarantee of Principal Death Benefit will apply to your contract. If the Guarantee of Principal Death Benefit is in effect, the death benefit will be equal to the greater of: o The current contract value as of the valuation date we approve the payment of the claim; or o The sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Guaranteed Annual Income amount under the Lincoln Lifetime IncomeSM Advantage 2.0 rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0). In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with those withdrawals (surrender charges for example) and premium taxes, if any. Enhanced Guaranteed Minimum Death Benefit (EGMDB). If the EGMDB is in effect, the death benefit paid will be the greatest of: o The current contract value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Guaranteed Annual Income amount under the Lincoln Lifetime IncomeSM Advantage 2.0 rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0); or 32 o the highest contract value which the contract attains on any contract anniversary (including the inception date) (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the death of the contractowner, joint owner (if applicable) or annuitant for whom the death claim is approved for payment. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduced the contract value. In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with those withdrawals (surrender charges for example) and premium taxes, if any. The EGMDB is not available under contracts issued to a contractowner, or joint owner or annuitant, who is age 80 or older at the time of issuance. You may discontinue the EGMDB at any time by completing the Death Benefit Discontinuance form and sending it to our Home Office. The benefit will be discontinued as of the valuation date we receive the request, and the Guarantee of Principal Death Benefit will apply. We will deduct the charge for the Guarantee of Principal Death Benefit as of that date. See Charges and Other Deductions. General Death Benefit Information Only one of these death benefits may be in effect at any one time and these benefits terminate if you elect i4LIFE (Reg. TM) Advantage (which provides a death benefit) or you elect an annuitization option. If there are joint owners, upon the death of the first contractowner, we will pay a death benefit to the surviving joint owner. The surviving joint owner will be treated as the primary, designated beneficiary. Any other beneficiary designation on record at the time of death will be treated as a contingent beneficiary. If the surviving joint owner is the spouse of the deceased joint owner, he/she may continue the contract as sole contractowner. Upon the death of the spouse who continues the contract, we will pay a death benefit to the designated beneficiary(s). If the beneficiary is the spouse of the contractowner, then the spouse may elect to continue the contract as the new contractowner. Pursuant to the Federal Defense of Marriage Act, same-sex marriages are not recognized for purposes of federal law. Therefore, the favorable tax treatment provided by federal tax law to an opposite-sex spouse is not available to a same-sex spouse. Same-sex spouses should consult a tax advisor prior to purchasing annuity products that provide benefits based upon status as a spouse, and prior to exercising any spousal rights under an annuity. Should the surviving spouse elect to continue the contract, a portion of the death benefit may be credited to the contract. Any portion of the death benefit that would have been payable (if the contract had not been continued) that exceeds the current contract value on the date the surviving spouse elects to continue will be added to the contract value. If the contract is continued in this way, the death benefit in effect at the time the beneficiary elected to continue the contract will remain as the death benefit. The value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of a claim submitted in good order. To be in good order, we require all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us, of the death; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: o If any beneficiary dies before the contractowner, that beneficiary's interest will go to any other beneficiaries named, according to their respective interests; and/or o If no beneficiary survives the contractowner, the proceeds will be paid to the contractowner's estate. If the beneficiary is a minor, court documents appointing the guardian/custodian may be required. Unless the contractowner has already selected a settlement option, the beneficiary may choose the method of payment of the death benefit. The death benefit payable to the beneficiary or joint owner must be distributed within five years of the contractowner's date of death unless the beneficiary begins receiving within one year of the contractowner's death the distribution in the form of a life annuity or an annuity for a designated period not extending beyond the beneficiary's life expectancy. Upon the death of the annuitant, Federal tax law requires that an annuity election be made no later than 60 days after we have approved the death claim for payment. 33 If the death benefit becomes payable, the recipient may elect to receive payment either in the form of a lump sum settlement or an annuity payout. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. In the case of a death of one of the parties to the annuity contract, if the recipient of the death benefit has elected a lump sum settlement and the death benefit is over $10,000, the proceeds will be placed into a SecureLine (Reg. TM) account in the recipient's name as the owner of the account. SecureLine (Reg. TM) is a service we offer to help the recipient manage the death benefit proceeds. With SecureLine (Reg. TM), an interest bearing account is established from the proceeds payable on a policy or contract administered by us. The recipient is the owner of the account, and is the only one authorized to transfer proceeds from the account. Instead of mailing the recipient a check, we will send a checkbook so that the recipient will have access to the account by writing a check. The recipient may choose to leave the proceeds in this account, or may begin writing checks right away. If the recipient decides he or she wants the entire proceeds immediately, the recipient may write one check for the entire account balance. The recipient can write as many checks as he or she wishes. We may at our discretion set minimum withdrawal amounts per check. The total of all checks written cannot exceed the account balance. The SecureLine (Reg. TM) account is part of our general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of our general account, it is subject to the claims of our creditors. We receive a benefit from all amounts left in the SecureLine (Reg. TM)account. The recipient may request that surrender proceeds be paid directly to him or her instead of applied to a SecureLine (Reg. TM) account. Interest credited in the SecureLine (Reg. TM) account is taxable as ordinary income in the year such interest is credited, and is not tax deferred. We recommend that the recipient consult a tax advisor to determine the tax consequences associated with the payment of interest on amounts in the SecureLine (Reg. TM) account. The balance in the recipient's SecureLine (Reg. TM) account starts earning interest the day the account is opened and will continue to earn interest until all funds are withdrawn. Interest is compounded daily and credited to the recipient's account on the last day of each month. The interest rate will be updated monthly and we may increase or decrease the rate at our discretion. The interest rate credited to the recipient's SecureLine (Reg. TM) account may be more or less than the rate earned on funds held in our general account. There are no monthly fees. The recipient may be charged a fee for a stop payment or if a check is returned for insufficient funds. Investment Requirements If you purchase a Living Benefit rider (Lincoln Lifetime IncomeSM Advantage 2.0, Lincoln SmartSecurity (Reg. TM) Advantage, or the Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage), you will be subject to Investment Requirements, which means you will be limited in how much you can invest in certain subaccounts of your contract. You must comply with the Investment Requirements during the period of time you own the rider (the minimum time period for ownership, if any, is specified in the termination section of each rider.) After that period, if you no longer comply with the Investment Requirements, the rider will be terminated. Currently, if you purchase i4LIFE (Reg. TM) without the Guaranteed Income Benefit, you will not be subject to any Investment Requirements, although we reserve the right to impose Investment Requirements for this rider in the future. We have divided the subaccounts of your contract into groups and have specified the minimum or maximum percentages of contract value that must be in each group at the time you purchase the rider (or when the rider Investment Requirements are enforced, if later). Some subaccounts are not available to you if you purchase certain riders. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. You can select the percentages of contract value (or Account Value if i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts within the group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Any reallocation of contract value among the subaccounts made by you prior to a rebalancing date will become your allocation instructions for rebalancing purposes. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the Delaware VIP Limited- Term Diversified Income Series as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group, change the investment options that are or are not available to you, or change the rebalancing frequency at any time in our sole discretion. You will be notified at least 30 days prior to the date of any change. We may make such modifications at any time when we believe the modifications are necessary to protect our ability to provide the guarantees under these 34 Riders. Our decision to make modifications will be based on several factors including the general market conditions and the style and investment objectives of the subaccount investments. At the time you receive notice of a change to the Investment Requirements, you may: 1. drop the applicable rider immediately, without waiting for a termination event if you do not wish to be subject to these Investment Requirements; or 2. submit your own reallocation instructions for the contract value, before the effective date specified in the notice, so that the Investment Requirements are satisfied; or 3. take no action and be subject to the quarterly rebalancing as described above. If this results is a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 30% of contract value Investments cannot exceed 70% of contract value or Account Value (if i4LIFE (Reg. TM) or Account Value (if i4LIFE (Reg. TM) Advantage with the Advantage with the Guaranteed Income Benefit is in effect) -------------------------------------------------------------------- Guaranteed Income Benefit is in effect) ----------------------------------------------------------- 1. LVIP Delaware Bond Fund Any of the funds offered under the contract, except for funds in Groups 1 and 3, the PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio, Franklin Templeton Founding Investment Strategy, and the fixed account. 2. Delaware VIP (Reg. TM) Limited-Term Diversified Income Series 3. Delaware VIP (Reg. TM) Diversified Income Series 4. LVIP SSgA Bond Index Fund 5. LVIP Global Income Fund 6. LVIP Total Bond Fund 7. LVIP Delaware Diversified Floating Rate Fund 8. LVIP BlackRock Inflation Protected Bond Fund
Group 3 Investments cannot exceed 10% of contract value or Account Value (if i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit is in effect) ------------------------------------------------------- 1. Delaware VIP Emerging Markets Series 2. LVIP SSgA Emerging Markets 100 Fund 3. Delaware VIP REIT Series 4. LVIP Cohen & Steers Global Real Estate Fund 5. MFS VIT Utilities Series 6. AllianceBernstein VPS Global Thematic Growth Portfolio 7. DWS Alternative Asset Allocation Plus VIP Portfolio
As an alternative to satisfy these Investment Requirements, you may allocate 100% of your contract value among the funds listed below. If you allocate less than 100% of contract value or i4LIFE (Reg. TM) Advantage Account Value among these funds, then the funds listed below that are also listed in Group 1 will be subject to Group 1 restrictions. Any remaining funds listed below that are not listed in Group 1 will fall into Group 2 and be subject to Group 2 restrictions. The PIMCO VIT CommodityRealReturn (Reg. TM) Strategy Portfolio, Franklin Templeton Founding Investment Strategy, and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. BlackRock Global Allocation VI Fund Delaware VIP Diversified Income Series Delaware VIP Limited-Term Diversified Income Series LVIP BlackRock Inflation Protected Bond Fund LVIP Delaware Bond Fund LVIP Delaware Diversified Floating Rate Fund LVIP Global Income Fund LVIP SSgA Bond Index Fund LVIP SSgA Global Tactical Allocation Fund LVIP SSgA Conservative Index Allocation Fund LVIP SSgA Conservative Structured Allocation Fund LVIP SSgA Moderate Index Allocation Fund LVIP SSgA Moderate Structured Allocation Fund LVIP SSgA Moderately Aggressive Index Allocation Fund LVIP SSgA Moderately Aggressive Structured Allocation Fund LVIP Total Bond Fund 35 LVIP Conservative Profile Fund LVIP Moderate Profile Fund LVIP Moderately Aggressive Profile Fund Living Benefit Riders The optional Living Benefit riders offered under this variable annuity contract Lincoln Lifetime IncomeSM Advantage 2.0 Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (version 4) - are described in the following sections. The riders offer either a minimum withdrawal benefit (Lincoln Lifetime IncomeSM Advantage 2.0 and Lincoln SmartSecurity (Reg. TM) Advantage) or a minimum annuity payout (i4LIFE (Reg. TM) Advantage). You may not elect more than one Living Benefit rider at a time. Upon election of a Living Benefit rider, you will be subject to Investment Requirements (unless you elect i4LIFE (Reg. TM) Advantage without the Guaranteed Income Benefit (version 4)). The overview chart provided as an appendix to this prospectus provides a brief description and comparison of each Living Benefit rider. Excess withdrawals under certain Living Benefit riders may result in a reduction or premature termination of those benefits or of those riders. If you are not certain how an excess withdrawal will reduce your future guaranteed amounts, you should contact either your registered representative or us prior to requesting a withdrawal to find out what, if any, impact the excess withdrawal will have on any guarantees under the Living Benefit rider. Terms and conditions may change after the contract is purchased. Lincoln Lifetime IncomeSM Advantage 2.0 The Lincoln Lifetime IncomeSM Advantage 2.0 is a Living Benefit rider available for purchase in your contract that provides: o Guaranteed lifetime periodic withdrawals up to the Guaranteed Annual Income amount which is based upon a guaranteed Income Base (a value equal to either your initial purchase payment or contract value, if elected after the contract's effective date); o A 5% Enhancement to the Income Base if greater than an Automatic Annual Step-up so long as no withdrawals are made in that year and the rider is within a ten-year Enhancement period; o Automatic Annual Step-ups of the Income Base to the contract value if the contract value is equal to or greater than the Income Base after the 5% Enhancement; o Age-based increases to the Guaranteed Annual Income amount (after reaching a higher age-band and after an Automatic Annual Step-up). Please note any withdrawals made prior to age 55 or that exceed the Guaranteed Annual Income amount or that are not payable to the original contractowner or original contractowner's bank account (or to the original annuitant or the original annuitant's bank account, if the owner is a non-natural person) (Excess Withdrawals) may significantly reduce your Income Base as well as your Guaranteed Annual Income amount by an amount greater than the dollar amount of the Excess Withdrawal and will terminate the rider if the Income Base is reduced to zero. In order to purchase Lincoln Lifetime IncomeSM Advantage 2.0 the purchase payment or contract value (if purchased after the contract is issued) must be at least $25,000. This rider provides guaranteed, periodic withdrawals for your life as contractowner/annuitant (single life option) or for the lives of you as contractowner/annuitant and your spouse as joint owner (joint life option) regardless of the investment performance of the contract, provided that certain conditions are met. An Income Base is used to calculate the Guaranteed Annual Income payment from your contract, but is not available as a separate benefit upon death or surrender. The Income Base is equal to the initial purchase payment (or contract value if elected after contract issue), increased by subsequent purchase payments, Automatic Annual Step-ups and 5% Enhancements, and decreased by Excess Withdrawals in accordance with the provisions set forth below. After the first anniversary of the rider effective date, cumulative additional purchase payments into the contract will be limited to an amount equal to $100,000 without Home Office approval. No additional purchase payments are allowed if the contract value decreases to zero for any reason. No additional purchase payments are allowed after the Nursing Home Enhancement is requested and approved by us (described later in this prospectus). This rider provides for guaranteed, periodic withdrawals up to the Guaranteed Annual Income amount commencing after the younger of you or your spouse (joint life option) reach age 55. The Guaranteed Annual Income payments are based upon specified percentages of the Income Base. The specified withdrawal percentages of the Income Base are age based and may increase over time. With the single life option, you may receive Guaranteed Annual Income payments for your lifetime. If you purchase the joint life option, Guaranteed Annual Income amounts for the lifetimes of you and your spouse will be available. Withdrawals in excess of the Guaranteed Annual Income amount or that are made prior to age 55 or that are not payable to the original contractowner or original contractowner's bank account (or to the original annuitant or the original annuitant's bank account, if the owner is a non-natural person) (Excess Withdrawals) may significantly reduce your Income Base and your Guaranteed Annual Income payments by an amount greater than the dollar amount of the Excess Withdrawal and may terminate the rider and the contract if the Income Base is reduced to zero. Withdrawals will also negatively impact the availability of the 5% Enhancement. Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. These options are discussed below in detail. 36 Lincoln Life offers other optional riders available for purchase with its variable annuity contracts. These riders provide different methods to take income from your contract value and may provide certain guarantees. There are differences between the riders in the features provided as well as the charge structure. In addition, the purchase of one rider may impact the availability of another rider. Information about the relationship between Lincoln Lifetime IncomeSM Advantage 2.0 and these other riders is included later in this discussion. Not all riders will be available at all times. You may consider purchasing the Lincoln Lifetime IncomeSM Advantage 2.0 if you want a guaranteed lifetime income payment that may grow as you get older and may increase through the Automatic Annual Step-up or 5% Enhancement. The cost of the Lincoln Lifetime IncomeSM Advantage 2.0 may be higher than other Living Benefit riders that you may purchase in your contract. The age at which you may start receiving the Guaranteed Annual Income amount may be different than the ages that you may receive guaranteed payments under other riders. Availability. The Lincoln Lifetime IncomeSM Advantage 2.0 is available for purchase with new and existing nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. The contractowner/annuitant as well as the spouse under the joint life option must be under age 86 at the time this rider is elected. You cannot elect the rider and any other living benefit rider offered in your contract at the same time (Lincoln SmartSecurity (Reg. TM) Advantage). You may not elect the rider if you have also elected i4LIFE (Reg. TM) Advantage or Lincoln SmartIncomeSM Advantage, both annuity payout options. You must wait at least 12 months after terminating Lincoln SmartSecurity (Reg. TM) Advantage before electing Lincoln Lifetime IncomeSM Advantage 2.0. See The Contracts- Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage and Annuity Payouts - Lincoln SmartIncomeSM Inflation for more information. There is no guarantee that the Lincoln Lifetime IncomeSM Advantage 2.0 will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. The availability of this rider will depend upon your state's approval of this rider. Check with your registered representative regarding availability. If you purchase the Lincoln Lifetime IncomeSM Advantage 2.0 you will be limited in your ability to invest within the subaccounts offered within your contract. You will be required to adhere to Investment Requirements. In addition, the fixed account is not available except for use with dollar cost averaging. See Investment Requirements. If the rider is elected at contract issue, then the rider will be effective on the contract's effective date. If the rider is elected after the contract is issued (by sending a written request to our Home Office), the rider will be effective on the next valuation date following approval by us. Benefit Year. The Benefit Year is the 12-month period starting with the effective date of the rider and starting with each anniversary of the rider effective date after that. Income Base. The Income Base is a value used to calculate your Guaranteed Annual Income amount. The Income Base is not available to you as a lump sum withdrawal or a death benefit. The initial Income Base varies based on when you elect the rider. If you elect the rider at the time you purchase the contract, the initial Income Base will equal your initial purchase payment. If you elect the rider after we issue the contract, the initial Income Base will equal the contract value on the effective date of the rider. The maximum Income Base is $10,000,000. This maximum takes into consideration the total Income Bases and Guaranteed Amounts from all Lincoln Life contracts (or contracts issued by our affiliates) in which you (and/or spouse if joint life option) are the covered lives under any other Living Benefit riders. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage. Additional purchase payments automatically increase the Income Base by the amount of the purchase payment (not to exceed the maximum Income Base); for example, a $10,000 additional purchase payment will increase the Income Base by $10,000. After the first anniversary of the rider effective date, cumulative additional purchase payments into the contract will be limited to an amount equal to $100,000 without Home Office approval. If we grant approval to exceed the $100,000 additional purchase payment restriction, the charge will change to the then current charge in effect on the next Benefit Year anniversary. Additional purchase payments will not be allowed if the contract value decreases to zero for any reason including market loss. Excess Withdrawals reduce the Income Base as discussed below. Withdrawals less than or equal to the Guaranteed Annual Income amount will not reduce the Income Base. Since the charge for the rider is based on the Income Base, the cost of the rider increases when additional purchase payments, Automatic Annual Step-ups and 5% Enhancements are made, and the cost decreases as Excess Withdrawals are made because these transactions all adjust the Income Base. In addition, the percentage charge may change when Automatic Annual Step-ups or 5% Enhancements occur as discussed below or additional purchase payments occur. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. 5% Enhancement. On each Benefit Year anniversary, the Income Base, minus purchase payments received in that year, will be increased by 5% if the contract owner/annuitant (as well as the spouse if the joint life option is in effect) are under age 86, if there were no withdrawals in that year and the rider is within a 10-year Enhancement period described below. If during any 10-year Enhancement period there are no Automatic Annual Step-ups the 5% Enhancements will stop at the end of the Enhancement period and will not restart until the next Benefit Year anniversary following the Benefit Year anniversary upon which an Automatic Annual Step-up occurs. Any purchase payment made after the initial purchase payment will be added immediately to the Income Base and will result in an increased Guaranteed Annual Income amount but must be invested in the contract at least one Benefit Year before it 37 will be used in calculating the 5% Enhancement. Any purchase payments made within the first 90 days after the effective date of the rider will be included in the Income Base for purposes of calculating the 5% Enhancement on the first Benefit Year anniversary. If you decline an Automatic Annual Step-up during the first ten Benefit Years, you will continue to be eligible for the 5% Enhancements through the end of the current Enhancement Period, but the Lincoln Lifetime IncomeSM Advantage 2.0 percentage charge could increase to the then current charge at the time of any 5% Enhancements after the 10th Benefit Year Anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. In order to be eligible to receive further 5% Enhancements the contractowner/annuitant (single life option), or the contractowner and spouse (joint life option) must still be living and be under age 86. Note: The 5% Enhancement is not available in any year there is a withdrawal from contract value including a Guaranteed Annual Income payment. A 5% Enhancement will occur in subsequent years only under certain conditions. If you are eligible (as defined below) for the 5% Enhancement in the next year, the Enhancement will not occur until the Benefit Year anniversary of that year. The following is an example of the impact of the 5% Enhancement on the Income Base (assuming no withdrawals): Initial purchase payment = $100,000; Income Base = $100,000 Additional purchase payment on day 30 = $15,000; Income Base = $115,000 Additional purchase payment on day 95 = $10,000; Income Base = $125,000 On the first Benefit Year Anniversary, the Income Base will not be less than $130,750 ($115,000 times 1.05%=$120,750 plus $10,000). The $10,000 purchase payment on day 95 is not eligible for the 5% Enhancement until the 2nd Benefit Year Anniversary. The 5% Enhancement will be in effect for 10 years (the Enhancement period) from the effective date of the rider. A new Enhancement period will begin each time an Automatic Annual Step-up to the contract value occurs as described below. As explained below, the 5% Enhancement and Automatic Annual Step-up will not occur in the same year. If the Automatic Annual Step-up provides a greater increase to the Income Base, you will not receive the 5% Enhancement. If the Automatic Annual Step-up and the 5% Enhancement increase the Income Base to the same amount then you will receive the Automatic Annual Step-up. The 5% Enhancement or the Automatic Annual Step-up cannot increase the Income Base above the maximum Income Base of $10,000,000. You will not receive the 5% Enhancement on any Benefit Year anniversary in which there is a withdrawal, including a Guaranteed Annual Income payment from the contract during that Benefit Year. The 5% Enhancement will occur on the following Benefit Year anniversary if no further withdrawals are made from the contract and the rider is within the Enhancement period. An example of the impact of a withdrawal on the 5% Enhancement is included in the Withdrawal Amounts section below. If during the first ten Benefit Years your Income Base is increased by the 5% Enhancement on the Benefit Year anniversary, your percentage charge for the rider will not change on the Benefit Year anniversary. However, the amount you pay for the rider will increase since the charge for the rider is based on the Income Base. After the tenth Benefit Year anniversary the annual rider percentage charge may increase to the current charge each year if the Income Base increases as a result of the 5% Enhancement, but the charge will never exceed the guaranteed maximum annual percentage charge of 2.00%. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. If your percentage charge for this rider is increased due to a 5% Enhancement that occurs after the tenth Benefit Year anniversary, you may opt-out of the 5% Enhancement by giving us notice in writing within 30 days after the Benefit Year anniversary if you do not want your percentage charge for the rider to change. This opt-out will only apply for this particular 5% Enhancement. You will need to notify us each time thereafter (if an Enhancement would cause your percentage charge to increase) if you do not want the 5% Enhancement. You may not opt-out of the 5% Enhancement if the current charge for the rider increases due to additional purchase payment made during that Benefit Year that exceeds the $100,000 purchase payment restriction after the first Benefit Year. See Income Base section for more details. Automatic Annual Step-ups of the Income Base. The Income Base will automatically step-up to the contract value on each Benefit Year anniversary if: a. the contractowner/annuitant (single life option), or the contractowner and spouse (joint life option) are still living and under age 86; and b. the contract value on that Benefit Year anniversary, after the deduction of any withdrawals (including surrender charges, the rider charge and account fee), plus any purchase payments made on that date is equal to or greater than the Income Base after the 5% Enhancement (if any). Each time the Income Base is stepped up to the current contract value as described above, your percentage charge for the rider will be the current charge for the rider, not to exceed the guaranteed maximum charge. Therefore, your percentage charge for this rider could increase every Benefit Year anniversary. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage 2.0 Charge. 38 Each time the Automatic Annual Step-up occurs a new 10-year Enhancement period starts. The Automatic Annual Step-up is available even in those years when a withdrawal has occurred. If your percentage charge for this rider is increased upon an Automatic Annual Step-up, you may opt-out of the Automatic Annual Step-up by giving us notice in writing within 30 days after the Benefit Year anniversary if you do not want your percentage charge for the rider to change. This opt-out will only apply for this particular Automatic Annual Step-up. You will need to notify us each time the percentage charge increases if you do not want the Step-up. As stated above, if you decline an Automatic Annual Step-up during the first ten Benefit Years, you will continue to be eligible for the 5% Enhancements through the end of the current Enhancement Period, but the Lincoln Lifetime IncomeSM Advantage 2.0 charge could increase to the then current charge at the time of any 5% Enhancements after the 10th Benefit Year anniversary. You will have the option to opt out of the Enhancements after the 10th Benefit Year. See the earlier Income Base section. You may not opt-out of the Automatic Annual Step-up if an additional purchase payment made during that Benefit Year caused the charge for the rider to increase to the current charge. Following is an example of how the Automatic Annual Step-ups and the 5% Enhancement will work (assuming no withdrawals or additional purchase payments):
Income Base with Potential for Charge Contract Value 5% Enhancement Income Base to Change ---------------- ------------------ ------------- --------------------- Initial Purchase Payment $50,000 . $50,000 N/A $50,000 N/A 1st Benefit Year Anniversary......... $54,000 $52,500 $54,000 Yes 2nd Benefit Year Anniversary......... $53,900 $56,700 $56,700 No 3rd Benefit Year Anniversary......... $57,000 $59,535 $59,535 No 4th Benefit Year Anniversary......... $64,000 $62,512 $64,000 Yes
On the 1st Benefit Year anniversary, the Automatic Annual Step-up increased the Income Base to the contract value of $54,000 since the increase in the contract value is greater than the 5% Enhancement amount of $2,500 (5% of $50,000). On the 2nd Benefit Year anniversary, the 5% Enhancement provided a larger increase (5% of $54,000 = $2,700). On the 3rd Benefit Year anniversary, the 5% Enhancement provided a larger increase (5% of $56,700=$2,835). On the 4th Benefit Year anniversary, the Automatic Annual Step-up to the contract value was greater than the 5% Enhancement amount of $2,977 (5% of $59,535). An Automatic Annual Step-up cannot increase the Income Base beyond the maximum Income Base of $10,000,000. Withdrawal Amount. You may make periodic withdrawals up to the Guaranteed Annual Income amount each Benefit Year for your (contractowner) lifetime (single life option) or the lifetimes of you and your spouse (joint life option) as long as your Guaranteed Annual Income amount is greater than zero. You may start taking Guaranteed Annual Income withdrawals when you (single life option) or the younger of you and your spouse (joint life option) turn age 55. The initial Guaranteed Annual Income amount is calculated when you purchase the rider. If you (or younger of you and your spouse if the joint life option is elected) are under age 55 at the time the rider is elected the initial Guaranteed Annual Income amount will be zero. If you (or the younger of you and your spouse if the joint life option is elected) are age 55 or older at the time the rider is elected the initial Guaranteed Annual Income amount will be equal to a specified percentage of the Income Base. The specified percentage of the Income Base will be based on your age (or younger of you and your spouse if the joint life option is elected). Upon your first withdrawal the Guaranteed Annual Income percentage is based on your age (single life option) or the younger of you and your spouse's age (joint life option) at the time of the withdrawal. For example, if you purchase the rider at age 57, your Guaranteed Annual Income percentage is 4%. If you waited until you were age 60 (single life option) to make your first withdrawal your Guaranteed Annual Income percentage would be 5%. During the first Benefit Year the Guaranteed Annual Income amount is calculated using the Income Base as of the effective date of the rider (including any purchase payments made within the first 90 days after the effective date of the rider). After the first Benefit Year anniversary we will use the Income Base calculated on the most recent Benefit Year anniversary for calculating the Guaranteed Annual Income amount. After your first withdrawal the Guaranteed Annual Income amount percentage will only increase on a Benefit Year Anniversary on or after you have reached an applicable higher age band and after there has also been an Automatic Annual Step-up. If you have reached an applicable age band and there has not also been an Automatic Annual Step-up, then the Guaranteed Annual Income amount percentage will not increase until the next Automatic Annual Step-up occurs. If you do not withdraw the entire Guaranteed Annual Income amount during a Benefit Year, there is no carryover of the extra amount into the next Benefit Year. Guaranteed Annual Income Percentages by Ages
Guaranteed Age (Joint Life Guaranteed Annual Income Age (Single Annual Income amount Option - younger of amount percentage Life Option) percentage (single life option) you and your spouse's age) (joint life option) ------------------------------ --------------------------------- ---------------------------- ------------------------- At least 55 and under 59 1/2 4% 55-64 4% 59 1/2+ 5% 65+ 5%
39 If your contract value is reduced to zero because of market performance or rider charges, withdrawals equal to the Guaranteed Annual Income amount will continue automatically for your life (and your spouse's life if applicable) under the Guaranteed Annual Income Annuity Payout Option. You may not withdraw the remaining Income Base in a lump sum. You will not be entitled to the Guaranteed Annual Income amount if the Income Base is reduced to zero as a result of an Excess Withdrawal. If the Income Base is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. If the contract value is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. Withdrawals equal to or less than the Guaranteed Annual Income amount will not reduce the Income Base. All withdrawals you make will decrease the contract value. Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. The following example shows the calculation of the Guaranteed Annual Income amount and how withdrawals less than or equal to the Guaranteed Annual Income amount affect the Income Base and the contract value. The contractowner is age 58 (4% Guaranteed Annual Income percentage for single life option) on the rider's effective date, and makes an initial purchase payment of $200,000 into the contract: Contract value on the rider's effective date $200,000 Income Base on the rider's effective date $200,000 Initial Guaranteed Annual Income amount on the rider's $ 8,000 effective date ($200,000 x 4%) Contract value six months after rider's effective date $210,000 Income Base six months after rider's effective date $200,000 Withdrawal six months after rider's effective date when $ 8,000 contractowner is still age 58 Contract value after withdrawal ($210,000 - $8,000) $202,000 Income Base after withdrawal ($200,000 - $0) $200,000 Contract value on first Benefit Year anniversary $205,000 Income Base on first Benefit Year anniversary $205,000 Guaranteed Annual Income amount on first Benefit Year $ 8,200 anniversary
Since there was a withdrawal during the first year the 5% Enhancement is not available but the Automatic Annual Step-up was available and increased the Income Base to the contract value of $205,000. On the first anniversary of the rider's effective date the Guaranteed Annual Income amount is $8,200 (4% x $205,000). Purchase payments added to the contract subsequent to the initial purchase payment will increase the Guaranteed Annual Income amount by an amount equal to the applicable Guaranteed Annual Income amount percentage multiplied by the amount of the subsequent purchase payment. For example, assuming a contractowner is age 58 (single life option), if the Guaranteed Annual Income amount of $2,000 (4% of $50,000 Income Base) is in effect and an additional purchase payment of $10,000 is made, the new Guaranteed Annual Income amount that Benefit Year is $2,400 ($2,000 + 4% of $10,000). The Guaranteed Annual Income payment amount will be recalculated immediately after a purchase payment is added to the contract. Cumulative additional purchase payments into the contract that exceed $100,000 after the first anniversary of the rider effective date must receive Home Office approval. Additional purchase payments will not be allowed if the contract value is zero. No additional purchase payments are allowed after the Nursing Home Enhancement is requested and approved by us (described below). 5% Enhancements and Automatic Annual Step-ups will increase the Income Base and thus the Guaranteed Annual Income amount. The Guaranteed Annual Income amount after the Income Base is adjusted either by a 5% Enhancement or an Automatic Annual Step-up will be equal to the adjusted Income Base multiplied by the applicable Guaranteed Annual Income percentage. Nursing Home Enhancement. The Guaranteed Annual Income amount will be increased to 10%, called the Nursing Home Enhancement, during a Benefit Year when the contractowner/annuitant is age 65 or older or the youngest of the contractowner and spouse is age 65 or older (joint life option), and one is admitted into an accredited nursing home or equivalent health care facility. The Nursing Home Enhancement applies if the admittance into such facility occurs 60 months or more after the effective date of the rider, the individual was not in the nursing home in the year prior to the effective date of the rider, and upon entering the nursing home, the person has been then confined for at least 90 consecutive days. For the joint life option if both spouses qualify, the Nursing Home Enhancement is available for either spouse, but not both spouses. If no withdrawal has been taken since the rider's effective date, the Nursing Home Enhancement will be available when the contractowner/annuitant is age 65 or the youngest of the contractowner and spouse is age 65 (joint life option). If a withdrawal has been taken since the rider's effective date, the Nursing Home Enhancement will be available on the next Benefit Year anniversary after the contractowner/annuitant is age 65 or the youngest of the contractowner and spouse is age 65 (joint life option). You may request the Nursing Home Enhancement by filling out a request form provided by us. Proof of nursing home confinement will be required each year. If you leave the nursing home, your Guaranteed Annual Income amount will be reduced to the amount you 40 would otherwise be eligible to receive starting after the next Benefit Year anniversary. Any withdrawals made prior to the entrance into a nursing home and during the Benefit Year that the Nursing Home Enhancement commences, will reduce the amount available that year for the Nursing Home Enhancement. Purchase payments may not be made into the contract after a request for the Nursing Home Enhancement is approved by us and any purchase payments made either in the 12 months prior to entering the nursing home or while you are residing in a nursing home will not be included in the calculation of the Nursing Home Enhancement. The requirements of an accredited nursing home or equivalent health care facility are set forth in the Nursing Home Enhancement Claim Form. The criteria for the facility include, but are not limited to: providing 24 hour a day nursing services; an available physician; an employed nurse on duty or call at all times; maintains daily clinical records; and able to dispense medications. This does not include an assisted living or similar facility. The admittance to a nursing home must be pursuant to a plan of care provided by a licensed health care practitioner, and the nursing home must be located in the United States. The remaining references to the Guaranteed Annual Income amount also include the Nursing Home Enhancement amount. Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) that exceed the Guaranteed Annual Income amount at the time of the withdrawal or are withdrawals made prior to age 55 (younger of you or your spouse for joint life) or that are not payable to the original contractowner or original contractowner's bank account (or to the original annuitant or the original annuitant's bank account, if the owner is a non-natural person). When an Excess Withdrawal occurs: 1. The Income Base is reduced by the same proportion that the Excess Withdrawal reduces the contract value. This means that the reduction in the Income Base could be more than the dollar amount of the withdrawal; and 2. The Guaranteed Annual Income amount will be recalculated to equal the applicable Guaranteed Annual Income amount percentage multiplied by the new (reduced) Income Base (after the pro rata reduction for the Excess Withdrawal). We will provide you with quarterly statements that will include the Guaranteed Annual Income amount (as adjusted for Guaranteed Annual Income amount payments, Excess Withdrawals and additional purchase payments) available to you for the Benefit Year, if applicable, in order for you to determine whether a withdrawal may be an Excess Withdrawal. We encourage you to either consult with your registered representative or call us at number provided on the front page of this prospectus if you have questions about Excess Withdrawals. The following example demonstrates the impact of an Excess Withdrawal on the Income Base, the Guaranteed Annual Income amount and the contract value. The contractowner who is age 58 (single life option) makes a $12,000 withdrawal which causes a $12,915.19 reduction in the Income Base. Prior to Excess Withdrawal: Contract value = $60,000 Income Base = $85,000 Guaranteed Annual Income amount = $3,400 (4% of the Income Base of $85,000) After a $12,000 Withdrawal ($3,400 is within the Guaranteed Annual Income amount, $8,600 is the Excess Withdrawal): The contract value is reduced by the amount of the Guaranteed Annual Income amount of $3,400 and the Income Base is not reduced: Contract value = $56,600 ($60,000 - $3,400) Income Base = $85,000 The contract value is also reduced by the $8,600 Excess Withdrawal and the Income Base is reduced by 15.19435%, the same proportion that the Excess Withdrawal reduced the $56,600 contract value ($8,600 - $56,600) Contract value = $48,000 ($56,600 - $8,600) Income Base = $72,084.81 ($85,000 x 15.19435% = $12,915.19; $85,000 - $12,915.19 = $72,084.81). Guaranteed Annual Income amount = $2,883.39 (4% of $72,084.81 Income Base) On the following Benefit Year anniversary: Contract value = $43,000 Income Base = $72,084.81 Guaranteed Income amount = $2,883.39 (4% x $72,084.81) In a declining market, Excess Withdrawals may significantly reduce your Income Base as well as your Guaranteed Annual Income amount. If the Income Base is reduced to zero due to an Excess Withdrawal the rider will terminate. If the contract value is reduced to zero due to an Excess Withdrawal the rider and contract will terminate. 41 Surrender charges are waived on cumulative withdrawals less than or equal to the Guaranteed Annual Income amount. Excess Withdrawals will be subject to surrender charges unless one of the waivers of surrender charge provisions set forth in your prospectus is applicable. Continuing with the prior example of the $12,000 withdrawal: the $3,400 Guaranteed Annual Income amount is not subject to surrender charges; the $8,600 Excess Withdrawal may be subject to surrender charges according to the surrender charge schedule in this prospectus. See Charges and Other Deductions - Surrender Charge. Withdrawals from IRA contracts will be treated as within the Guaranteed Annual Income amount (even if they exceed the Guaranteed Annual Income amount) only if the withdrawals are taken as systematic monthly or quarterly installments of the amount needed to satisfy the required minimum distribution (RMD) rules under Internal Revenue Code Section 401(a)(9). In addition, in order for this exception for RMDs to apply, the following must occur: 1. Lincoln's monthly or quarterly automatic withdrawal service is used to calculate and pay the RMD; 2. The RMD calculation must be based only on the value in this contract; and 3. No withdrawals other than RMDs are made within the Benefit Year (except as described in the next paragraph). If your RMD withdrawals during a Benefit Year are less than the Guaranteed Annual Income amount, an additional amount up to the Guaranteed Annual Income amount may be withdrawn and will not be subject to surrender charges. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the Guaranteed Annual Income amount, including amounts attributable to RMDs, will be treated as Excess Withdrawals. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters for a discussion of the tax consequences of withdrawals. Guaranteed Annual Income Amount Annuity Payout Option. If you are required to take annuity payments because you have reached the maturity date of the contract, you have the option of electing the Guaranteed Annual Income Amount Annuity Payout Option. If the contract value is reduced to zero and you have a remaining Income Base, you will receive the Guaranteed Annual Income Amount Annuity Payout Option. If you are receiving the Guaranteed Annual Income Amount Annuity Payout Option, the beneficiary may be eligible to receive final payment upon death of the single life or surviving joint life. To be eligible the death benefit option in effect immediately prior to the effective date of the Guaranteed Annual Income Amount Annuity Payout Option must be one of the following death benefits: the Guarantee of Principal death benefit or the EGMDB. Contractowners may decide to choose the Guaranteed Annual Income Amount Annuity Payout Option over i4LIFE (Reg. TM) Advantage if they feel this may provide a higher final payment option over time and they may place more importance on this over access to the Account Value. The Guaranteed Annual Income Amount Annuity Payout Option is an annuity payout option which the contractowner (and spouse if applicable) will receive annual annuity payments equal to the Guaranteed Annual Income amount for life (this option is different from other annuity payout options, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. You will have no other contract features other than the right to receive annuity payments equal to the Guaranteed Annual Income amount for your life or the life of you and your spouse for the joint life option. The final payment is a one-time lump-sum payment. If the effective date of the rider is the same as the effective date of the contract the final payment will be equal to the sum of all purchase payments, decreased by withdrawals. If the effective date of the rider is after the effective date of the contract the final payment will be equal to the contract value on the effective date of the rider, increased for purchase payments received after the rider effective date and decreased by withdrawals. Excess Withdrawals reduce the final payment in the same proportion as the withdrawals reduce the contract value; withdrawals less than or equal to the Guaranteed Annual Income amount and payments under the Guaranteed Annual Income Amount Annuity Payout Option will reduce the final payment dollar for dollar. Death Prior to the Annuity Commencement Date. The Lincoln Lifetime IncomeSM Advantage 2.0 has no provision for a payout of the Income Base or any other death benefit upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit options (as described earlier in this prospectus) will be in effect. Election of the Lincoln Lifetime IncomeSM Advantage 2.0 does not impact the death benefit options available for purchase with your annuity contract except as described below in Impact to Withdrawal Calculations of Death Benefits before the Annuity Commencement Date. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the single life, the Lincoln Lifetime IncomeSM Advantage 2.0 will end and no further Guaranteed Annual Income amounts are available (even if there was an Income Base in effect at the time of the death). If the beneficiary elects to continue the contract after the death of the single life (through a separate provision of the contract), the beneficiary may purchase a new Lincoln Lifetime IncomeSM Advantage 2.0 if available under the terms and charge in effect at the time of the new purchase. There is no carryover of the Income Base. Upon the first death under the joint life option, the lifetime payout of the Guaranteed Annual Income amount will continue for the life of the surviving spouse. The 5% Enhancement and Automatic Annual Step-up will continue if applicable as discussed above. Upon the 42 death of the surviving spouse, the Lincoln Lifetime IncomeSM Advantage 2.0 will end and no further Guaranteed Annual Income amounts are available (even if there was an Income Base in effect at the time of the death). As an alternative, after the first death, the surviving spouse if under age 86 may choose to terminate the joint life option and purchase a new single life option, if available, under the terms and charge in effect at the time for a new purchase. In deciding whether to make this change, the surviving spouse should consider whether the change will cause the Income Base and the Guaranteed Annual Income amount to decrease. Termination. After the fifth anniversary of the effective date of the rider, the contractowner may terminate the rider by notifying us in writing. Lincoln Lifetime IncomeSM Advantage 2.0 will automatically terminate: o on the annuity commencement date (except payments under the Guaranteed Annual Income Amount Annuity Payout Option will continue if applicable); or o upon the death under the single life option or the death of the surviving spouse under the joint life option; or when the Guaranteed Annual Income amount or contract value is reduced to zero due to an Excess Withdrawal; or o upon surrender of the contract; or o upon termination of the underlying annuity contract. The termination will not result in any increase in contract value equal to the Income Base. Upon effective termination of this rider, the benefits and charges within this rider will terminate. If you terminate the rider, you must wait one year before you can re-elect any Living Benefit rider, Lincoln SmartSecurity (Reg. TM) Advantage, or any other living benefits we may offer in the future. Compare to Lincoln SmartSecurity (Reg. TM) Advantage. If a contractowner is interested in purchasing a rider that provides guaranteed minimum withdrawals, the following factors should be considered when comparing Lincoln Lifetime IncomeSM Advantage 2.0 and the Lincoln SmartSecurity (Reg. TM) Advantage (only one of these riders can be added to a contract at any one time): the Lincoln Lifetime IncomeSM Advantage 2.0 has the opportunity to provide a higher Income Base than the Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage because of the 5% Enhancement or Automatic Annual Step-up. The Income Base for Lincoln Lifetime IncomeSM Advantage 2.0 may also be higher than the Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage because withdrawals equal to or less than the Guaranteed Annual Income amount do not reduce the Income Base whereas withdrawals under Lincoln SmartSecurity (Reg. TM) Advantage reduce the Guaranteed Amount. Lincoln Lifetime IncomeSM Advantage 2.0 also provides the potential for lifetime withdrawals from an earlier age (rather than age 65 with the Lincoln SmartSecurity (Reg. TM) Advantage). However, the percentage charge for the Lincoln Lifetime IncomeSM Advantage 2.0 is higher and has the potential to increase on every Benefit Year Anniversary if the increase in contract value exceeds the 5% Enhancement and after the 10th Benefit Year anniversary upon a 5% Enhancement. In addition, the guaranteed maximum charge is higher for Lincoln Lifetime IncomeSM Advantage 2.0. Since the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base is not reduced by withdrawals that are less than or equal to the Guaranteed Annual Income amount, the charge, which is applied against the Income Base will not be reduced. Whereas with Lincoln SmartSecurity (Reg. TM) Advantage, withdrawals reduce the Guaranteed Amount against which the Lincoln SmartSecurity (Reg. TM) Advantage charge is applied. In addition, the Lincoln SmartSecurity (Reg. TM) Advantage provides that guaranteed Maximum Annual Withdrawal amounts can continue to a beneficiary to the extent of any remaining Guaranteed Amount while the Lincoln Lifetime IncomeSM Advantage 2.0 does not offer this feature. i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) for purchasers who previously purchased Lincoln Lifetime IncomeSM Advantage 2.0. i4LIFE (Reg. TM) Advantage is an optional annuity payout rider, available for purchase at an additional charge, that provides periodic variable income payments for life, the ability to make withdrawals during a defined period of time (the Access Period) and a death benefit during the Access Period. A minimum payout floor, called the Guaranteed Income Benefit, is also available for purchase at the time you elect i4LIFE (Reg. TM) Advantage. You cannot have both i4LIFE (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage 2.0 in effect on your contract at the same time. Contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0 may decide to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). If this decision is made, the contractowner can use the greater of the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or contract value to establish the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) at the terms in effect for purchasers of this rider. If you choose to drop the Lincoln Lifetime IncomeSM Advantage 2.0 and have the single life option, you must purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) single life option. If you drop the Lincoln Lifetime IncomeSM Advantage 2.0 and have the joint life option, you must purchase i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (version 4) joint life option. Contractowners who purchase Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed the ability in the future to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) even if it is no longer available for sale. They are also guaranteed that the Guaranteed Income Benefit percentage and Access Period requirements will be at least as favorable as those at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. If you choose to drop your rider and elect i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) prior to the 5th Benefit Year anniversary, the election must be made before the Annuity Commencement Date and by age 95 for nonqualified contracts or age 80 for qualified contracts. Elections made prior to the 5th Benefit Year anniversary will result in a minimum Access Period of the greater of 20 years or age 90. If you choose to drop the rider and elect i4LIFE (Reg. TM) Advantage with 43 Guaranteed Income Benefit (version 4) after the 5th Benefit Year anniversary the election must be made before the Annuity Commencement Date and by age 86 for qualified contracts or age 99 for nonqualified contracts. Elections made after the 5th Benefit Year anniversary will result in a minimum Access Period of the greater of 15 years or age 85. See i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). For nonqualified contracts, the contractowner must elect the levelized option for regular income payments. While i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is in effect, the contractowner cannot change the payment mode elected or decrease the length of the Access Period. When deciding whether to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) you should consider that depending on a person's age and the selected length of the Access Period, i4LIFE (Reg. TM) Advantage may provide a higher payout than the Guaranteed Annual Income amounts under Lincoln Lifetime IncomeSM Advantage 2.0. You should consider electing i4LIFE (Reg. TM) Advantage when you are ready to immediately start receiving i4LIFE (Reg. TM) Advantage payments whereas with Lincoln Lifetime IncomeSM Advantage 2.0 you may defer taking withdrawals until a later date. The initial charge for i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) will be equal to the current annual rate in effect for your Lincoln Lifetime IncomeSM Advantage 2.0 rider. This charge is in addition to the mortality and expense risk and administrative charge for your base contract death benefit option. The charge is calculated based upon the greater of the value of the Income Base or contract value as of the last valuation date under Lincoln Lifetime IncomeSM Advantage 2.0 prior to election of i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). During the Access Period, this charge is deducted from the i4LIFE (Reg. TM) Advantage Account Value on a quarterly basis with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). During the Lifetime Income Period, this charge is deducted annually. The initial charge may increase annually upon a step-up of the Guaranteed Income Benefit by an amount equal to the prior charge rate (or initial charge rate if the first anniversary of the rider's effective date) multiplied by the percentage increase, if any, to the Guaranteed Income Benefit and the percentage increase if any to the Lincoln Lifetime IncomeSM Advantage 2.0 current charge. If an Excess Withdrawal occurs, the charge will decrease by the same percentage as the percentage change to the Account Value. Impact to Withdrawal Calculations of Death Benefits before the Annuity Commencement Date. The death benefit calculation for certain death benefit options in effect prior to the annuity commencement date may change for contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0. Certain death benefit options provide that all withdrawals reduce the death benefit in the same proportion that the withdrawals reduce the contract value. If you elect the Lincoln Lifetime IncomeSM Advantage 2.0, withdrawals less than or equal to the Guaranteed Annual Income will reduce the sum of all purchase payments option of the death benefit on a dollar for dollar basis. This applies to the Guarantee of Principal Death Benefit, and only the sum of all purchase payments alternative of the EGMDB, whichever is in effect. See The Contracts - Death Benefits. Any Excess Withdrawals will reduce the sum of all purchase payments in the same proportion that the withdrawals reduced the contract value under any death benefit option in which proportionate withdrawals are in effect. This change has no impact on death benefit options in which all withdrawals reduce the death benefit calculation on a dollar for dollar basis. The terms of your contract will describe which method is in effect for your contract while this rider is in effect. The following example demonstrates how a withdrawal will reduce the death benefit if both the EGMDB and the Lincoln Lifetime IncomeSM Advantage 2.0 are in effect when the contractowner dies. Note that this calculation applies only to the sum of all purchase payments calculation and not for purposes of reducing the highest anniversary contract value under the EGMDB: Contract value before withdrawal $80,000 Guaranteed Annual Income amount $5,000 Enhanced Guaranteed Minimum Death Benefit (EGMDB) values before withdrawal is the greatest of a), b), or c) described in detail in the EGMDB section of your prospectus: a) Contract value $80,000 b) Sum of purchase payments $100,000 c) Highest anniversary contract value $150,000 Withdrawal of $9,000 will impact the death benefit calculation as follows: a) $80,000 - $9,000 = $71,000 (Reduction $9,000) b) $100,000 - $5,000 = $95,000 (reduction by the amount of the Guaranteed Annual Income amount) ($95,000 - $5,067 = $89,932 [$95,000 times ($4,000/$75,000) = $5,067] Proportional reduction of Excess Withdrawal. Total reduction = $10,067. c) $150,000 - $16,875 = $133,125 [$150,000 times $9,000/$80,000 = $16,875]. The entire $9,000 withdrawal reduced the death benefit option proportionally. Total reduction = $16,875. 44 Item c) provides the largest death benefit of $133,125. Lincoln SmartSecurity (Reg. TM) Advantage The Lincoln SmartSecurity (Reg. TM) Advantage is a Rider that is available for purchase with your variable annuity contract. This benefit provides a minimum guaranteed amount (Guaranteed Amount) that you will be able to withdraw, in installments, from your contract. The Guaranteed Amount is equal to the initial purchase payment (or contract value if elected after contract issue) adjusted for subsequent purchase payments, step-ups and withdrawals in accordance with the provisions set forth below. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the Guaranteed Amount will automatically step-up to the contract value, if higher, on each Benefit Year anniversary through the 10th anniversary. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the contractowner can also initiate additional ten-year periods of automatic step-ups. You may access this Guaranteed Amount through periodic withdrawals which are based on a percentage of the Guaranteed Amount. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life or Joint Life options, you also have the option to receive periodic withdrawals for your lifetime or for the lifetimes of you and your spouse (when available in your state). These options are discussed below in detail. By purchasing this Rider, you will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. We offer other optional riders available for purchase with variable annuity contracts. These riders, which are fully discussed in this prospectus, provide different methods to take income from your contract value and may provide certain guarantees. There are differences between the riders in the features provided as well as the charge structure. In addition, the purchase of one rider may impact the availability of another rider. In particular, before you elect the Lincoln SmartSecurity (Reg. TM) Advantage, you may want to compare it to Lincoln Lifetime IncomeSM Advantage 2.0, which provides minimum guaranteed, periodic withdrawals for life. See The Contracts - Lincoln Lifetime IncomeSM Advantage 2.0 - Compare to Lincoln SmartSecurity (Reg. TM) Advantage. If the benefit is elected at contract issue, then the Rider will be effective on the contract's effective date. If the benefit is elected after the contract is issued (by sending a written request to our Home Office), the Rider will be effective on the next valuation date following approval by us. Benefit Year. The Benefit Year is the 12-month period starting with the effective date of the Rider and starting with each anniversary of the Rider effective date after that. If the contractowner elects to step-up the Guaranteed Amount (this does not include automatic annual step-ups within a ten-year period), the Benefit Year will begin on the effective date of the step-up and each anniversary of the effective date of the step-up after that. The step-up will be effective on the next valuation date after notice of the step-up is approved by us. Guaranteed Amount. The Guaranteed Amount is a value used to calculate your withdrawal benefit under this Rider. The Guaranteed Amount is not available to you as a lump sum withdrawal or a death benefit. The initial Guaranteed Amount varies based on when and how you elect the benefit. If you elect the benefit at the time you purchase the contract, the Guaranteed Amount will equal your initial purchase payment. If you elect the benefit after we issue the contract, the Guaranteed Amount will equal the contract value on the effective date of the Rider. The maximum Guaranteed Amount is $10,000,000 for Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up. This maximum takes into consideration the combined Guaranteed Amount under Lincoln SmartSecurity (Reg. TM) Advantage or the Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 of all Lincoln Life contracts (or contracts issued by our affiliates) owned by you (or on which you or your spouse if joint owner are the annuitant). Additional purchase payments automatically increase the Guaranteed Amount by the amount of the purchase payment (not to exceed the maximum); for example, a $10,000 additional purchase payment will increase the Guaranteed Amount by $10,000. We will allow purchase payments into your annuity contract after the first anniversary of the Rider effective date if the cumulative additional purchase payments exceed $100,000 only with prior Home Office approval. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Guaranteed Amount as discussed below. Since the charge for the Rider is based on the Guaranteed Amount, the cost of the Rider increases when additional purchase payments and step-ups are made, and the cost decreases as withdrawals are made because these transactions all adjust the Guaranteed Amount. Step-ups of the Guaranteed Amount. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, the Guaranteed Amount will automatically step-up to the contract value on each Benefit Year anniversary up to and including the tenth Benefit Year if: a. the contractowner or joint owner is still living; and b. the contract value as of the valuation date, after the deduction of any withdrawals (including surrender charges), the Rider charge and account fee plus any purchase payments made on that date is greater than the Guaranteed Amount immediately preceding the valuation date. 45 After the tenth Benefit Year anniversary, you may initiate another ten-year period of automatic step-ups by electing (in writing) to step-up the Guaranteed Amount to the greater of the Contract Value or the current Guaranteed Amount if: a. each contractowner and annuitant is under age 81; and b. the contractowner or joint owner is still living. If you choose, we will administer this election for you automatically, so that a new ten-year period of step-ups will begin at the end of each prior ten-year step-up period. Following is an example of how the step-ups work in the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, (assuming no withdrawals or additional purchase payments):
Guaranteed Contract Value Amount o Initial purchase payment $50,000 $50,000 $50,000 o 1st Benefit Year Anniversary $54,000 $54,000 o 2nd Benefit Year Anniversary $53,900 $54,000 o 3rd Benefit Year Anniversary $57,000 $57,000
Annual step-ups, if the conditions are met, will continue until (and including) the 10th Benefit Year Anniversary. If you had elected to have the next ten-year period of step-ups begin automatically after the prior ten-year period, annual step-ups, if conditions are met, will continue beginning on the 11th Benefit Year Anniversary. Contractowner elected step-ups (other than automatic step-ups) will be effective on the next valuation date after we receive your request and a new Benefit Year will begin. Purchase payments and withdrawals made after a step-up adjust the Guaranteed Amount. In the future, we may limit your right to step-up the Guaranteed Amount to your Benefit Year anniversary dates. All step-ups are subject to the maximum Guaranteed Amount. A contractowner elected step-up (including contractowner step-ups that we administer for you to begin a new ten-year step-up period) may cause a change in the percentage charge for this benefit. There is no change in the percentage charge when automatic, annual step-ups occur during a ten-year period. See Charges and Other Deductions - Rider Charges - Lincoln SmartSecurity (Reg. TM) Advantage Charge. Withdrawals. You will have access to your Guaranteed Amount through periodic withdrawals up to the Maximum Annual Withdrawal amount each Benefit Year until the Guaranteed Amount equals zero. On the effective date of the Rider, the Maximum Annual Withdrawal amount is 5% of the Guaranteed Amount. If you do not withdraw the entire Maximum Annual Withdrawal amount during a Benefit Year, there is no carryover of the extra amount into the next Benefit Year. The Maximum Annual Withdrawal amount is increased by 5% of any additional purchase payments. For example, if the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option with a Maximum Annual Withdrawal amount of $2,500 (5% of $50,000 Guaranteed Amount) is in effect and an additional purchase payment of $10,000 is made, the new Maximum Annual Withdrawal amount is $3,000 ($2,500 + 5% of $10,000). Step-ups of the Guaranteed Amount (both automatic step-ups and step-ups elected by you) will step-up the Maximum Annual Withdrawal amount to the greater of: a. the Maximum Annual Withdrawal amount immediately prior to the step-up; or b. 5% of the new (stepped-up) Guaranteed Amount. If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) are within the Maximum Annual Withdrawal amount, then: 1. the withdrawal will reduce the Guaranteed Amount by the amount of the withdrawal on a dollar-for-dollar basis, and 2. the Maximum Annual Withdrawal amount will remain the same. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up is in effect, withdrawals from IRA contracts will be treated as within the Maximum Annual Withdrawal amount (even if they exceed the 5% Maximum Annual Withdrawal amount) only if the withdrawals are taken in the form of systematic monthly or quarterly installments, as calculated by Lincoln, of the amount needed to satisfy the required minimum distribution rules under Internal Revenue Code Section 401(a)(9) for this contract value. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters. When cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) exceed the Maximum Annual Withdrawal amount: 1. The Guaranteed Amount is reduced to the lesser of: 46 o the contract value immediately following the withdrawal, or o the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal. 2. The Maximum Annual Withdrawal amount will be the least of: o the Maximum Annual Withdrawal amount immediately prior to the withdrawal; or o the greater of: o 5% of the reduced Guaranteed Amount immediately following the withdrawal (as specified above when withdrawals exceed the Maximum Annual Withdrawal amount); or o 5% of the contract value immediately following the withdrawal; or o the new Guaranteed Amount. The following example of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up demonstrates the impact of a withdrawal in excess of the Maximum Annual Withdrawal amount on the Guaranteed Amount and the Maximum Annual Withdrawal amount. A $7,000 withdrawal caused a $32,000 reduction in the Guaranteed Amount. Prior to Excess Withdrawal: Contract Value = $60,000 Guaranteed Amount = $85,000 Maximum Annual Withdrawal = $5,000 (5% of the initial Guaranteed Amount of $100,000) After a $7,000 Withdrawal: Contract Value = $53,000 Guaranteed Amount = $53,000 Maximum Annual Withdrawal = $2,650 The Guaranteed Amount was reduced to the lesser of the contract value immediately following the withdrawal ($53,000) or the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal ($85,000 $7,000 = $78,000). The Maximum Annual Withdrawal amount was reduced to the least of: 1) Maximum Annual Withdrawal amount prior to the withdrawal ($5,000); or 2) The greater of 5% of the new Guaranteed Amount ($2,650) or 5% of the contract value following the withdrawal ($2,650); or 3) The new Guaranteed Amount ($53,000). The least of these three items is $2,650. In a declining market, withdrawals that exceed the Maximum Annual Withdrawal amount may substantially deplete or eliminate your Guaranteed Amount and reduce your Maximum Annual Withdrawal amount. Withdrawals in excess of the Maximum Annual Withdrawal amount will be subject to surrender charges (to the extent that total withdrawals exceed the free amount of withdrawals allowed during a contract year) and an interest adjustment on the amount withdrawn from the fixed account. Refer to the Statement of Additional Information for an example of the interest adjustment calculation. Lifetime Withdrawals. Payment of the Maximum Annual Withdrawal amount will be guaranteed for your (contractowner) lifetime (if you purchase the Single Life option) or for the lifetimes of you (contractowner) and your spouse (if the Joint Life option is purchased), as long as: 1) No withdrawals are made before you (and your spouse if a Joint Life) are age 65; and 2) An excess withdrawal (described above) has not reduced the Maximum Annual Withdrawal amount to zero. If the lifetime withdrawal is not in effect, the Maximum Annual Withdrawal amount will last only until the Guaranteed Amount equals zero. If any withdrawal is made prior to the time you (or both spouses) are age 65, the Maximum Annual Withdrawal amount will not last for the lifetime(s), except in the two situations described below: 1) If a step-up of the Guaranteed Amount after age 65 causes the Maximum Annual Withdrawal amount to equal or increase from the immediately prior Maximum Annual Withdrawal amount. This typically occurs if the contract value equals or exceeds the highest, prior Guaranteed Amount. If this happens, the new Maximum Annual Withdrawal amount will automatically be available for the specified lifetime(s); or 2) The contractowner makes a one-time election to reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount. This reset will occur on the first valuation date following the Benefit Year anniversary and will be based on the Guaranteed Amount as of that valuation date. This will reduce your Maximum Annual Withdrawal amount. A contractowner would only choose this if the above situation did not occur. To reset the Maximum Annual Withdrawal amount, the following must occur: a. the contractowner (and spouse if applicable) is age 65; 47 b. the contract is currently within a ten-year automatic step-up period described above (or else a contractowner submits a step-up request to start a new ten-year automatic step-up period) (the contractowner must be eligible to elect a step-up; i.e., all contractowners and the annuitant must be alive and under age 81); and c. you have submitted this request to us in writing at least 30 days prior to the end of the Benefit Year. As an example of these two situations, if you purchased the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life with $100,000, your initial Guaranteed Amount is $100,000 and your initial Maximum Annual Withdrawal amount is $5,000. If you make a $5,000 withdrawal at age 62, your Guaranteed Amount will decrease to $95,000. Since you did not satisfy the age 65 requirement, you do not have a lifetime Maximum Annual Withdrawal amount. If a step-up of the Guaranteed Amount after age 65 (either automatic or owner-elected) causes the Guaranteed Amount to equal or exceed $100,000, then the Maximum Annual Withdrawal amount of $5,000 (or greater) will become a lifetime payout. This is the first situation described above. However, if the Guaranteed Amount has not been reset to equal or exceed the highest prior Guaranteed Amount, then you can choose the second situation described above if you are age 65 and the contract is within a ten-year automatic step-up period. This will reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount; 5% of $95,000 is $4,750. This is your new Maximum Annual Withdrawal amount which can be paid for your lifetime unless excess withdrawals are made. The tax consequences of withdrawals and annuity payments are discussed in Federal Tax Matters. All withdrawals you make, whether or not within the Maximum Annual Withdrawal amount, will decrease your contract value. If the contract is surrendered, the contractowner will receive the contract value (less any applicable charges, fees, and taxes) and not the Guaranteed Amount. If your contract value is reduced to zero because of market performance, withdrawals equal to the Maximum Annual Withdrawal amount will continue for the life of you (and your spouse if applicable) if the lifetime withdrawals are in effect. If not, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount equals zero. You may not withdraw the remaining Guaranteed Amount in a lump sum. Guaranteed Amount Annuity Payout Option. If you desire to annuitize your Guaranteed Amount, the Guaranteed Amount Annuity Payout Option is available. The Guaranteed Amount Annuity Payment Option is a fixed annuitization in which the contractowner (and spouse if applicable) will receive the Guaranteed Amount in annual annuity payments equal to the current 5% Maximum Annual Withdrawal amount, including the lifetime Maximum Annual Withdrawals if in effect (this option is different from other annuity payment options discussed in this prospectus, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. Payments will continue until the Guaranteed Amount equals zero and may continue until death if the lifetime Maximum Annual Withdrawal is in effect. This may result in a partial, final payment. You would consider this option only if your contract value is less than the Guaranteed Amount (and you don't believe the contract value will ever exceed the Guaranteed Amount) and you do not wish to keep your annuity contract in force other than to pay out the Guaranteed Amount. You will have no other contract features other than the right to receive annuity payments equal to the Maximum Annual Withdrawal amount until the Guaranteed Amount equals zero. If the contract value is zero and you have a remaining Guaranteed Amount, you may not withdraw the remaining Guaranteed Amount in a lump sum, but must elect the Guaranteed Amount Annuity Payment Option. Death Prior to the Annuity Commencement Date. There is no provision for a lump sum payout of the Guaranteed Amount upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit will be paid other than any applicable Maximum Annual Withdrawal amounts. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the Single Life under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Single Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will end. If the contract is continued as discussed below, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero. In the alternative, the surviving spouse can choose to become the new Single Life, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. The surviving spouse will need to be 65 before taking withdrawals to qualify for a lifetime payout. In deciding whether to make this change, the surviving spouse should consider: 1) the change a reset would cause to the Guaranteed Amount and the Maximum Annual Withdrawal amount; 2) whether it is important to have Maximum Annual Withdrawal amounts for life versus the remainder of the prior Guaranteed Amount; and 3) the cost of the Single Life option. Upon the first death under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will continue for the life of the surviving spouse. Upon the death of the surviving spouse, the lifetime payout of the Maximum Annual Withdrawal amount will end. However, if the spouse's beneficiary elects to 48 take the annuity death benefit in installments over life expectancy, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero (see below for a non-spouse beneficiary). As an alternative, after the first death, the surviving spouse may choose to change from the Joint Life option to the Single Life option, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. In deciding whether to make this change, the surviving spouse should consider: 1) if the reset will cause the Guaranteed Amount and the Maximum Annual Withdrawal amount to decrease and 2) if the cost of the Single Life option is less than the cost of the Joint Life option. If the surviving spouse of the deceased contractowner continues the contract, the remaining automatic step-ups under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up will apply to the spouse as the new contractowner. If a non-spouse beneficiary elects to receive the death benefit in installments over life expectancy (thereby keeping the contract in force), the beneficiary may continue the Lincoln SmartSecurity (Reg. TM) Advantage if desired. Automatic step-ups under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up will not continue and elective step-ups of the Guaranteed Amount under both options will not be permitted. In the event the contract value declines below the Guaranteed Amount (as adjusted for withdrawals of death benefit payments), the beneficiary is assured of receiving payments equal to the Guaranteed Amount (as adjusted). Deductions for the Rider charge will continue on a quarterly basis and will be charged against the remaining Guaranteed Amount. Note: there are instances where the required installments of the death benefit, in order to be in compliance with the Internal Revenue Code as noted above, may exceed the Maximum Annual Withdrawal amount, thereby reducing the benefit of this Rider. If there are multiple beneficiaries, each beneficiary will be entitled to continue a share of the Lincoln SmartSecurity (Reg. TM) Advantage equal to his or her share of the death benefit. Impact of Divorce on Joint Life Option. In the event of a divorce, the contractowner may change from a Joint Life Option to a Single Life Option (if the contractowner is under age 81) at the current Rider charge for new sales of the Single Life Option. At the time of the change, the Guaranteed Amount will be reset to the current contract value and the Maximum Annual Withdrawal amount will equal 5% of this new Guaranteed Amount. After a divorce, the contractowner may keep the Joint Life Option to have the opportunity to receive lifetime payouts for the lives of the contractowner and a new spouse. This is only available if no withdrawals were made from the contract after the effective date of the Rider up to and including the date the new spouse is added to the Rider. Termination. After the later of the fifth anniversary of the effective date of the Rider or the fifth anniversary of the most recent contractowner-elected step-up, including any step-up we administered for you, of the Guaranteed Amount, the contractowner may terminate the Rider by notifying us in writing. Lincoln SmartSecurity (Reg. TM) Advantage will automatically terminate: o on the annuity commencement date (except payments under the Guaranteed Amount Annuity Payment Option will continue if applicable); o upon the election of i4LIFE (Reg. TM) Advantage; o if the contractowner or annuitant is changed (except if the surviving spouse assumes ownership of the contract upon death of the contractowner) including any sale or assignment of the contract or any pledge of the contract as collateral; o upon the last payment of the Guaranteed Amount unless the lifetime Maximum Annual Withdrawal is in effect; o when a withdrawal in excess of the Maximum Annual Withdrawal amount reduces the Guaranteed Amount to zero; or o upon termination of the underlying annuity contract. The termination will not result in any increase in contract value equal to the Guaranteed Amount. Upon effective termination of this Rider, the benefits and charges within this Rider will terminate. If you terminate the Rider, you must wait one year before you can elect Lincoln SmartSecurity (Reg. TM) Advantage, or purchase Lincoln Lifetime IncomeSM Advantage 2.0 or any other living benefit we are offering in the future. i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to terminate the Lincoln SmartSecurity (Reg. TM) Advantage rider and purchase i4LIFE (Reg. TM) Advantage can use any remaining Guaranteed Amount to establish the Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage terms and charge in effect at the time of the i4LIFE (Reg. TM) Advantage election. Contractowners may consider this if i4LIFE (Reg. TM) Advantage will provide a higher payout amount, among other reasons. There are many factors to consider when making this decision, including the cost of the riders, the payout amounts and applicable guarantees. You should discuss this decision with your registered representative. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up is available for purchase with qualified (IRAs and Roth IRAs) annuity contracts. All contractowners and the annuitant of the contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up must be under age 81 at the time this Rider is elected. You cannot elect the Rider on or after the purchase of i4LIFE (Reg. TM) Advantage or on or after the Annuity Commencement Date. 49 There is no guarantee that the Lincoln SmartSecurity (Reg. TM) Advantage will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. Check with your investment representative regarding availability. i4LIFE (Reg. TM) Advantage i4LIFE (Reg. TM) Advantage (the Variable Annuity Payout Option Rider in your contract) is an optional annuity payout rider you may purchase at an additional cost and is separate and distinct from other annuity payout options offered under your contract and described later in this prospectus. You may also purchase the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit for an additional charge. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is a payout option that provides you with variable, periodic regular income payments for life. These payouts are made during two time periods: an Access Period, when you have access to the Account Value and after the Access Period ends, payouts continue for the rest of your life, which is called the Lifetime Income Period. i4LIFE (Reg. TM) Advantage is different from other annuity payout options provided by Lincoln because with i4LIFE (Reg. TM) Advantage, you have the ability to make additional withdrawals or surrender the contract during the Access Period. You may also purchase the Guaranteed Income Benefit which provides a minimum payout floor for your regular income payments. The initial regular income payment is calculated from the Account Value on the periodic income commencement date, a date no more than 14 days prior to the date you select to begin receiving the regular income payments. This option is available on IRAs and Roth IRAs (check with your registered representative regarding availability with SEP market). This option is subject to a charge (imposed only during the i4LIFE (Reg. TM) Advantage payout phase) computed daily on the average account value. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is available for contracts with a contract value of at least $50,000 and may be elected at the time of application or at any time before any other annuity payout option is elected by sending a written request to our Home Office. When you elect i4LIFE (Reg. TM) Advantage, you must choose the annuitant, secondary life, if applicable, and make several choices about your regular income payments. The annuitant and secondary life may not be changed after i4LIFE (Reg. TM) Advantage is elected. For qualified contracts, the secondary life must be the spouse. See i4LIFE (Reg. TM) Advantage Death Benefits regarding the impact of a change to the annuitant prior to the i4LIFE (Reg. TM) Advantage election. i4LIFE (Reg. TM) Advantage for IRA annuity contracts is only available if the annuitant and secondary life, if applicable, are age 591/2 or older at the time the option is elected. i4LIFE (Reg. TM) Advantage must be elected by age 85 on qualified contracts. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. Additional purchase payments may be made during the Access Period for an IRA annuity contract, unless a Guaranteed Income Benefit has been elected. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The Contracts - Transfers on or Before the Annuity Commencement Date. When you elect i4LIFE (Reg. TM) Advantage, the death benefit option that you had previously elected will become the death benefit election under i4LIFE (Reg. TM) Advantage, unless you elect a less expensive death benefit option. The amount paid under the new death benefit may be less than the amount that would have been paid under the death benefit provided before i4LIFE (Reg. TM) Advantage began (if premium taxes have been deducted). See The Contracts - i4LIFE (Reg. TM) Advantage Death Benefits. Access Period. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period, which begins on the periodic income commencement date. The Access Period is a defined period of time during which we pay variable, periodic regular income payments and provide a death benefit, and during which you may surrender the contract and make withdrawals from your Account Value (defined below). At the end of the Access Period, the remaining Account Value is used to make regular income payments for the rest of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently, the length of time between your current age and age 115 for non-qualified contracts or age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. Additional restrictions may apply if you are under age 591/2 when you request a change to the Access Period. Currently, if you extend the Access Period, it must be extended at least 5 years. If you change the Access Period, subsequent regular income payments will be adjusted accordingly, and the Account Value remaining at the end of the new Access Period will be applied to continue regular income payments for your life. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. We may reduce or terminate the Access Period for IRA i4LIFE (Reg. TM) Advantage contracts in order to keep the regular income payments in compliance with IRC provisions for required minimum distributions. The minimum Access Period requirements for Guaranteed Income Benefits are longer than the requirements for i4LIFE (Reg. TM) Advantage without a Guaranteed Income Benefit. Shortening the Access Period will terminate the Guaranteed Income Benefit. See The Contracts - Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. 50 Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective (or initial purchase payment if i4LIFE (Reg. TM) Advantage is purchased at contract issue), less any applicable premium taxes. During the Access Period, the Account Value on a valuation date will equal the total value of all of the contractowner's accumulation units plus the contractowner's value in the fixed account, and will be reduced by regular income payments and Guaranteed Income Benefit payments made as well as any withdrawals taken. After the Access Period ends, the remaining Account Value will be applied to continue regular income payments for your life and the Account Value will be reduced to zero. Regular income payments during the Access Period. i4LIFE (Reg. TM) Advantage provides for variable, periodic regular income payments for as long as an annuitant (or secondary life, if applicable) is living and access to your Account Value during the Access Period. When you elect i4LIFE (Reg. TM) Advantage, you will have to choose the date you will receive the initial regular income payment, the frequency of the payments (monthly, quarterly, semi-annually or annually), how often the payment is recalculated, the length of the Access Period and the assumed investment return. These choices will influence the amount of your regular income payments. Regular income payments must begin within one year of the date you elect i4LIFE (Reg. TM) Advantage. If you do not choose a payment frequency, the default is a monthly frequency. In most states, you may also elect to have regular income payments from non-qualified contracts recalculated only once each year rather than recalculated at the time of each payment. This results in level regular income payments between recalculation dates. Qualified contracts are only recalculated once per year, at the beginning of each calendar year. You also choose the assumed investment return. Return rates of 3%, 4%, 5%, or 6% may be available. The higher the assumed investment return you choose, the higher your initial regular income payment will be and the higher the return must be to increase subsequent regular income payments. You also choose the length of the Access Period. At this time, changes can only be made on periodic income commencement date anniversaries. Regular income payments are not subject to any surrender charges. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (or purchase payment if elected at contract issue), less applicable premium taxes by 1000 and multiplying the result by an annuity factor. The annuity factor is based upon: o the age and sex of the annuitant and secondary life, if applicable; o the length of the Access Period selected; o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The annuity factor used to determine the regular income payments reflects the fact that, during the Access Period, you have the ability to withdraw the entire Account Value and that a death benefit of the entire Account Value will be paid to your beneficiary upon your death. These benefits during the Access Period result in a slightly lower regular income payment, during both the Access Period and the Lifetime Income Period, than would be payable if this access was not permitted and no lump-sum death benefit of the full Account Value was payable (The contractowner must elect an Access Period of no less than the minimum Access Period which is currently set at 5 years.) The annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and any Guaranteed Income Benefit if applicable) will terminate. 51 Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed investment return and the frequency of the recalculation do not change. The initial regular income payment during the Lifetime Income Period is determined by dividing the Account Value on the last valuation date of the Access Period by 1000 and multiplying the result by an annuity factor revised to reflect that the Access Period has ended. The annuity factor is based upon: o the age and sex of the annuitant and secondary life (if living); o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The impact of the length of the Access Period and any withdrawals made during the Access Period will continue to be reflected in the regular income payments during the Lifetime Income Period. To determine subsequent regular income payments, the contract is credited with a fixed number of annuity units equal to the initial regular income payment (during the Lifetime Income Period) divided by the annuity unit value (by subaccount). Subsequent regular income payments are determined by multiplying the number of annuity units per subaccount by the annuity unit value. Your regular income payments will vary based on the value of your annuity units. If your regular income payments are adjusted on an annual basis, the total of the annual payment is transferred to Lincoln Life's general account to be paid out based on the payment mode you selected. Your payment(s) will not be affected by market performance during that year. Your regular income payment(s) for the following year will be recalculated at the beginning of the following year based on the current value of the annuity units. Regular income payments will continue for as long as the annuitant or secondary life, if applicable, is living, and will continue to be adjusted for investment performance of the subaccounts your annuity units are invested in (and the fixed account if applicable). Regular income payments vary with investment performance. During the lifetime income period, there is no longer an Account Value; therefore, no withdrawals are available and no death benefit is payable. In addition, transfers are not allowed from a fixed annuity payment to a variable annuity payment. i4LIFE (Reg. TM) Advantage Death Benefits i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit. The i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit is available during the Access Period and will be equal to the greater of: o the Account Value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefits, reduce the death benefit by the dollar amount of the payment; and o all other withdrawals, if any, reduce the death benefit in the same proportion that withdrawals reduce the contract value or Account Value. References to purchase payments and withdrawals include purchase payments and withdrawals made prior to the election of i4LIFE (Reg. TM) Advantage if your contract was in force with the Guarantee of Principal or greater death benefit option prior to that election. In a declining market, withdrawals which are deducted in the same proportion that withdrawals reduce the contract value or Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with that withdrawal (surrender charges for example) and premium taxes, if any. The following example demonstrates the impact of a proportionate withdrawal on your death benefit: o i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit $200,000 o Total i4LIFE (Reg. TM) Regular Income payments $ 25,000 o Additional Withdrawal $15,000 ($15,000/$150,000=10% withdrawal) o Account Value at the time of Additional Withdrawal $150,000
Death Benefit Value after i4LIFE (Reg. TM) regular income payment = $200,000 - $25,000 = $175,000 Death Benefit Value after additional withdrawal = $175,000 - $17,500 = $157,500 Reduction in Death Benefit Value for Withdrawal = $175,000 X 10% = $17,500 The regular income payments reduce the death benefit by $25,000 and the additional withdrawal causes a 10% reduction in the death benefit, the same percentage that the withdrawal reduced the Account Value. i4LIFE (Reg. TM) Advantage EGMDB. The i4LIFE (Reg. TM) Advantage EGMDB is only available during the Access Period. This benefit is the greatest of: o the Account Value as of the valuation date on which we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: 52 o regular income payments, including withdrawals to provide the Guaranteed Income Benefit, reduce the death benefit by the dollar amount of the payment; and o all other withdrawals, if any, reduce the death benefit in the same proportion that withdrawals reduce the contract value or Account Value. References to purchase payments and withdrawals include purchase payments and withdrawals made prior to the election of i4LIFE (Reg. TM) Advantage if your contract was in force with the Guarantee of Principal or greater death benefit option prior to that election; or o the highest Account Value or contract value on any contract anniversary date (including the inception date of the contract) after the EGMDB is effective (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the date of death. The highest Account Value or contract value is increased by purchase payments and is decreased by regular income payments, including withdrawals to provide the Guaranteed Income Benefits and all other withdrawals subsequent to the anniversary date on which the highest Account Value or contract value is obtained. Regular income payments and withdrawals are deducted in the same proportion that regular income payments and withdrawals reduce the contract value or Account Value. When determining the highest anniversary value, if you elected the EGMDB (or more expensive death benefit option) prior to electing i4LIFE (Reg. TM) Advantage and this death benefit was in effect when you purchased i4LIFE (Reg. TM) Advantage, we will look at the contract value before i4LIFE (Reg. TM) Advantage and the Account Value after the i4LIFE (Reg. TM) Advantage election to determine the highest anniversary value. In a declining market, withdrawals which are deducted in the same proportion that withdrawals reduce the Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with that withdrawal (surrender charges for example) and premium taxes, if any. Contracts with the i4LIFE (Reg. TM) Advantage EGMDB may elect to change to the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our Home office, and we will begin deducting the lower i4LIFE (Reg. TM) Advantage charge at that time. Once the change is effective, you may not elect to return to the i4LIFE (Reg. TM) Advantage EGMDB. General Death Benefit Provisions. For all death benefit options, following the Access Period, there is no death benefit. The death benefits also terminate when the Account Value equals zero, because the Access Period terminates. If there is a change in the contractowner, joint owner or annuitant during the life of the contract, for any reason other than death, the only death benefit payable for the new person will be the Account Value. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. If a death occurs during the Access Period, the value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Upon notification to us of the death, regular income payments may be suspended until the death claim is approved. Upon approval, a lump sum payment for the value of any suspended payments will be made as of the date the death claim is approved, and regular income payments will continue, if applicable. The excess, if any, of the death benefit over the Account Value will be credited into the contract at that time. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage A Guaranteed Income Benefit is available for purchase when you elect i4LIFE (Reg. TM) Advantage which ensures that your regular income payments will never be less than a minimum payout floor, regardless of the actual investment performance of your contract. See Charges and Other Deductions for a discussion of the Guaranteed Income Benefit charges. 53 As discussed below, certain features of the Guaranteed Income Benefit may be impacted if you purchased Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0 (withdrawal benefit riders) prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (annuity payout rider). Additional purchase payments cannot be made to a contract with the Guaranteed Income Benefit. You are also limited in how much you can invest in certain subaccounts. See the Contracts - Investment Requirements. There is no guarantee that the i4LIFE (Reg. TM) Guaranteed Income Benefit option will be available to elect in the future, as we reserve the right to discontinue this option at any time. In addition, we may make different versions of the Guaranteed Income Benefit available to new purchasers or may create different versions for use with various Living Benefit riders. However, a contractowner with the Lincoln Lifetime IncomeSM Advantage 2.0 who decides to drop Lincoln Lifetime IncomeSM Advantage 2.0 to purchase i4LIFE (Reg. TM) Advantage will be guaranteed the right to purchase the Guaranteed Income Benefit under the terms set forth in the Lincoln Lifetime IncomeSM Advantage 2.0 rider. i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, is elected when you elect i4LIFE (Reg. TM) Advantage or during the Access Period, if still available for election, subject to terms and conditions at that time. You may choose not to purchase the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit at the time you purchase i4LIFE (Reg. TM) Advantage by indicating that you do not want the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit on the election form at the time that you purchase i4LIFE (Reg. TM) Advantage. If you intend to use the Guaranteed Amount from the Lincoln SmartSecurity (Reg. TM) Advantage rider or the Income Base from the Lincoln Lifetime IncomeSM Advantage 2.0 rider to establish the Guaranteed Income Benefit, you must elect the Guaranteed Income Benefit at the time you elect i4LIFE (Reg. TM) Advantage. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. See i4LIFE (Reg. TM) Advantage - General i4LIFE (Reg. TM) Provisions for an example. Guaranteed Income Benefit (version 4). For Guaranteed Income Benefit (version 4) the initial Guaranteed Income Benefit will be an amount equal to a specified percentage of your Account Value, based on your age (or the age of the youngest life under a joint life option) at the time the Guaranteed Income Benefit is elected. The specified percentages of the Account Value and the corresponding age-bands for calculating the initial Guaranteed Income Benefit are outlined in the table below. Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit
Age Percentage of Account Value, Income Base or Guaranteed Amount* ------------------- --------------------------------------------------------------- Under 40 2.5% 40 - 54 3.0% 55 - under 59.5 3.5% 59.5 - 64 4.0% 65 - 69 4.5% 70 - 79 5.0% 80 and above 5.5%
*Purchasers of Lincoln SmartSecurity (Reg. TM) Advantage may use any remaining Guaranteed Amount (if greater than the contract value) to calculate the initial Guaranteed Income Benefit. Purchasers of Lincoln Lifetime IncomeSM Advantage 2.0 may use any remaining Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or the rider's effective date (if there has not been any Automatic Annual Step-up) if greater than the contract value to establish the initial Guaranteed Income Benefit. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment has fallen below the Guaranteed Income Benefit, because of poor investment results, a payment equal to the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit is the minimum payment you will receive. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the Guaranteed Income Benefit, the Guaranteed Income Benefit will never come into effect. If the Guaranteed Income Benefit is paid, it will be paid with the same frequency as your regular income payment. If your regular income payment is less than the Guaranteed Income Benefit, we will reduce the Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the Guaranteed Income Benefit (in other words, Guaranteed Income Benefit payments reduce the Account Value by the entire amount of the Guaranteed Income Benefit payment). (Regular income payments also reduce the Account Value). This payment will be made from the variable subaccounts and the fixed account on a pro-rata basis according to your investment allocations. If your Account Value reaches zero as a result of payments to provide the Guaranteed Income Benefit, we will continue to pay you an amount equal to the Guaranteed Income Benefit. If your Account Value reaches zero, your Access Period will end and your Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled, and will reduce your death benefit. If your Account Value equals zero, no 54 death benefit will be paid. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
The contractowner receives an amount equal to the Guaranteed Income Benefit. The entire amount of the Guaranteed Income Benefit is deducted from the Account Value. The Guaranteed Income Benefit (version 4) will automatically step up every year to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. For non-qualified contracts, the step-up will occur annually on the first valuation date on or after each periodic income commencement date anniversary starting on the first periodic income commencement date anniversary. For qualified contracts, the step-up will occur annually on the valuation date of the first periodic income payment of each calendar year. The first step-up is the valuation date of the first periodic income payment in the next calendar year following the periodic income commencement date. The following example illustrates how the initial Guaranteed Income Benefit (version 4) is calculated for a 60-year old contractowner with a nonqualified contract, and how a step-up would increase the Guaranteed Income Benefit in a subsequent year. The percentage of the Account Value used to calculate the initial Guaranteed Income Benefit is 4% for a 60-year old per the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. The example also assumes that the Account Value has increased due to positive investment returns resulting in a higher recalculated regular income payment. See The Contracts- i4LIFE (Reg. TM) Advantage-Regular income payments during the Access Period for a discussion of recalculation of the regular income payment. 8/1/2010 Amount of initial regular income payment: $ 5,051 8/1/2010 Account Value at election of Guaranteed Income Benefit (version 4): $100,000 8/1/2010 Initial Guaranteed Income Benefit (4% times $100,000 Account Value): $ 4,000 8/1/2011 Recalculated regular income payment: $ 6,000 8/1/2011 Guaranteed Income Benefit after step-up (75% of $6,000): $ 4,500
The contractowner's Guaranteed Income Benefit was increased to 75% of the recalculated regular income payment. At the time of a step-up of the Guaranteed Income Benefit the i4LIFE (Reg. TM) Guaranteed Income Benefit percentage charge may increase subject to the maximum guaranteed charge of 2.00%. This means that your charge may change every year. If we automatically administer a new step-up for you and if your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the date of the step-up. If we receive notice of your request to reverse the step-up, on a going forward basis, we will decrease the percentage charge to the percentage charge in effect before the step-up occurred. Any increased charges paid between the time of the step-up and the date we receive your notice to reverse the step-up will not be reimbursed. Step-ups will continue after a request to reverse a step-up. i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charges. We will provide you with written notice when a step-up will result in an increase to the current charge so that you may give us timely notice if you wish to reverse a step-up. The next section describes certain guarantees in living benefit riders relating to the election of the Guaranteed Income Benefit. Lincoln Lifetime IncomeSM Advantage 2.0. Contractowners who purchase Lincoln Lifetime IncomeSM Advantage 2.0 are guaranteed the ability in the future to purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) even if it is no longer available for sale. They are also guaranteed that the Guaranteed Income Benefit percentage and Access Period requirements will be at least as favorable as those available at the time they purchase Lincoln Lifetime IncomeSM Advantage 2.0. See The Contracts- Lincoln Lifetime IncomeSM Advantage 2.0. Contractowners with an active Lincoln Lifetime IncomeSM Advantage 2.0 may decide to drop Lincoln Lifetime IncomeSM Advantage 2.0 and purchase i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). If this decision is made, the contractowner can use the Lincoln Lifetime IncomeSM Advantage 2.0 Income Base reduced by all Guaranteed Annual Income payments since the last Automatic Annual Step-up or since the rider's effective date (if there has not been an Automatic Annual Step-up) if greater than the contract value to establish the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) at the terms in effect for purchasers of this rider. Lincoln SmartSecurity (Reg. TM) Advantage. Contractowners who purchased the Lincoln SmartSecurity (Reg. TM) Advantage are guaranteed that they may use the remaining Guaranteed Amount (if greater than the contract value) at the time the initial Guaranteed Income Benefit is 55 determined, to calculate the Guaranteed Income Benefit. The initial Guaranteed Income Benefit will be equal to the applicable percentage based on either the contractowner's age (single life) or the youngest age of either the contractowner or secondary life (if applicable) , at the time the Guaranteed Income Benefit is elected, multiplied by the remaining Guaranteed Amount. The applicable percentage is found in the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. In other words, the initial Guaranteed Income Benefit will equal the applicable percentage based on the contractowner's age multiplied by the remaining Guaranteed Amount (if greater than the contract value). The following is an example of how the Guaranteed Amount from Lincoln SmartSecurity (Reg. TM) Advantage or the Income Base from Lincoln Lifetime IncomeSM Advantage 2.0 may be used to calculate the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4). The example assumes that on the date that i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit (version 4) is elected the contractowner is 70 years of age and has made no withdrawals from the contract. The percentage of the Account Value used to calculate the initial Guaranteed Income Benefit is 5% for a 70-year old per the Age-Banded Percentages for Calculating Initial Guaranteed Income Benefit table above. The example assumes an annual payment mode has been elected. Account Value (equals contract value on date i4LIFE (Reg. TM) $100,000 Advantage with Guaranteed Income Benefit (version 4) is elected): Guaranteed Amount/Income Base on date i4LIFE (Reg. TM) $120,000 Advantage with Guaranteed Income Benefit (version 4) is elected: Amount of initial regular income payment: $ 5,992 per year Initial Guaranteed Income Benefit (5% x $120,000 $ 6,000 Guaranteed Amount/Income Base which is greater than $100,000 Account Value):
Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. When you select the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, certain restrictions will apply to your contract: o A 4% assumed investment return (AIR) will be used to calculate the regular income payments. o The minimum Access Period required for Guaranteed Income Benefit (version 4) is the longer of 20 years or the difference between your age (nearest birthday) and age 90. We may change this Access Period requirement prior to election of the Guaranteed Income Benefit. If you use the greater of the Account Value or Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 to calculate the Guaranteed Income Benefit after the fifth anniversary of the rider's effective date, the minimum Access Period will be the longer of 15 years or the difference between your age (nearest birthday) and age 85. o The maximum Access Period available for this benefit is to age 115 for non-qualified contracts; to age 100 for qualified contracts. If you choose to lengthen your Access Period (which must be increased by a minimum of 5 years), your regular income payment will be reduced, but the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will not be affected. If you choose to shorten your Access Period, the i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit will terminate. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency; or o upon written notice to us; or o assignment of the contract. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. However if you used the greater of the Account Value or Income Base under Lincoln Lifetime IncomeSM Advantage 2.0 to establish the Guaranteed Income Benefit any termination of the Guaranteed Income Benefit will also result in a termination of the i4LIFE (Reg. TM) Advantage election. If you terminate the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit you may be able to re-elect it, if available, after one year. The election will be treated as a new purchase, subject to the terms and charges in effect at the time of election and the i4LIFE (Reg. TM) Advantage regular income payments will be recalculated. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. Availability. The Guaranteed Income Benefit (version 4) will be available with qualified (IRAs and Roth IRAs) annuity contracts upon approval in your state. The contractowner must be under age 81 for qualified contracts at the time this rider is elected. Withdrawals. You may request a withdrawal at any time prior to or during the Access Period. We reduce the Account Value by the amount of the withdrawal, and all subsequent regular income payments and Guaranteed Income Benefit payments, if applicable, will 56 be reduced proportionately. Withdrawals may have tax consequences. See Federal Tax Matters. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. The following example demonstrates the impact of a withdrawal on the regular income payments and the Guaranteed Income Benefit payments: o i4LIFE (Reg. TM) Regular Income Payment before Withdrawal $ 1,200 o Guaranteed Income Benefit before Withdrawal $ 900 o Account Value at time of Additional Withdrawal $150,000 o Additional Withdrawal $ 15,000 (a 10% withdrawal)
Reduction in i4LIFE (Reg. TM) Regular Income payment for Withdrawal = $1,200 X 10 % = $120 i4LIFE (Reg. TM) Regular Income payment after Withdrawal = $1,200 - $120 = $1,080 Reduction in Guaranteed Income Benefit for Withdrawal = $900 X 10% = $90 Guaranteed Income Benefit after Withdrawal = $900 - $90 = $810 Surrender. At any time prior to or during the Access Period, you may surrender the contract by withdrawing the surrender value. If the contract is surrendered, the contract terminates and no further regular income payments will be made. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. Termination. For IRA annuity contracts, you may terminate i4LIFE (Reg. TM) Advantage prior to the end of the Access Period by notifying us in writing. The termination will be effective on the next valuation date after we receive the notice and your contract will return to the accumulation phase. Your i4LIFE (Reg. TM) Advantage death benefit will terminate and you may choose the Guarantee of Principal death benefit option. Upon termination, we will stop assessing the charge for i4LIFE (Reg. TM) Advantage and begin assessing the mortality and expense risk charge and administrative charge associated with the new death benefit option. Your contract value upon termination will be equal to the Account Value on the valuation date we terminate i4LIFE (Reg. TM) Advantage. For non-qualified contracts, you may not terminate i4LIFE (Reg. TM) Advantage once you have elected it. Annuity Payouts When you apply for a contract, you may select any annuity commencement date permitted by law, which is usually on or before the annuitant's 90th birthday. However, you must elect to receive annuity payouts by the annuitant's 99th birthday. Your broker-dealer may recommend that you annuitize at an earlier age. As an alternative, contractowners with Lincoln SmartSecurity (Reg. TM) Advantage may elect to annuitize their Guaranteed Amount under the Guaranteed Amount Annuity Payout Option. Contractowners with Lincoln Lifetime IncomeSM Advantage 2.0 may elect the Guaranteed Annual Income Amount Annuity Payout option. The contract provides optional forms of payouts of annuities (annuity options), each of which is payable on a variable basis, a fixed basis or a combination of both as you specify. The contract provides that all or part of the contract value may be used to purchase an annuity payout option. You may elect annuity payouts in monthly, quarterly, semiannual or annual installments. If the payouts from any subaccount would be or become less than $50, we have the right to reduce their frequency until the payouts are at least $50 each. Following are explanations of the annuity options available. Annuity Options The annuity options outlined below do not apply to contractowners who have elected i4LIFE (Reg. TM) Advantage, the Guaranteed Amount Annuity Payout option or the Guaranteed Annual Income Amount Annuity Payout option. Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if the annuitant dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Payouts Guaranteed for Designated Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. 57 Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option provides a periodic payout during the joint lifetime of the annuitant and a joint annuitant. When one of the joint annuitants dies, the survivor receives two-thirds of the periodic payout made when both were alive. This option further provides that should one or both of the annuitants die during the elected guaranteed period, usually 10 or 20 years, full benefit payment will continue for the rest of the guaranteed period. Unit Refund Life Annuity. This option offers a periodic payout during the lifetime of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable Annuity Payouts) equal to the excess, if any, of: o the total amount applied under this option divided by the annuity unit value for the date payouts begin, minus o the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for payment by the Home Office. Life Annuity with Cash Refund. Fixed annuity benefit payments that will be made for the lifetime of the annuitant with the guarantee that upon death, should (a) the total dollar amount applied to purchase this option be greater than (b) the fixed annuity benefit payment multiplied by the number of annuity benefit payments paid prior to death, then a refund payment equal to the dollar amount of (a) minus (b) will be made. Under the annuity options listed above, you may not make withdrawals. Other options, with or without withdrawal features, may be made available by us. You may pre-select an annuity payout option as a method of paying the death benefit to a beneficiary. If you do, the beneficiary cannot change this payout option. You may change or revoke in writing to our Home Office, any such selection, unless such selection was made irrevocable. If you have not already chosen an annuity payout option, the beneficiary may choose any annuity payout option. At death, options are only available to the extent they are consistent with the requirements of the contract as well as Sections 72(s) and 401(a)(9) of the tax code, if applicable. Lincoln SmartIncomeSM Inflation. The Lincoln SmartIncomeSM Inflation Fixed Annuity Payout Option ("Lincoln SmartIncomeSM Inflation") is an annuity payout option that provides: o Scheduled Payments (the periodic annuity payouts under this rider) for the life of the annuitant and secondary life (secondary life may also be referred to as joint life), if applicable, that may change each January based on changes in the Consumer Price Index-Urban (CPI). The CPI is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for all Urban Consumers published by the U.S. Bureau of Labor Statistics and is widely used to measure inflation. o A Guaranteed Minimum Scheduled Payment. o A death benefit based on the Reserve Value. o A Reserve Value from which additional withdrawals, called Unscheduled Payments, may be taken at any time as long as the Reserve Value is greater than zero and up to the amount of the Reserve Value less any related charges and taxes. You must wait at least one year from the effective date of the contract to elect Lincoln SmartIncomeSM Inflation. For non-qualified annuities the annuitant and joint annuitant must be at least 50 years of age and not older than 85 years of age (50 years and not more than 75 years of age for qualified annuities). The minimum contract value that may be credited to this annuity payout option is $50,000 and the maximum is $2,000,000. You may consider electing this annuity payout option if you would like an annuity payout that may increase or decrease as inflation, as measured by the CPI, increases or decreases. Lincoln SmartIncomeSM Inflation also provides a guaranteed minimum payout, death benefits and access to the Reserve Value from which you can take Unscheduled Payments. We offer other fixed annuity payout options that have a higher income factor and would result in a higher payment than Lincoln SmartIncomeSM Inflation but do not offer Unscheduled Payments or a death benefit. You should carefully consider whether or not Lincoln SmartIncomeSM Inflation is the appropriate choice for you. All or a portion of your contract value may be used to fund the Lincoln SmartIncomeSM Inflation. You may select both Lincoln SmartIncomeSM Inflation and another annuity payout option at the same time by allocating less than 100% of your contract value to Lincoln SmartIncomeSM Inflation and the remainder to the other annuity payout option. If only a portion of your contract value is used to fund Lincoln SmartIncomeSM Inflation, the remainder of the contract value must be used to fund another annuity payout option. 58 The Lincoln SmartIncomeSM Inflation may not be available for purchase in the future as we reserve the right not to offer it for sale. The availability of Lincoln SmartIncomeSM Inflation will depend upon your state's approval of the contract rider. We also reserve the right to substitute an appropriate index for the CPI, if: 1. The CPI is discontinued, delayed, or otherwise not available for this use; or 2. The composition, base or method of calculating the CPI changes so that we deem it inappropriate for use. If the CPI is discontinued, delayed or otherwise not available, or if the composition, base or method of, calculating the CPI changes so that we deem it inappropriate for use in Lincoln SmartIncomeSM Inflation, we will substitute an appropriate index for the CPI. In the case of a substitution, we will give you written notification at least 30 days in advance of this change, as well as provide you with an amendment to the prospectus. We will attempt to utilize a substitute index generated by the government that is a measure of inflation. We will not substitute an index created by us or one of our affiliates. Upon substitution of the CPI, annuity payment values will be calculated consistent with the formulas currently used but with different index values for calculating the Scheduled Payment and Reserve Value adjustments. If we substitute a different index of the CPI you may cancel the Rider per the terms of the termination provisions of Rider and may be subject to an Unscheduled Payment charge. See Termination and Unscheduled Payments. Rider Year and Rider Date. The Rider Date is the effective date of the Rider. The Rider Date anniversary is the same calendar day as the Rider Date each calendar year. A Rider Year is each 12-month period starting with the Rider Date and starting each Rider Date anniversary after that. Scheduled Payment and Guaranteed Minimum Scheduled Payment. Scheduled Payments are annuity payouts for the life of the annuitant (and secondary life if applicable).You choose when payments will begin and whether the Scheduled Payment is paid monthly, quarterly, semi-annually or annually. Once the Scheduled Payment frequency is established it cannot be changed. The frequency of the Scheduled Payments will affect the dollar amount of each Scheduled Payment. For example, a more frequent payment schedule will reduce the dollar amount of each Scheduled Payment. The first payment must be at least 30 days after the Rider Date and before the first Rider Date anniversary. The Scheduled Payment will be adjusted either up or down on an annual basis depending on the percentage change of the CPI. Scheduled Payments are also adjusted for Unscheduled Payments, any related Unscheduled Payment charge and any deduction for premium taxes. If adjustments to the Scheduled Payment cause it to be less than the Guaranteed Minimum Scheduled Payment, as adjusted, you will receive the Guaranteed Minimum Scheduled Payment, as adjusted, unless Unscheduled Payments have reduced the Reserved Value to zero, in which case the Rider will terminate. Lincoln SmartIncomeSM Inflation also provides a Guaranteed Minimum Scheduled Payment which is initially equal to the first Scheduled Payment. The Guaranteed Minimum Scheduled Payment may be adjusted for Unscheduled Payments, any related Unscheduled Payment charge and any deductions for premium taxes, but is not adjusted for changes in the CPI. (See further discussion and example of reductions to the Scheduled Payment and Guaranteed Minimum Scheduled Payment for Unscheduled Payment in the Unscheduled Payment section below.) The initial Scheduled Payment is calculated by multiplying the contract value allocated to Lincoln SmartIncomeSM Inflation, reduced for any premium tax, by an income factor. The income factor is based upon: o the age and sex of the annuitant and secondary life; o the frequency of the Scheduled Payments; o the Scheduled Payments start date. For a given contractowner with the same characteristics (sex, age, frequency of annuity payouts and annuity payout start date) the income factor for a fixed lifetime annuity payout option would be higher than the income factor for Lincoln SmartIncomeSM Inflation. You may request an illustration of annuity values prior to purchasing Lincoln SmartIncomeSM Inflation which will illustrate the Scheduled Payment and Guaranteed Minimum Scheduled Payment you may expect. Reserve Value. The Reserve Value is a value we establish to determine the amount available for Unscheduled Payments and the death benefit, if any. The initial Reserve Value on the Rider Date is equal to the amount of the contract value used to purchase Lincoln SmartIncomeSM Inflation, less any outstanding premium taxes that have not previously been deducted. Each January 1, the Reserve Value will be adjusted either up or down by the percentage change in the CPI during the preceding calendar year, as described below. The Reserve Value is decreased dollar for dollar by any Scheduled or Unscheduled Payments and related Unscheduled Payment charges or any premium taxes. There is no minimum floor to the Reserve Value. If the Reserve Value falls to zero because of Scheduled Payments and/or negative CPI Adjustments (and not due to the deduction of Unscheduled Payments and related Unscheduled Payment charges and taxes) there will be no more annual adjustments to the Reserve Value and there will be no more Unscheduled Payments or death benefit. However, the Scheduled Payments will continue for the life of the annuitant and secondary life, if applicable. If the deduction of an Unscheduled Payment and related Unscheduled Payment charge reduces the Reserve Value to zero the Lincoln SmartIncomeSM Inflation will terminate. 59 Adjustment of the Scheduled Payment and Reserve Value. Each January 1st (Adjustment Date) the Scheduled Payment and Reserve Value may be adjusted up or down by the same percentage, which will be the percentage change in the CPI during the preceding calendar year. The CPI is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for all Urban Consumers and is published monthly by the United States Department of Labor, Bureau of Labor Statistics (BLS). The CPI measures over time the average price change paid by urban consumers for consumer goods and services. The CPI is published as a number (CPI Value).You may obtain information regarding the CPI from BLS electronically (www.bls.gov/cpi), through subscriptions to publications, and via telephone and fax, through automated recordings. The adjustment to the Scheduled Payment and to the Reserve Value each Adjustment Date may be positive or negative, depending upon whether the CPI Value has risen or fallen in the preceding calendar year. A rise in the CPI Value will result in a positive adjustment. A fall in the CPI Value will result in a negative adjustment. The percentage change in the CPI is measured by the change in the CPI Value published each December immediately preceding the Adjustment Date compared to either the initial CPI Value (first adjustment) or the CPI Value published in December two calendar years preceding the Adjustment Date (all subsequent adjustments after the first). The CPI Value published in December is the CPI Value for the month of November. The first adjustment to the Scheduled Payment and Reserve Value will be made on the next Adjustment Date following the Rider Date. For the first adjustment the initial CPI Value will be the CPI Value published in the month preceding the Rider Date. The calculation of the first adjustment percentage will be equal to [(i)/(ii)] where: (i) is the CPI Value published in December of the calendar year immediately preceding the Adjustment Date (ii) is the initial CPI Value Following is an example of the calculation of the first adjustment percentage and the first adjustment to the Reserve Value using hypothetical CPI values: Initial Reserve Value on Rider Date 4/15/2009 $ 150,000 Initial Scheduled Payment on 4/15/2009 $ 8,000 Initial CPI Value published in March 2009 150 CPI Value published in December 2009 155 Adjustment percentage (155/150) 1.033333 Reserve Value After 1/1/2010 Adjustment ($150,000 x 1.033333) $ 155,000 Scheduled Payment After 1/1/2010 Adjustment ($8,000 x 1.033333) $8,266.67
Subsequent adjustments will be calculated on each subsequent Adjustment Date. Subsequent adjustments will be based upon the percentage change in the CPI Value published in December immediately preceding the Adjustment Date compared with the CPI Value published two calendar years prior to the Adjustment Date. Calculations of the adjustment percentage after calculation of the first adjustment percentage will be equal to [(i)/ (ii)] where: (i) is the CPI Value published in December of the calendar year immediately preceding the Adjustment Date (ii) is the CPI Value published in December two calendar years preceding the Adjustment Date. If adjustments to the Scheduled Payment cause it to be less than the Guaranteed Minimum Scheduled Payment you will receive the Guaranteed Minimum Scheduled Payment. While you are receiving the Guaranteed Minimum Scheduled Payment we will continue to adjust the Scheduled Payment by the percentage change of the CPI Value published each December immediately preceding the Adjustment Date compared to the CPI Value published two calendar years prior to the Adjustment Date. You will start to receive the Scheduled Payment again in the year that it is adjusted so that it is greater than the Guaranteed Minimum Scheduled Payment. The following example demonstrates the impact of a positive change in a hypothetical CPI Value resulting in a positive adjustment to the Scheduled Payment and Reserve Value: Annual Scheduled Payment for calendar year 2009 $ 5,000 Guaranteed Minimum Scheduled Payment for calendar year 2009 $ 4,800 Reserve Value 12/31/2009 $ 100,000 CPI Value published in December 2009 120 CPI Value published in December 2008 115 Adjustment percentage (120/115): 1.043782 Reserve Value after 1/1/2010 adjustment ($100,000 x 1.043782) $ 104,378 Annual Scheduled Payment for calendar year 2010 after 1/1/2010 adjustment ($5,000 x $5,217.39 1.043782)
Since the Scheduled Payment (after the adjustment) for 2010 of $5,217.39 is greater than the Guaranteed Scheduled Payment of $4,800, the payment you will receive in 2010 will equal the Scheduled Payment of $5,217.39. 60 The following example demonstrates the impact of a negative change in a hypothetical CPI Value resulting in a negative adjustment to the Scheduled Payment and Reserve Value: Annual Scheduled Payment for calendar year 2009 $ 5,000 Guaranteed Minimum Scheduled Payment for calendar year 2009 $ 4,800 Reserve Value 12/31/2009 $ 100,000 CPI Value published in December 2009 120 CPI Value published in December 2008 130 Adjustment percentage (120/130): 0.9230769 Reserve Value after 1/1/2010 adjustment ($100,000 x 0.9230769) $ 92,308 Annual Scheduled Payment for calendar year 2010 after 1/1/2010 adjustment ($5,000 x $ 4,615.38 0.9230769)
Since the Scheduled Payment (after adjustment) for 2010 of $4,615.38 is less than the Guaranteed Minimum Scheduled Payment of $4,800, the payment you will receive in 2010 will equal the Guaranteed Minimum Scheduled Payment of $4,800. Continuing this example for the next year's adjustment: Annual Scheduled Payment for calendar year 2010 $ 4,800 Guaranteed Minimum Scheduled Payment for calendar year 2010 $ 4,800 Reserve Value 12/31/2010 ($92,308 - $4,800) $ 87,508 CPI Value published in December 2010 140 CPI Value published in December 2009 120 Adjustment percentage (140/120): 1.16666 Reserve Value after 1/1/2011 adjustment ($87,508 x 1.166666) $ 102,093 Annual Scheduled Payment for calendar year 2011 after 1/1/2011 adjustment ($4,615.38 $5,384.61 x 1.166666)
The adjustment is applied to the previously calculated Scheduled Payment ($4,615.38) and not the Guaranteed Minimum Scheduled Payment $4,800. Since the adjusted Scheduled Payment is greater than the Guaranteed Minimum Guaranteed Payment, the Scheduled Payment will be paid out in calendar year 2011. Unscheduled Payments. You may take withdrawals in addition to your Scheduled Payments (Unscheduled Payments) up to the amount of the Reserve Value less any related Unscheduled Payment charges and any deduction for any premium taxes. Unscheduled Payments and any related Unscheduled Payment charges or premium taxes will reduce the Reserve Value on a dollar for dollar basis. Unscheduled Payments will reduce the Scheduled Payments and Guaranteed Minimum Scheduled Payment in the same proportion the Unscheduled Payment reduces the Reserve Value (including Unscheduled Payment charges and taxes). Because the Reserve Value is reduced over time (due to Scheduled Payments, Unscheduled Payments and related Unscheduled Payment charges and any premium taxes) an Unscheduled Payment taken in the later years of the Rider when the Reserve Value is smaller may result in a larger proportional reduction to the Scheduled Payment and Guaranteed Minimum Scheduled Payment than if the same Unscheduled Payment was taken in the early years of the Rider when the Reserve Value was larger and may also result in a proportional reduction of the Scheduled Payment and Guaranteed Minimum Scheduled Payment that is more than the Unscheduled Payment amount taken. If the Reserve Value falls to zero because of Scheduled Payments and/or negative CPI Adjustments (other than due to the deduction of Unscheduled Payments and related Unscheduled Payment charges and taxes) there will be no more annual adjustments to the Reserve Value and there will be no more Unscheduled Payments or death benefit. However, the Scheduled Payments will continue for the life of the annuitant and secondary life, if applicable. If the deduction of an Unscheduled Payment and related Unscheduled Payment charge reduces the Reserve Value to zero the Lincoln SmartIncomeSM Inflation will terminate. The following example shows how an Unscheduled Payment of $2,000 taken in the early years of the Rider results in a $300 proportional reduction of the Guaranteed Minimum Scheduled Payment. The example assumes that no other Unscheduled Payments have been taken. Reserve Value 1/1/2010 $100,000 Guaranteed Minimum Scheduled Payment 1/1/2010 $ 15,000 Unscheduled Payment 1/2/2010 $ 2,000 Proportional reduction percentage ($2,000/$100,000) .02 Proportional reduction to the Guaranteed Minimum Scheduled Payment (.02 x $15,000) $ 300 New Guaranteed Minimum Scheduled Payment $ 14,700
The example next shows how the same $2,000 Unscheduled Payment taken in the later years of the Rider results in a $3,000 proportional reduction of the Guaranteed Minimum Scheduled Payment which is more than the actual Unscheduled Payment amount. 61 Reserve Value 1/1/2010 $10,000 Guaranteed Minimum Scheduled Payment $15,000 Unscheduled Payment 1/2/2010 $ 2,000 Proportional reduction percentage ($2,000/$10,000) .20 Proportional reduction to the Guaranteed Minimum Scheduled Payment (.20 x $15,000) $ 3,000 New Guaranteed Minimum Scheduled Payment ($15,000 - $3,000) $12,000
Please note that any Unscheduled Payments may significantly reduce your future Scheduled Payments, Guaranteed Minimum Scheduled Payment, as well as your Reserve Value, so carefully consider this before deciding to take an Unscheduled Payment. If the Unscheduled Payment is taken during the first seven Rider Years an Unscheduled Payment charge is assessed on the amount of the Unscheduled Payment that exceeds the 10% free amount per Rider Year. Unscheduled Payments of up to 10% of the then current Reserve Value may be taken each Rider Year without charge, as long as the then current Reserve Value is greater than zero. The Unscheduled Payment charge is assessed against Unscheduled Payments in excess of 10% of the then current Reserve Value in a Rider Year. Unscheduled Payments that do not exceed on a cumulative basis more than 10% of the then current Reserve Value each year are not subject to an Unscheduled Payment charge. If an Unscheduled Payment is subject to an Unscheduled Payment charge the charge will be deducted from the Unscheduled Payment so that you will receive less than the amount requested. If the annuitant or secondary life is diagnosed with a terminal illness or confined to an extended care facility after the first Rider Year, then no Unscheduled Payment charges are assessed on any Unscheduled Payment. The Unscheduled Payment charge is also waived upon payment of a death benefit as described below. See Charges and Other Deductions - Charges for Lincoln SmartIncomeSM Inflation for a schedule of Unscheduled Payment charges. The following example demonstrates the Unscheduled Payment charge for an Unscheduled Payment taken in the third Rider Year and the impact to Scheduled Payments and the Guaranteed Minimum Scheduled Payment: Guaranteed Minimum Scheduled Payment for calendar year 2010 $ 4,800 Annual Scheduled Payment for calendar year 2010 paid 1/1/2010 $ 5,000 Reserve Value 1/1/2010 before Scheduled Payment $ 515,000 Reserve Value 1/2/2010 after Scheduled Payment ($515,000 - $5,000) $ 510,000 Unscheduled Payment charge percent 7% Then current Reserve Value before Unscheduled Payment on 1/15/2010 $ 510,000 Free amount on 1/15/2010 (10% x $510,000) $ 51,000 Unscheduled Payment 1/15/2010 $ 10,000 [since Unscheduled Payment is within the 10% free amount ($10,000 < = $51,000) there is no Unscheduled Payment charge] Reserve Value 1/15/2010 after Unscheduled Payment ($510,000 - $10,000) $ 500,000 Proportional reduction percentage due to Unscheduled Payment ($10,000/$510,000) 1.96078% Scheduled Payment after proportional reduction for Unscheduled Payment [$5,000 - $ 4,902 ($5,000 x .0196078)] Guaranteed Scheduled Payment after proportional reduction [$4,800 -($4,800 x $ 4,706 .0196078)] Then current Reserve Value 2/1/2010 before second Unscheduled Payment $ 500,000 2nd Unscheduled Payment 2/1/2010 $ 75,000 Free amount on 2/1/2010 (10% x $500,000) $ 50,000 Remaining free amount ($50,000 - $10,000 prior Unscheduled Payment) $ 40,000 Unscheduled Payment charge [($75,000 - $40,000) x .07] $ 2,450 Unscheduled Payment paid (minus Unscheduled Payment charge ($75,000 - $2,450) $ 72,550 Proportional reduction percentage due to Unscheduled Payment ($75,000/$500,000) 15% Scheduled Payment after proportional reduction for Unscheduled Payment [$5,000 - $ 4,250 ($5,000 x .15)] Guaranteed Minimum Scheduled Payment after proportional reduction for Unscheduled $ 4,000 Payment [$4,800 - ($4,800 x .15)] Reserve Value after 2/2/2010 Unscheduled Payment and Unscheduled Payment charge $ 425,000 ($500,000 - $75,000)
If the deduction for an Unscheduled Payment, including any related Unscheduled Payment charge and premium taxes, reduces the Reserve Value to zero, Lincoln SmartIncomeSM Inflation will terminate. Death of Contractowner, Annuitant or Secondary Life. On or after the annuity commencement date, upon the death of the contractowner, annuitant or the secondary life a death benefit will be paid if there is a Reserve Value. The death benefit will be determined as of the date due proof of death is received by us. See Annuity Options - General Information. 62 The death benefit paid under Lincoln SmartIncomeSM Inflation will be the greater of: a. the current Reserve Value as of the date due proof of death is received by us; or b. the initial Reserve Value, less all Scheduled and Unscheduled Payments, less any Unscheduled Payment charges. Following is an example of the calculation of a death benefit upon the death of the contractowner demonstrating the impact of a negative hypothetical CPI factor: 7/15/2009 Initial Reserve Value $100,000 1/10/2010 Reserve Value is adjusted due to negative CPI Value of -.10 $ 90,000 ($100,000 x .10 = $10,000 Adjustment) ($100,000 - $10,000 = $90,000 Reserve Value) 2/1/2010 Scheduled Payment of $45,000 reduces the Reserve Value $ 45,000 Reserve Value is reduced by the amount of the Scheduled Payment ($90,000 - $45,000 = $45,000) 8/6/2010 Death of a contractowner Death benefit is greater of a) current Reserve Value ($45,000);or b) initial Reserve Value minus Scheduled Payment ($100,000 - $45,000 = $55,000) 8/5/2010 Death benefit paid $ 55,000
If any contractowner (who is not the annuitant) dies while Lincoln SmartIncomeSM Inflation is in force, the holder of the rights of ownership (i.e. the beneficiary or successor owner) pursuant to the terms of the underlying contract may: 1. Terminate the contract and receive the death benefit, if any, in a lump-sum; or 2. Continue the contract in force and receive Scheduled Payments and Unscheduled Payments less any Unscheduled Payment charge until the later of (i) the Reserve Value being reduced to zero, or (ii) the death(s) of the annuitant and any secondary life. If the annuitant dies (whether or not the annuitant is an owner) while Lincoln SmartIncomeSM Inflation is in force, the holder of the rights of ownership pursuant to the terms of the underlying contract may: 1. Terminate the contract and receive the death benefit, if any, in a lump-sum; or 2. Continue the contract in force and receive Scheduled Payments and Unscheduled Payments less any Unscheduled Payment charge until the later of (i) the Reserve Value being reduced to zero (this may result in a reduced final Scheduled Payment where the Reserve Value is less than the Scheduled Payment to reduce the Reserve Value to zero), or (ii) the death of any secondary life. If the secondary life (who is not an owner) dies while Lincoln SmartIncomeSM Inflation is in force the holder of the rights of ownership pursuant to the terms of the underlying contract, may: 1. Terminate the contract and receive the death benefit, if any in a lump-sum; or 2. Continue the contract in force and receive Scheduled Payments and Unscheduled Payments, less Unscheduled Payment charge until the later of (i) the Reserve Value being reduced to zero (this may result in a reduced final Scheduled Payment where the Reserve Value is less than the Scheduled Payment to reduce the Reserve Value to zero), or (ii) the death of the annuitant. Once you elect Lincoln SmartIncomeSM Inflation, any prior death benefit elections will terminate (other than any death benefit in effect under i4LIFE (Reg. TM) Advantage) and the Lincoln SmartIncomeSM Inflation death benefit will be in effect. If you have elected i4LIFE (Reg. TM) Advantage, the i4LIFE (Reg. TM) Advantage death benefit will be in effect only on the portion of the contract value invested in i4LIFE (Reg. TM) Advantage. If we were not notified of a death and we continue to make Scheduled or Unscheduled Payments after the date that Lincoln SmartIncomeSM Inflation should have been terminated, any such payments made are recoverable by us. The contractowner(s) or the holder of the rights of ownership will be liable to the Company for the amount of such payments made. Termination. You may terminate the Lincoln SmartIncomeSM Inflation by taking an Unscheduled Payment that results in the Reserve Value being reduced to zero due to the deduction of the Unscheduled Payment and any related Unscheduled Payment charge and any premium taxes. Upon termination of the Rider due to the deduction of an Unscheduled Payment, and any related Unscheduled Payment charge and any premium taxes, there will be no further Scheduled Payments made or received under the Rider. If the Reserve Value is reduced to zero and the sum of the Scheduled and Unscheduled Payments made, plus all Unscheduled Payment charges incurred, is less than the initial Reserve Value, we will pay the holder of the rights of ownership, the difference. The payment of the difference between the initial Reserve Value and the sum of all Scheduled and Unscheduled Payments made, plus charges incurred may occur under circumstances where changes in the CPI have been negative, thus resulting in a lowered Reserve Value. 63 The following example shows how negative changes to the CPI result in a payment of the difference between the initial Reserve Value and the sum of all Scheduled and Unscheduled Payments made plus incurred charges: 7/15/2009 Initial Reserve Value $100,000 1/10/2010 Reserve Value is adjusted due to negative CPI Value of -.10 $ 90,000 ($100,000 x .10 = $10,000 Adjustment) ($100,000 - $10,000 = $90,000 Reserve Value) 2/1/2010 Scheduled Payment of $45,000 reduces the Reserve Value $ 45,000 Reserve Value is reduced by the amount of the Scheduled Payment ($90,000 - $45,000 = $45,000) 8/6/2010 Unscheduled Payment $ 45,000 Reserve Value $ 0 Reserve Value is reduced to zero which results in termination of the rider Initial Reserve Value is greater than payments received [$100,000 > ($45,000 + $45,000) = $90,000] Final payment made to holder of rights of ownership $ 10,000
General Information Any previously selected death benefit in effect before the annuity commencement date will no longer be available on and after the annuity commencement date. You may change the annuity commencement date, change the annuity option or change the allocation of the investment among subaccounts up to 30 days before the scheduled annuity commencement date, upon written notice to the Home Office. You must give us at least 30 days notice before the date on which you want payouts to begin. Unless you select another option, the contract automatically provides for a life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable or combination fixed and variable basis, in proportion to the account allocations at the time of annuitization) except when a joint life payout is required by law. Under any option providing for guaranteed period payouts, the number of payouts which remain unpaid at the date of the annuitant's death (or surviving annuitant's death in case of joint life annuity) will be paid to you or your beneficiary as payouts become due after we are in receipt of: o proof, satisfactory to us, of the death; o written authorization for payment; and o all claim forms, fully completed. Variable Annuity Payouts Variable annuity payouts will be determined using: o The contract value on the annuity commencement date, less applicable premium taxes; o The annuity tables contained in the contract; o The annuity option selected; and o The investment performance of the fund(s) selected. To determine the amount of payouts, we make this calculation: 1. Determine the dollar amount of the first periodic payout; then 2. Credit the contract with a fixed number of annuity units equal to the first periodic payout divided by the annuity unit value; and 3. Calculate the value of the annuity units each period thereafter. Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as applied to the applicable mortality table. Some of these assumed interest rates may not be available in your state; therefore, please check with your investment representative. You may choose your assumed interest rate at the time you elect a variable annuity payout on the administrative form provided by us. The higher the assumed interest rate you choose, the higher your initial annuity payment will be. The amount of each payout after the initial payout will depend upon how the underlying fund(s) perform, relative to the assumed rate. If the actual net investment rate (annualized) exceeds the assumed rate, the payment will increase at a rate proportional to the amount of such excess. Conversely, if the actual rate is less than the assumed rate, annuity payments will decrease. The higher the assumed interest rate, the less likely future annuity payments are to increase, or the payments will increase more slowly than if a lower assumed rate was used. There is a more complete explanation of this calculation in the SAI. 64 Fixed Side of the Contract Purchase payments allocated to the fixed side of the contract become part of our general account, and do not participate in the investment experience of the VAA. The general account is subject to regulation and supervision by the Indiana Department of Insurance as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed. In reliance on certain exemptions, exclusions and rules, we have not registered interests in the general account as a security under the Securities Act of 1933 and have not registered the general account as an investment company under the 1940 Act. Accordingly, neither the general account nor any interests in it are regulated under the 1933 Act or the 1940 Act. We have been advised that the staff of the SEC has not made a review of the disclosures which are included in this prospectus which relate to our general account and to the fixed account under the contract. These disclosures, however, may be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. We guarantee an effective interest rate of not less than 1.50% per year on amounts held in a fixed account. Any amount surrendered, withdrawn from or transferred out of a fixed account prior to the expiration of the guaranteed period is subject to the interest adjustment (see Interest Adjustment and Charges and Other Deductions). This may reduce your value upon surrender, withdrawal or transfer, but will not reduce the amount below the value it would have had if 1.50% (or the guaranteed minimum interest rate for your contract) interest had been credited to the fixed subaccount. Refer to Transfers before the Annuity Commencement Date and Transfers after the Annuity Commencement Date for additional transfer restrictions from the fixed account. ANY INTEREST IN EXCESS OF 1.50% (OR THE GUARANTEED MINIMUM INTEREST RATE STATED IN YOUR CONTRACT) WILL BE DECLARED IN ADVANCE AT OUR SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF THE MINIMUM INTEREST RATE WILL BE DECLARED. Your contract may not offer a fixed account or if permitted by your contract, and upon 30 days notice, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. Guaranteed Periods The portion of the fixed account which accepts allocations for a guaranteed period at a guaranteed interest rate is called a fixed subaccount. There is a fixed subaccount for each particular guaranteed period. You may allocate purchase payments to one or more fixed subaccounts with guaranteed periods of 1 to 10 years. We may add guaranteed periods or discontinue accepting purchase payments into one or more guaranteed periods at any time. The minimum amount of any purchase payment that can be allocated to a fixed subaccount is $2,000. Each purchase payment allocated to a fixed subaccount will start its own guaranteed period and will earn a guaranteed interest rate. The duration of the guaranteed period affects the guaranteed interest rate of the fixed subaccount. A fixed subaccount guarantee period ends on the date after the number of calendar years in the fixed subaccount's guaranteed period. Interest will be credited daily at a guaranteed rate that is equal to the effective annual rate determined on the first day of the fixed subaccount guaranteed period. Amounts surrendered, transferred or withdrawn from a fixed subaccount prior to the end of the guaranteed period will be subject to the interest adjustment. Each guaranteed period purchase payment will be treated separately for purposes of determining any applicable interest adjustment. Any amount withdrawn from a fixed subaccount may be subject to any applicable surrender charges, account fees and premium taxes. We will notify the contractowner in writing at least 30 days prior to the expiration date for any guaranteed period amount. A new fixed subaccount guaranteed period of the same duration as the previous fixed subaccount guaranteed period will begin automatically at the end of the previous guaranteed period, unless we receive, prior to the end of a guaranteed period, a written election by the contractowner. The written election may request the transfer of the guaranteed period amount to a different fixed subaccount or to a variable subaccount from among those being offered by us. Transfers of any guaranteed period amount which become effective upon the date of expiration of the applicable guaranteed period are not subject to the limitation of twelve transfers per contract year or the additional fixed account transfer restrictions. Interest Adjustment Any surrender, withdrawal or transfer of a fixed subaccount guaranteed period amount before the end of the guaranteed period (other than dollar cost averaging, or regular income payments under i4LIFE (Reg. TM) Advantage) will be subject to the interest adjustment. A surrender, withdrawal or transfer effective upon the expiration date of the guaranteed period will not be subject to the interest adjustment. The interest adjustment will be applied to the amount being surrendered, withdrawn or transferred. The interest adjustment will be applied after the deduction of any applicable account fees and before any applicable transfer charges. Any transfer, withdrawal, or surrender of contract value from a fixed subaccount will be increased or decreased by an interest adjustment, unless the transfer, withdrawal or surrender is effective: o during the free look period (See Return Privilege). o on the expiration date of a guaranteed period. 65 o as a result of the death of the contractowner or annuitant. o subsequent to the diagnosis of a terminal illness of the contractowner. Diagnosis of the terminal illness must be after the contract date and result in a life expectancy of less than one year, as determined by a qualified professional medical practitioner. o subsequent to the admittance of the contractowner into an accredited nursing home or equivalent health care facility. Admittance into such facility must be after the contract date and continue for 90 consecutive days prior to the surrender or withdrawal. o subsequent to the permanent and total disability of the contractowner if such disability begins after the contract date and prior to the 65th birthday of the contractowner. o upon annuitization of the contract. These provisions may not be applicable to your contract or available in your state. Please check with your investment representative regarding the availability of these provisions. In general, the interest adjustment reflects the relationship between the yield rate in effect at the time a purchase payment is allocated to a fixed subaccount's guaranteed period under the contract and the yield rate in effect at the time of the purchase payment's surrender, withdrawal or transfer. It also reflects the time remaining in the fixed subaccount's guaranteed period. If the yield rate at the time of the surrender, withdrawal or transfer is lower than the yield rate at the time the purchase payment was allocated, then the application of the interest adjustment will generally result in a higher payment at the time of the surrender, withdrawal or transfer. Similarly, if the yield rate at the time of surrender, withdrawal or transfer is higher than the yield rate at the time of the allocation of the purchase payment, then the application of the interest adjustment will generally result in a lower payment at the time of the surrender, withdrawal or transfer. The yield rate is published by the Federal Reserve Board. The interest adjustment is calculated by multiplying the transaction amount by: (1+A)n -1 ------------- (1+B +K )n
where: A = yield rate for a U.S. Treasury security with time to maturity equal to the subaccount's guaranteed period, determined at the beginning of the guaranteed period. B = yield rate for a U.S. Treasury security with time to maturity equal to the time remaining in the subaccount's guaranteed period if greater than one year, determined at the time of surrender, withdrawal or transfer. For remaining periods of one year or less, the yield rate for a one year U.S. Treasury security is used. K = a 0.25% adjustment (unless otherwise limited by applicable state law). This adjustment builds into the formula a factor representing direct and indirect costs to us associated with liquidating general account assets in order to satisfy surrender requests. This adjustment of 0.25% has been added to the denominator of the formula because it is anticipated that a substantial portion of applicable general account portfolio assets will be in relatively illiquid securities. Thus, in addition to direct transaction costs, if such securities must be sold (e.g., because of surrenders), the market price may be lower. Accordingly, even if interest rates decline, there will not be a positive adjustment until this factor is overcome, and then any adjustment will be lower than otherwise, to compensate for this factor. Similarly, if interest rates rise, any negative adjustment will be greater than otherwise, to compensate for this factor. If interest rates stay the same, there will be no interest adjustment. n = The number of years remaining in the guaranteed period (e.g., 1 year and 73 days = 1 + (73 divided by 365) = 1.2 years) Straight-Line interpolation is used for periods to maturity not quoted. See the SAI for examples of the application of the interest adjustment. Small Contract Surrenders We may surrender your contract, in accordance with the laws of your state if: o your contract value drops below certain state specified minimum amounts ($1,000 or less) for any reason, including if your contract value decreases due to the performance of the subaccounts you selected; o no purchase payments have been received for two (2) full, consecutive contract years; and o the paid up annuity benefit at maturity would be less than $20.00 per month (these requirements may differ in some states). At least 60 days before we surrender your contract, we will send you a letter at your last address we have on file, to inform you that your contract will be surrendered. You will have the opportunity to make additional purchase payments to bring your contract value above the minimum level to avoid surrender. If we surrender your contract, we will not assess any surrender charge. We will not surrender your contract if you are receiving guaranteed payments from us under one of the Living Benefit riders. 66 Delay of Payments Contract proceeds from the VAA will be paid within seven days, except: o when the NYSE is closed (other than weekends and holidays); o times when market trading is restricted or the SEC declares an emergency, and we cannot value units or the funds cannot redeem shares; or o when the SEC so orders to protect contractowners. If, pursuant to SEC rules, an underlying money market fund suspends payment of redemption proceeds in connection with a liquidation of the fund, we will delay payment of any transfer, partial withdrawal, surrender, loan, or death benefit from the money market sub-account until the fund is liquidated. Payment of contract proceeds from the fixed account may be delayed for up to six months. Due to federal laws designed to counter terrorism and prevent money laundering by criminals, we may be required to reject a purchase payment and/or deny payment of a request for transfers, withdrawals, surrenders, or death benefits, until instructions are received from the appropriate regulator. We also may be required to provide additional information about a contractowner's account to government regulators. Reinvestment Privilege You may elect to make a reinvestment purchase with any part of the proceeds of a surrender/withdrawal. This election must be made by your written authorization to us on an approved Lincoln reinvestment form and received in our Home Office within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this prospectus. In the case of a qualified retirement plan, a representation must be made that the proceeds being used to make the purchase have retained their tax-favored status under an arrangement for which the contracts offered by this prospectus are designed. The number of accumulation units which will be credited when the proceeds are reinvested will be based on the value of the accumulation unit(s) on the next valuation date. This computation will occur following receipt of the proceeds and request for reinvestment at the 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 (and a Form 1099 may be issued, if applicable). You should consult a tax adviser before you request a surrender/withdrawal or subsequent reinvestment purchase. Amendment of Contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Any changes are subject to prior approval of your state's insurance department (if required). Distribution of the Contracts Lincoln Financial Distributors, Inc. ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln Life and is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a member of FINRA. The Principal Underwriter has entered into selling agreements with Lincoln Financial Advisors Corporation and/or Lincoln Financial Securities Corporation (collectively "LFN"), also affiliates of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us ("Selling Firms"). While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. You may ask your registered representative how he/she will personally be compensated, in whole or in part, for the sale of the contract to you or for any alternative proposal that may have been presented to you. You may wish to take such compensation payments into account when considering and evaluating any recommendation made to you in connection with the purchase of a contract. The following paragraphs describe how payments are made by us and the Principal Underwriter to various parties. Compensation Paid to LFN. The maximum commission the Principal Underwriter pays to LFN is 4.00% of purchase payments. LFN may elect to receive a lower commission when a purchase payment is made along with an earlier quarterly payment based on contract value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to LFN is 4.00% of annuitized value and/or ongoing annual compensation of up to 0.40% of annuity value or statutory reserves. Lincoln Life also pays for the operating and other expenses of LFN, including the following sales expenses: sales representative training allowances; compensation and bonuses for LFN's management team; advertising expenses; and all other expenses of distributing the contracts. LFN pays its sales representatives a portion of the commissions received for their sales of contracts. LFN sales representatives and their managers are also eligible for various cash benefits, such as bonuses, insurance benefits and financing arrangements, and non-cash compensation items that we may provide jointly with LFN. Non-cash compensation items may include conferences, seminars, trips, entertainment, merchandise and other similar items. In addition, LFN sales representatives who meet certain productivity, persistency and length of service standards and/or their managers may be eligible for additional compensation. Sales of 67 the contracts may help LFN sales representatives and/or their managers qualify for such benefits. LFN sales representatives and their managers may receive other payments from us for services that do not directly involve the sale of the contracts, including payments made for the recruitment and training of personnel, production of promotional literature and similar services. Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays commissions to all Selling Firms. The maximum commission the Principal Underwriter pays to Selling Firms, other than LFN, is 4.00% of purchase payments. Some Selling Firms may elect to receive a lower commission when a purchase payment is made along with an earlier quarterly payment based on contract value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to Selling Firms is 3.00% of annuitized value and/or ongoing annual compensation of up to 0.40% of annuity value or statutory reserves. LFD also acts as wholesaler of the contracts and performs certain marketing and other functions in support of the distribution and servicing of the contracts. LFD may pay certain Selling Firms or their affiliates additional amounts for, among other things: (1) "preferred product" treatment of the contracts in their marketing programs, which may include marketing services and increased access to sales representatives; (2) sales promotions relating to the contracts; (3) costs associated with sales conferences and educational seminars for their sales representatives; (4) other sales expenses incurred by them; and (5) inclusion in the financial products the Selling Firm offers. Lincoln Life may provide loans to broker-dealers or their affiliates to help finance marketing and distribution of the contracts, and those loans may be forgiven if aggregate sales goals are met. In addition, we may provide staffing or other administrative support and services to broker-dealers who distribute the contracts. LFD, as wholesaler, may make bonus payments to certain Selling Firms based on aggregate sales of our variable insurance contracts (including the contracts) or persistency standards. These additional payments are not offered to all Selling Firms, and the terms of any particular agreement governing the payments may vary among Selling Firms. These additional types of compensation are not offered to all Selling Firms. The terms of any particular agreement governing compensation may vary among Selling Firms and the amounts may be significant. The prospect of receiving, or the receipt of, additional compensation may provide Selling Firms and/or their registered representatives with an incentive to favor sales of the contracts over other variable annuity contracts (or other investments) with respect to which a Selling Firm does not receive additional compensation, or lower levels of additional compensation. You may wish to take such payment arrangements into account when considering and evaluating any recommendation relating to the contracts. Additional information relating to compensation paid in 2010 is contained in the SAI. Compensation Paid to Other Parties. Depending on the particular selling arrangements, there may be others whom LFD compensates for the distribution activities. For example, LFD may compensate certain "wholesalers", who control access to certain selling offices, for access to those offices or for referrals, and that compensation may be separate from the compensation paid for sales of the contracts. LFD may compensate marketing organizations, associations, brokers or consultants which provide marketing assistance and other services to broker-dealers who distribute the contracts, and which may be affiliated with those broker-dealers. A marketing expense allowance is paid to American Funds Distributors (AFD) in consideration of the marketing assistance AFD provides to LFD. This allowance, which ranges from 0.10% to 0.16% is based on the amount of purchase payments initially allocated to the American Funds Insurance Series underlying the variable annuity. Commissions and other incentives or payments described above are not charged directly to contract owners or the Separate Account. All compensation is paid from our resources, which include fees and charges imposed on your contract. Contractowner Questions The obligations to purchasers under the contracts are those of Lincoln Life. This prospectus provides a general description of the material features of the contract. Contracts, endorsements and riders may vary as required by state law. Questions about your contract should be directed to us at 1-888-868-2583. Federal Tax Matters Introduction The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules to your individual situation. Nonqualified Annuities This part of the discussion describes some of the Federal income tax rules applicable to nonqualified annuities. A nonqualified annuity is a contract not issued in connection with a qualified retirement plan, such as an IRA or a section 403(b) plan, receiving special tax treatment under the tax code. We may not offer nonqualified annuities for all of our annuity products. 68 Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decedent; o Certain qualified contracts; o Contracts purchased by employers upon the termination of certain qualified plans; and o Certain contracts used in connection with structured settlement agreements. Investments In The VAA Must Be Diversified For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be "adequately diversified." IRS regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the contract purchase payments. Although we do not control the investments of the underlying investment options, we expect that the underlying investment options will comply with the IRS regulations so that the VAA will be considered "adequately diversified." Restrictions Federal income tax law limits your right to choose particular investments for the contract. Because the IRS has issued little guidance specifying those limits, the limits are uncertain and your right to allocate contract values among the subaccounts may exceed those limits. If so, you would be treated as the owner of the assets of the VAA and thus subject to current taxation on the income, bonus credits, persistency credits and gains, if applicable, from those assets. We do not know what limits may be set by the IRS in any guidance that it may issue and whether any such limits will apply to existing contracts. We reserve the right to modify the contract without your consent to try to prevent the tax law from considering you as the owner of the assets of the VAA. Loss Of Interest Deduction After June 8, 1997, if a contract is issued to a taxpayer that is not an individual, or if a contract is held for the benefit of an entity, the entity will lose a portion of its deduction for otherwise deductible interest expenses. Age At Which Annuity Payouts Begin Federal income tax rules do not expressly identify a particular age by which annuity payouts must begin. However, those rules do require that an annuity contract provide for amortization, through annuity payouts, of the contract's purchase payments, bonus credits, persistency credits and earnings. If annuity payouts under the contract begin or are scheduled to begin on a date past the annuitant's 85th birthday, it is possible that the tax law will not treat the contract as an annuity for Federal income tax purposes. In that event, you would be currently taxed on the excess of the contract value over the purchase payments of the contract. Tax Treatment Of Payments We make no guarantees regarding the tax treatment of any contract or of any transaction involving a contract. However, the rest of this discussion assumes that your contract will be treated as an annuity for Federal income tax purposes and that the tax law will not tax any increase in your contract value until there is a distribution from your contract. Taxation Of Withdrawals And Surrenders You will pay tax on withdrawals to the extent your contract value exceeds your purchase payments in the contract. This income (and all other income from your contract) is considered ordinary income (and does not receive capital gains treatment and is not qualified dividend income). A higher rate of tax is paid on ordinary income than on capital gains. You will pay tax on a surrender to the extent 69 the amount you receive exceeds your purchase payments. In certain circumstances, your purchase payments are reduced by amounts received from your contract that were not included in income. Surrender and reinstatement of your contract will generally be taxed as a withdrawal. If your contract has Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage 2.0, and if your Guaranteed Amount or Income Base immediately before a withdrawal exceeds your contract value, the tax law could require that an additional amount be included in income. Please consult your tax adviser. Taxation Of Annuity Payouts, Including Regular Income Payments The tax code imposes tax on a portion of each annuity payout (at ordinary income tax rates) and treats a portion as a nontaxable return of your purchase payments in the contract. We will notify you annually of the taxable amount of your annuity payout. Once you have recovered the total amount of the purchase payment in the contract, you will pay tax on the full amount of your annuity payouts. If annuity payouts end because of the annuitant's death and before the total amount in the contract has been distributed, the amount not received will generally be deductible. If withdrawals, other than regular income payments, are taken from i4LIFE (Reg. TM) Advantage during the Access Period, they are taxed subject to an exclusion ratio that is determined based on the amount of the payment. Taxation Of Death Benefits We may distribute amounts from your contract because of the death of a contractowner or an annuitant. The tax treatment of these amounts depends on whether you or the annuitant dies before or after the annuity commencement date. Death prior to the annuity commencement date: o If the beneficiary receives death benefits under an annuity payout option, they are taxed in the same manner as annuity payouts. o If the beneficiary does not receive death benefits under an annuity payout option, they are taxed in the same manner as a withdrawal. Death after the annuity commencement date: o If death benefits are received in accordance with the existing annuity payout option, they are excludible from income if they do not exceed the purchase payments not yet distributed from the contract. All annuity payouts in excess of the purchase payments not previously received are includible in income. o If death benefits are received in a lump sum, the tax law imposes tax on the amount of death benefits which exceeds the amount of purchase payments not previously received. Penalty Taxes Payable On Withdrawals, Surrenders, Or Annuity Payouts The tax code may impose a 10% penalty tax on any distribution from your contract which you must include in your gross income. The 10% penalty tax does not apply if one of several exceptions exists. These exceptions include withdrawals, surrenders, or annuity payouts that: o you receive on or after you reach 591/2, o you receive because you became disabled (as defined in the tax law), o you receive from an immediate annuity, o a beneficiary receives on or after your death, or o you receive as a series of substantially equal periodic payments based on your life or life expectancy (non-natural owners holding as agent for an individual do not qualify). Unearned Income Medicare Contribution Congress enacted the "Unearned Income Medicare Contribution" as a part of the Health Care and Education Reconciliation Act of 2010. This new tax, which affects individuals whose modified adjusted gross income exceeds certain thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned income," or (ii) the dollar amount by which the individual's modified adjusted gross income exceeds the applicable threshold. Unearned income includes the taxable portion of distributions that you take from your annuity contract. The tax is effected for tax years after December 31, 2012. Please consult your tax advisor to determine whether your annuity distributions are subject to this tax. Special Rules If You Own More Than One Annuity Contract In certain circumstances, you must combine some or all of the nonqualified annuity contracts you own in order to determine the amount of an annuity payout, a surrender, or a withdrawal that you must include in income. For example, if you purchase two or more deferred annuity contracts from the same life insurance company (or its affiliates) during any calendar year, the tax code treats all such contracts as one contract. Treating two or more contracts as one contract could affect the amount of a surrender, a withdrawal or an annuity payout that you must include in income and the amount that might be subject to the penalty tax described previously. 70 Loans and Assignments Except for certain qualified contracts, the tax code treats any amount received as a loan under your contract, and any assignment or pledge (or agreement to assign or pledge) of any portion of your contract value, as a withdrawal of such amount or portion. Gifting A Contract If you transfer ownership of your contract to a person other than to your spouse (or to your former spouse incident to divorce), and receive a payment less than your contract's value, you will pay tax on your contract value to the extent it exceeds your purchase payments not previously received. The new owner's purchase payments in the contract would then be increased to reflect the amount included in income. Charges for Additional Benefits Your contract automatically includes a basic death benefit and may include other optional riders. Certain enhancements to the basic death benefit may also be available to you. The cost of the basic death benefit and any additional benefit are deducted from your contract. It is possible that the tax law may treat all or a portion of the death benefit and other optional rider charges, if any, as a contract withdrawal. Qualified Retirement Plans We also designed the contracts for use in connection with certain types of retirement plans that receive favorable treatment under the tax code. Contracts issued to or in connection with a qualified retirement plan are called "qualified contracts." We issue contracts for use with various types of qualified plans. The Federal income tax rules applicable to those plans are complex and varied. As a result, this prospectus does not attempt to provide more than general information about the use of the contract with the various types of qualified plans. Persons planning to use the contract in connection with a qualified plan should obtain advice from a competent tax adviser. Types of Qualified Contracts and Terms of Contracts Qualified plans include the following: o Individual Retirement Accounts and Annuities ("Traditional IRAs") o Roth IRAs o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP") o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees) o 401(a) plans (qualified corporate employee pension and profit-sharing plans) o 403(a) plans (qualified annuity plans) o 403(b) plans (public school system and tax-exempt organization annuity plans) o H.R. 10 or Keogh Plans (self-employed individual plans) o 457(b) plans (deferred compensation plans for state and local governments and tax-exempt organizations) o Roth 403(b) plans We do not offer certain types of qualified plans for all of our annuity products. Check with your representative concerning qualified plan availability for this product. We will amend contracts to be used with a qualified plan as generally necessary to conform to the tax law requirements for the type of plan. However, the rights of a person to any qualified plan benefits may be subject to the plan's terms and conditions, regardless of the contract's terms and conditions. In addition, we are not bound by the terms and conditions of qualified plans to the extent such terms and conditions contradict the contract, unless we consent. Pursuant to new tax regulations, starting September 24, 2007, the contract is not available for purchase under a 403(b) plan and since July 31, 2008, we do not accept additional premiums or transfers to existing 403(b) contracts. Also, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that surrenders, loans or transfers you request comply with applicable tax requirements and to decline requests that are not in compliance. We will defer processing payments you request until all information required under the tax law has been received. By requesting a surrender, loan or transfer, you consent to the sharing of confidential information about you, your contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. 71 o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, as described below. o Loans are allowed under certain types of qualified plans, but Federal income tax rules prohibit loans under other types of qualified plans. For example, Federal income tax rules permit loans under some section 403(b) plans, but prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject to a variety of limitations, including restrictions as to the loan amount, the loan's duration, the rate of interest, and the manner of repayment. Your contract or plan may not permit loans. Tax Treatment of Payments The Federal income tax rules generally include distributions from a qualified contract in the participant's income as ordinary income. These taxable distributions will include purchase payments that were deductible or excludible from income. Thus, under many qualified contracts, the total amount received is included in income since a deduction or exclusion from income was taken for purchase payments. There are exceptions. For example, you do not include amounts received from a Roth IRA in income if certain conditions are satisfied. Required Minimum Distributions Under most qualified plans, you must begin receiving payments from the contract in certain minimum amounts by the later of age 701/2 or retirement. You are required to take distributions from your traditional IRAs beginning in the year you reach age 701/2. If you own a Roth IRA, you are not required to receive minimum distributions from your Roth IRA during your life. Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan. The IRS regulations applicable to required minimum distributions include a rule that may impact the distribution method you have chosen and the amount of your distributions. Under new regulations, the presence of an enhanced death benefit, or other benefit which could provide additional value to your contract, may require you to take additional distributions. An enhanced death benefit is any death benefit that has the potential to pay more than the contract value or a return of purchase payments. Annuity contracts inside Custodial or Trusteed IRAs will also be subject to these regulations. Please contact your tax adviser regarding any tax ramifications. Federal Penalty Taxes Payable on Distributions The tax code may impose a 10% penalty tax on a distribution from a qualified contract that must be included in income. The tax code does not impose the penalty tax if one of several exceptions applies. The exceptions vary depending on the type of qualified contract you purchase. For example, in the case of an IRA, exceptions provide that the penalty tax does not apply to a withdrawal, surrender, or annuity payout: o received on or after the annuitant reaches 591/2, o received on or after the annuitant's death or because of the annuitant's disability (as defined in the tax law), o received as a series of substantially equal periodic payments based on the annuitant's life (or life expectancy), or o received as reimbursement for certain amounts paid for medical care. These exceptions, as well as certain others not described here, generally apply to taxable distributions from other qualified plans. However, the specific requirements of the exception may vary. Unearned Income Medicare Contribution Congress enacted the "Unearned Income Medicare Contribution" as a part of the Health Care and Education Reconciliation Act of 2010. This new tax, which affects individuals whose modified adjusted gross income exceeds certain thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned income," or (ii) the dollar amount by which the individual's modified adjusted gross income exceeds the applicable threshold. Distributions that you take from your contract are not included in the calculation of unearned income because your contract is qualified plan contract. However, the amount of any such distribution is included in determining whether you exceed the modified adjusted gross income threshold. The tax is effective for tax years after December 31, 2012. Please consult your tax advisor to determine whether your annuity distributions are subject to this tax. Transfers and Direct Rollovers As a result of Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), you may be able to move funds between different types of qualified plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or transfer. You may be able to rollover or transfer amounts between qualified plans and traditional IRAs. These rules do not apply to Roth IRAs and 457(b) non-governmental tax-exempt plans. The Pension Protection Act of 2006 (PPA) permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distributions after 2007). There are special rules that apply to rollovers, direct rollovers and transfers (including rollovers or transfers of after-tax amounts). If the applicable rules are not followed, you may incur adverse Federal 72 income tax consequences, including paying taxes which you might not otherwise have had to pay. Before we send a rollover distribution, we will provide a notice explaining tax withholding requirements (see Federal Income Tax Withholding). We are not required to send you such notice for your IRA. You should always consult your tax adviser before you move or attempt to move any funds. Death Benefit and IRAs Pursuant to IRS regulations, IRAs may not invest in life insurance contracts. We do not believe that these regulations prohibit the death benefit from being provided under the contract when we issue the contract as a Traditional or Roth IRA. However, the law is unclear and it is possible that the presence of the death benefit under a contract issued as a Traditional or Roth IRA could result in increased taxes to you. Certain death benefit options may not be available for all of our products. Federal Income Tax Withholding We will withhold and remit to the IRS a part of the taxable portion of each distribution made under a contract unless you notify us prior to the distribution that tax is not to be withheld. In certain circumstances, Federal income tax rules may require us to withhold tax. At the time a withdrawal, surrender, or annuity payout is requested, we will give you an explanation of the withholding requirements. Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans. Our Tax Status Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes. Changes in the Law The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by applying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a "quorum"), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the same proportion as the voting instruction which we receive, it is important that each contractowner provide their voting instructions to us. Even though contractowners may choose not to provide voting instruction, the shares of a fund to which such contractowners would have been entitled to provide voting instruction will, subject to fair representation requirements, be voted by us in the same proportion as the voting instruction which we actually receive. As a result, the instruction of a small number of contractowners could determine the outcome of matters subject to shareholder vote. All shares voted by us will be counted when the underlying fund determines whether any requirement for a minimum number of shares be present at such a meeting to satisfy a quorum requirement has been met. Voting instructions to abstain on any item to be voted on will be applied on a pro-rata basis to reduce the number of votes eligible to be cast. 73 Whenever a shareholders meeting is called, we will provide or make available to each person having a voting interest in a subaccount proxy voting material, reports and other materials relating to the funds. Since the funds engage in shared funding, other persons or entities besides Lincoln Life may vote fund shares. See Investments of the Variable Annuity Account - Fund Shares. Return Privilege Within the free-look period after you receive the contract, you may cancel it for any reason by delivering or mailing it postage prepaid, to The Lincoln National Life Insurance Company at PO Box 2348, Fort Wayne, IN 46801-2348. A contract canceled under this provision will be void. Except as explained in the following paragraph, we will return the contract value as of the valuation date on which we receive the cancellation request, plus any premium taxes which had been deducted. No surrender charges or interest adjustment will apply. A purchaser who participates in the VAA is subject to the risk of a market loss on the contract value during the free-look period. 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 the greater of the purchase payment(s) or contract value as of the valuation date we receive the cancellation request, plus any premium taxes that had been deducted. IRA purchasers will also receive the greater of purchase payments or contract value as of the valuation date on which we receive the cancellation request. State Regulation As a life insurance company organized and operated under 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 Department of Insurance at all times. A full examination of our operations is conducted by that Department at least every five years. Records and Reports As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Home Office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Other Information You may elect to receive your prospectus, prospectus supplements, quarterly statements, and annual and semiannual reports electronically over the Internet, if you have an e-mail account and access to an Internet browser. Once you select eDelivery, via the Internet Service Center, all documents available in electronic format will no longer be sent to you in hard copy. You will receive an e-mail notification when the documents become available online. It is your responsibility to provide us with your current e-mail address. You can resume paper mailings at any time without cost, by updating your profile at the Internet Service Center, or contacting us. To learn more about this service, please log on to www.LincolnFinancial.com, select service centers and continue on through the Internet Service Center. Legal Proceedings In the ordinary course of its business, Lincoln Life, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of Lincoln Life, the financial position of the VAA, or the principal underwriter. 74 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Interest Adjustment Example Annuity Payouts Examples of Regular Income Payment Calculations Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below: Statement of Additional Information Request Card Lincoln ChoicePlusSM Rollover Lincoln Life Variable Annuity Account N . Please send me a free copy of the current Statement of Additional Information for Lincoln Life Variable Annuity Account N Lincoln ChoicePlusSM Rollover. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 2348, Fort Wayne, IN 46801-2348. 75 OVERVIEW OF LIVING BENEFIT RIDERS We offer a number of optional living benefit riders that, for an additional fee, offer certain guarantees, if certain conditions are met. These living benefit riders are described briefly below. Please see the more detailed description in the prospectus discussion for each rider, as well as the Charges and Other Deductions section of the prospectus, for important information on the costs, restrictions, and availability of each rider. Please consult your registered representative as to whether any living benefit rider is appropriate for you based on factors such as your investment objectives, risk tolerance, liquidity needs, and time horizon. Not all riders or features are available in all states or with your contract. Please consult your registered representative for the availability of any particular rider.
LINCOLN SMARTSECURITY(R) i4LIFE(R) ADVANTAGE ADVANTAGE 1-YR. LINCOLN LIFETIME GUARANTEED INCOME AUTOMATIC STEP-UP INCOME(SM) ADVANTAGE 2.0 i4LIFE(R) ADVANTAGE BENEFIT (VERSION 4) ------------------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to guarantee that Designed to guarantee that if Designed to provide an Designed to use the if you make your first you make your first withdrawal income program that Account Value* withdrawal on or after the on or after the date you reach combines variable established under date you reach age 65, you age 55 you are guaranteed lifetime income i4LIFE(R) Advantage (iF are guaranteed income for income for your life (and your payments and a death i4LIFE(R) Advantage your life (and your spouse's, under Joint Life benefit with the Guaranteed Income spouse's, under Joint Life version). Also includes ability to make Benefit is elected) or version), even after the age-based increases to the withdrawals during an the greater of the entire amount of purchase withdrawal amount. Access Period. Income Base or Account payments has been returned Value under LINCOLN to you through periodic LIFETIME INCOME(SM) withdrawals. If lifetime Advantage 2.0 (for prior withdrawals are not in purchasers of LINCOLN effect, you may make LIFETIME INCOME(SM) periodic withdrawals of Advantage 2.0) to the Guaranteed Amount. PROVIDE a minimum payout floor for i4LIFE(R) Advantage regular income payments, regardless of investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage. 2. Current Fee 0.65% (Single Life) or Single life option 1.05% of Varies based on 1) 0.65% added to the 0.80% (Joint Life) of Income Base product and death i4LIFE(R) Advantage Guaranteed Amount Joint life option 1.25% of benefit option charge (0.85% if joint Income Base (assessed as a % of life option is chosen) account value, and only during annuity 2) For Purchasers of payout phase) LINCOLN LIFETIME Income(SM) Advantage 2.0, 1.05% (single life option) or 1.25 (joint life option) which is the total charge for i4LIFE(R) Advantage with the Guaranteed Income Benefit initially (assessed as a % of the LINCOLN LIFETIME Income(SM) Advantage 2.0 Income Base or Account Value, if greater). This charge is in addition to the daily mortality and expense risk and administrative charge for your death benefit option on your base contract. 3. Guaranteed 1.50% of Guaranteed Amount 2.00% of Income Base Same as current fee 1) 2.00% added to the Maximum Fee i4LIFE(R) Advantage charge (assessed as a % of account value, and only during annuity payout phase) 2) 2.00% charge for i4LIFE(R) Advantage Guaranteed Income Benefit for Purchasers of LINCOLN LIFETIME INCOME(SM) Advantage 2.0. (assessed as a % of the LINCOLN LIFETIME Income(SM) Advantage 2.0 Income Base or Account Value, if greater). This charge is in addition to the daily mortality and expense risk and administrative charge for your death benefit option on your base contract.
4. Withdrawals Yes - 5% annually Yes - Age-based (4-5%) Yes, during Access Excess Withdrawals may Permitted Excess Withdrawals may annually Excess Withdrawals Period significantly reduce significantly reduce your may significantly reduce your your guaranteed payments. guaranteed payments. guaranteed payments. 5. Payments for Life Yes (if conditions are Yes (if conditions are met) Yes (if conditions are Yes (if conditions are met) met) met) 6. Potential Purchase Payments Purchase Payments 5% N/A Automatic Annual Step-Ups Increases to Automatic Annual Step-Ups Enhancements Automatic Annual (if conditions are met) Guaranteed (if conditions are met) Step-Ups (if conditions are Amount, Income met) Base, or Guaranteed Income Benefit (as applicable) 7. Investment Yes Yes None Yes Requirements 8. Ability to Make Yes, after the first rider Yes--may impact the charge Yes, for qualified No Additional anniversary, if cumulative (Cumulative purchase payments contracts, during the Purchase Payments payments are over $100,000 in excess of $100,000 require Access Period, unless if Contract and prior Home Office Home Office approval.) i4LIFE(R) Advantage Value is greater approval is provided Guaranteed Income than zero Benefit has been elected 9. Spousal Yes No No No Continuation 10. Ability to Cancel Yes, after 5 years Yes, after 5 Years Qualified contracts Yes, at any time if Rider following the later of may terminate the i4LIFE(R) Advantage rider effective date or rider prior to the end Guaranteed Income contractowner-elected of the Access Period. Benefit is elected step-up Nonqualified contracts may not terminate Yes, after 5 years the rider. following the rider effective date for LINCOLN LIFETIME Income(SM) Advantage 2.0 (if purchasers of LINCOLN LIFETIME Income(SM) Advantage 2.0 elect the Guaranteed Income Benefit) 11. Nursing Home No Yes No No Benefit (subject to state availability) 12. May Elect Other No No Limited to Guaranteed Limited to i4LIFE(R) Living Benefit Income Benefit Advantage Riders
Lincoln ChoicePlusSM Rollover Lincoln Life Variable Annuity Account N (Registrant) The Lincoln National Life Insurance Company (Depositor) Statement of Additional Information (SAI) This SAI should be read in conjunction with the Lincoln ChoicePlusSM Rollover prospectus of Lincoln Life Variable Annuity Account N dated May 11, 2011. You may obtain a copy of the Lincoln ChoicePlusSM Rollover prospectus on request and without charge. Please write Lincoln Life Customer Service, The Lincoln National Life Insurance Company, PO Box 2348, Fort Wayne, IN 46802, or call 1-888-868-2583. Table of Contents
Item Page Special Terms B-2 Services B-2 Principal Underwriter B-2 Purchase of Securities Being Offered B-2 Interest Adjustment Example B-2 Annuity Payouts B-4 Examples of Regular Income Payment Calculations B-5
Item Page Determination of Accumulation and Annuity Unit Value B-5 Capital Markets B-5 Advertising & Ratings B-6 More About the S&P 500 Index B-6 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is May 11, 2011. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm Ernst & Young LLP, independent registered public accounting firm, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania, 19103, has audited a) our financial statements of the VAA as of December 31, 2010; and b) our consolidated financial statements of The Lincoln National Life Insurance Company as of December 31, 2010, which are included in this SAI and Registration Statement. The aforementioned financial statements are included herein in reliance on Ernst & Young LLP's reports, given on their authority as experts in accounting and auditing. Keeper of Records All accounts, books, records and other documents which are required to be maintained for the VAA are maintained by us or by third parties responsible to Lincoln Life. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service. Principal Underwriter Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life, serves as principal underwriter (the "Principal Underwriter") for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives, who are associated with Lincoln Financial Advisors Corporation and/or Lincoln Financial Securities Corporation (collectively, "LFN"), our affiliates. The Principal Underwriter also may enter into selling agreements with other broker-dealers ("Selling Firms") for the sale of the contracts. Sales representatives of Selling Firms are appointed as our insurance agents. LFD, acting as Principal Underwriter, paid $220,940,772, $202,245,526 and $289,902,595 to LFA and Selling Firms in 2008, 2009 and 2010, respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts. Purchase of Securities Being Offered The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived. Both before and after the annuity commencement date, there are exchange privileges between subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts. The offering of the contracts is continuous. Interest Adjustment Example Note: This example is intended to show how the interest adjustment calculation impacts the surrender value of a representative contract. The surrender charges, annual account fee, adjustment factor, and guaranteed minimum interest rate values shown here are generally different from those that apply to specific contracts, particularly those contracts that deduct an initial sales load or pay a bonus on deposits. Calculations of the interest adjustment in your contract, if applicable, will be based on the factors applicable to your contract. The interest adjustment may be referred to as a market value adjustment in your contract. B-2 SAMPLE CALCULATIONS FOR MALE 35 ISSUE CASH SURRENDER VALUES Single Premium.................. $50,000 Premium taxes................... None Withdrawals..................... None Guaranteed Period............... 5 years Guaranteed Interest Rate........ 3.50% Annuity Date.................... Age 70 Index Rate A.................... 3.50% Index Rate B.................... 4.00% End of contract year 1 3.50% End of contract year 2 3.00% End of contract year 3 2.00% End of contract year 4 Percentage adjustment to B...... 0.50%
Interest Adjustment Formula (1 + Index A)n ------------------------------ -1 n = Remaining Guaranteed Period (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity 1 + Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment Formula Value Value (3) & (4) Charge Value --------------- --------- -------------------- ---------- --------- ------------ ----------- ---------- 1............ $51,710 0.962268 $49,759 $50,710 $50,710 $4,250 $46,460 2............ $53,480 0.985646 $52,712 $51,431 $52,712 $4,250 $48,462 3............ $55,312 1.000000 $55,312 $52,162 $55,312 $4,000 $51,312 4............ $57,208 1.009756 $57,766 $52,905 $57,766 $3,500 $54,266 5............ $59,170 N/A $59,170 $53,658 $59,170 $3,000 $56,170
ANNUITY VALUE CALCULATION
BOY* Annual EOY** Annuity Guaranteed Account Annuity Contract Year Value Interest Rate Fee Value ------------------ --------- --------------- --------- ---------- 1...............$50,000 x 1.035 - $40 = $51,710 2...............$51,710 x 1.035 - $40 = $53,480 3...............$53,480 x 1.035 - $40 = $55,312 4...............$55,312 x 1.035 - $40 = $57,208 5...............$57,208 x 1.035 - $40 = $59,170
SURRENDER CHARGE CALCULATION
Surrender Charge Surrender Contract Year Factor Deposit Charge ------------------ ---------- --------- ---------- 1............... 8.5% x $50,000 = $4,250 2............... 8.5% x $50,000 = $4,250 3............... 8.0% x $50,000 = $4,000 4............... 7.0% x $50,000 = $3,500 5............... 6.0% x $50,000 = $3,000
B-3 1 + INTEREST ADJUSTMENT FORMULA CALCULATION
Contract Year Index A Index B Adj Index B N Result ---------------- --------- --------- ------------- ----- --------- 1............. 3.50% 4.00% 4.50% 4 0.962268 2............. 3.50% 3.50% 4.00% 3 0.985646 3............. 3.50% 3.00% 3.50% 2 1.000000 4............. 3.50% 2.00% 2.50% 1 1.009756 5............. 3.50% N/A N/A N/A N/A
MINIMUM VALUE CALCULATION
Minimum Annual Guaranteed Account Minimum Contract Year Interest Rate Fee Value ------------------ --------------- --------- ---------- 1...............$50,000 x 1.015 - $40 = $50,710 2...............$50,710 x 1.015 - $40 = $51,431 3...............$51,431 x 1.015 - $40 = $52,162 4...............$52,162 x 1.015 - $40 = $52,905 5...............$52,905 x 1.015 - $40 = $53,658
* BOY = beginning of year ** EOY = end of year Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax; o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity Mortality Tables, modified, with an assumed investment return at the rate of 3%, 4%, 5% or 6% per annum, depending on the terms of your contract. The first annuity payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The assumed interest rate is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than the assumed interest rate, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. We may use sex-distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law. At an annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying B-4 the contractowner's fixed number of annuity units in each subaccount by the appropriate annuity unit value for the valuation date ending 14 days prior to the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immediately preceding valuation date by the product of: o The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and o A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days prior to the payment date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of Age, Sex and Survival We may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. Examples of Regular Income Payment Calculations These examples will illustrate the impact of the length of the access period and the impact of a withdrawal on the regular income payments. These examples assume that the investment return is the same as the assumed investment return (AIR) to make the regular income payment calculations simpler to understand. The regular income payments will vary based on the investment performance of the underlying funds. Annuitant............................ Male, Age 65 Secondary Life....................... Female, Age 63 Purchase Payment..................... $200,000.00 Regular Income Payment Frequency..... Annual AIR.................................. 4.0% Hypothetical Investment Return....... 4.0% 20-year Access Period 30-Year Access Period Regular Income Payment............... $ 10,600.94 $10,004.94
A 10% withdrawal from the account value will reduce the regular income payments by 10% to $9,540.85 with the 20-year access period and $9,004.45 with the 30-year access period. At the end of the 20-year access period, the remaining account value of $109,921.94 (assuming no withdrawals) will be used to continue the $10,600.94 regular income payment during the lifetime income period for the lives of the annuitant and secondary life. At the end of the 30-year access period, the remaining account value of $65,108.01 (assuming no withdrawals) will be used to continue the $10,004.94 regular income payment during the lifetime income period for the lives of the annuitant and secondary life. (Note: the regular income payments during the lifetime income period will vary with the investment performance of the underlying funds). Determination of Accumulation and Annuity Unit Value A description of the days on which accumulation and annuity units will be valued is given in the prospectus. The New York Stock Exchange's (NYSE) most recent announcement (which is subject to change) states that it will be closed on weekends and on these holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of these holidays occurs on a weekend day, the Exchange may also be closed on the business day occurring just before or just after the holiday. It may also be closed on other days. Since the portfolios of some of the fund and series will consist of securities primarily listed on foreign exchanges or otherwise traded outside the United States, those securities may be traded (and the net asset value of those fund and series and of the variable account could therefore be significantly affected) on days when the investor has no access to those funds and series. Capital Markets In any particular year, our capital may increase or decrease depending on a variety of factors - the amount of our statutory income or losses (which is sensitive to equity market and credit market conditions), the amount of additional capital we must hold to support business growth, changes in reserving requirements, our inability to secure capital market solutions to provide reserve relief, such as B-5 issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio and changes in interest rates. Advertising & Ratings We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln Life or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. All ratings are on outlook stable. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis or in accordance with other terms we make available, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts or in accordance with other terms we make available. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. The minimum amount to be dollar cost averaged is $1,500 ($2,000 for contracts purchased prior to November 15, 2010) over any period between six and 60 months. Once elected, the program will remain in effect until the earlier of: o the annuity commencement date; o the value of the amount being DCA'd is depleted; or o you cancel the program by written request or by telephone if we have your telephone authorization on file. We reserve the right to restrict access to this program at any time. A transfer made as part of this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges or interest adjustment which may apply to transfers. Upon receipt of an additional purchase payment allocated to the DCA fixed account, the existing program duration will be extended to reflect the end date of the new DCA program. B-6 However, the existing interest crediting rate will not be extended. The existing interest crediting rate will expire at its originally scheduled expiration date and the value remaining in the DCA account from the original amount as well as any additional purchase payments will be credited with interest at the standard DCA rate at the time. We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. Automatic Withdrawal Service (AWS) - AWS provides an automatic, periodic withdrawal of contract value to you. AWS may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. You may elect to participate in AWS at the time of application or at any time before the annuity commencement date by sending a written request to us. The minimum contract value required to establish AWS is $10,000. You may cancel or make changes to your AWS program at any time by sending a written request to us. If telephone authorization has been elected, certain changes may be made by telephone. Notwithstanding the requirements of the program, any withdrawal must be permitted under Section 401(a)(9) of the IRC for qualified plans or permitted under Section 72 of the IRC for non-qualified contracts. To the extent that withdrawals under AWS do not qualify for an exemption from the contingent deferred sales charge, we will assess any applicable surrender charges on those withdrawals. See Contingent deferred sales charges. Portfolio Rebalancing - Portfolio rebalancing is an option, which, if elected by the contractowner, restores to a pre-determined level the percentage of the contract value, allocated to each variable subaccount. This pre-determined level will be the allocation initially selected when the contract was purchased, unless subsequently changed. The portfolio rebalancing allocation may be changed at any time by submitting a written request to us. If portfolio rebalancing is elected, all purchase payments allocated to the variable subaccounts must be subject to portfolio rebalancing. Portfolio rebalancing may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. The contractowner may terminate the portfolio rebalancing program or re-enroll at any time by sending a written request to us. If telephone authorization has been elected, the contractowner may make these elections by phone. The portfolio rebalancing program is not available following the annuity commencement date. Other Information Due to differences in redemption rates, tax treatment or other considerations, the interests of contractowners under the variable life accounts could conflict with those of contractowners under the VAA. In those cases, where assets from variable life and variable annuity separate accounts are invested in the same fund(s) (i.e., where mixed funding occurs), the Boards of Directors of the fund involved will monitor for any material conflicts and determine what action, if any, should be taken. If it becomes necessary for any separate account to replace shares of any fund with another investment, that fund may have to liquidate securities on a disadvantageous basis. Refer to the prospectus for each fund for more information about mixed funding. Financial Statements The December 31, 2010 financial statements of the VAA and the December 31, 2010 consolidated financial statements of Lincoln Life appear on the following pages. B-7 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY S-1 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 S-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of The Lincoln National Life Insurance Company We have audited the accompanying consolidated balance sheets of The Lincoln National Life Insurance Company (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Lincoln National Life Insurance Company and subsidiaries at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 2010 the Company changed its method of accounting for the consolidation of variable interest entities. Also, as discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed its method of accounting for the recognition and presentation of other-than-temporary impairments. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 1, 2011 S-3 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, --------------------- 2010 2009 -------- ------------ ASSETS Investments: Available-for-sale securities, at fair value: Fixed maturity securities (amortized cost: 2010 -- $63,512; 2009 -- $58,816) $ 66,289 $ 58,889 Variable interest entities' fixed maturity securities (amortized cost: 2010 -- $570) 584 -- Equity securities (cost: 2010 -- $119; 2009 -- $141) 140 155 Trading securities 2,459 2,366 Mortgage loans on real estate 6,431 6,835 Real estate 168 128 Policy loans 2,832 2,864 Derivative investments 1,021 841 Other investments 978 975 -------- ------------ Total investments 80,902 73,053 Cash and invested cash 1,904 2,553 Deferred acquisition costs and value of business acquired 8,854 9,396 Premiums and fees receivable 334 302 Accrued investment income 904 860 Reinsurance recoverables 7,626 7,880 Reinsurance related embedded derivatives 112 277 Goodwill 3,017 3,011 Other assets 3,729 3,375 Separate account assets 84,630 73,500 -------- ------------ Total assets $192,012 $174,207 ======== ============ LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Future contract benefits $ 14,872 $ 14,507 Other contract holder funds 66,721 63,177 Short-term debt 10 21 Long-term debt 2,429 1,925 Funds withheld reinsurance liabilities 3,385 3,137 Deferred gain on business sold through reinsurance 405 516 Payables for collateral on investments 1,712 1,924 Variable interest entities' liabilities 132 -- Other liabilities 3,118 2,099 Separate account liabilities 84,630 73,500 -------- ------------ Total liabilities 177,414 160,806 -------- ------------ CONTINGENCIES AND COMMITMENTS (SEE NOTE 14) STOCKHOLDER'S EQUITY Common stock -- 10,000,000 shares authorized, issued and outstanding 10,585 10,588 Retained earnings 3,137 2,915 Accumulated other comprehensive income (loss) 876 (102) -------- ------------ Total stockholder's equity 14,598 13,401 -------- ------------ Total liabilities and stockholder's equity $192,012 $174,207 ======== ============ See accompanying Notes to Consolidated Financial Statements
S-4 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (LOSS) (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 --------- --------- --------- REVENUES Insurance premiums $1,929 $1,878 $1,835 Insurance fees 3,070 2,841 2,990 Net investment income 4,362 4,006 3,975 Realized gain (loss): Total other-than-temporary impairment losses on securities (231) (643) (682) Portion of loss recognized in other comprehensive income 83 262 -- --------- --------- --------- Net other-than-temporary impairment losses on securities recognized in earnings (148) (381) (682) Realized gain (loss), excluding other-than-temporary impairment losses on securities (100) (208) (142) --------- --------- --------- Total realized gain (loss) (248) (589) (824) --------- --------- --------- Amortization of deferred gain on business sold through reinsurance 52 73 76 Other revenues and fees 360 299 271 --------- --------- --------- Total revenues 9,525 8,508 8,323 --------- --------- --------- BENEFITS AND EXPENSES Interest credited 2,435 2,406 2,438 Benefits 2,570 2,450 2,654 Underwriting, acquisition, insurance and other expenses 2,999 2,579 2,960 Interest and debt expense 99 93 85 Impairment of intangibles -- 729 -- --------- --------- --------- Total benefits and expenses 8,103 8,257 8,137 --------- --------- --------- Income (loss) before taxes 1,422 251 186 Federal income tax expense (benefit) 347 163 (68) --------- --------- --------- Net income (loss) $1,075 $ 88 $ 254 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements S-5 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2010 2009 2008 ---------- ---------- ---------- COMMON STOCK Balance as of beginning-of-year $10,588 $ 9,132 $ 9,105 Capital contribution from Lincoln National Corporation -- 1,451 -- Stock compensation/issued for benefit plans (3) 5 27 ---------- ---------- ---------- Balance as of end-of-year 10,585 10,588 9,132 ---------- ---------- ---------- RETAINED EARNINGS Balance as of beginning-of-year 2,915 3,135 3,283 Cumulative effect from adoption of new accounting standards (169) 97 -- Comprehensive income (loss) 1,872 2,692 (2,408) Less other comprehensive income (loss), net of tax 797 2,604 (2,662) ---------- ---------- ---------- Net income (loss) 1,075 88 254 Dividends declared (684) (405) (402) ---------- ---------- ---------- Balance as of end-of-year 3,137 2,915 3,135 ---------- ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance as of beginning-of-year (102) (2,609) 53 Cumulative effect from adoption of new accounting standards 181 (97) -- Other comprehensive income (loss), net of tax 797 2,604 (2,662) ---------- ---------- ---------- Balance as of end-of-year 876 (102) (2,609) ---------- ---------- ---------- Total stockholder's equity as of end-of-year $14,598 $13,401 $ 9,658 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements S-6 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2010 2009 2008 ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 1,075 $ 88 $ 254 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred acquisition costs, value of business acquired, deferred sales inducements and deferred front-end loads deferrals and interest, net of amortization (304) (371) (237) Trading securities purchases, sales and maturities, net 39 (20) 177 Change in premiums and fees receivable (32) 143 (61) Change in accrued investment income (44) (87) 19 Change in future contract benefits and other contract holder funds (202) (2,857) 4,098 Change in reinsurance related assets and liabilities 888 2,790 (3,618) Change in federal income tax accruals 692 178 (45) Realized (gain) loss 248 589 824 Amortization of deferred gain on business sold through reinsurance (52) (73) (76) Impairment of intangibles -- 729 -- Other 63 1 (12) ---------- ---------- ---------- Net cash provided by (used in) operating activities 2,371 1,110 1,323 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (12,816) (13,075) (5,776) Sales of available-for-sale securities 2,642 3,614 1,506 Maturities of available-for-sale securities 4,429 3,209 3,732 Purchases of other investments (2,775) (779) (1,163) Sales or maturities of other investments 3,099 1,102 907 Increase (decrease) in payables for collateral on investments (212) 1,044 (255) Proceeds from sale of subsidiaries/businesses, net of cash disposed -- 6 -- Proceeds from reinsurance recapture 25 -- -- Other (74) (51) (117) ---------- ---------- ---------- Net cash provided by (used in) investing activities (5,682) (4,930) (1,166) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt, net of issuance costs 504 -- 250 Increase (decrease) in short-term debt (11) 3 (14) Deposits of fixed account values, including the fixed portion of variable 11,051 11,346 9,806 Withdrawals of fixed account values, including the fixed portion of variable (5,225) (5,440) (5,910) Transfers to and from separate accounts, net (2,958) (2,248) (2,204) Payment of funding agreements -- -- (550) Common stock issued for benefit plans and excess tax benefits (15) -- 8 Capital contribution from parent company -- 1,001 -- Dividends paid to stockholders (684) (405) (402) ---------- ---------- ---------- Net cash provided by (used in) financing activities 2,662 4,257 984 ---------- ---------- ---------- Net increase (decrease) in cash and invested cash, including discontinued operations (649) 437 1,141 Cash and invested cash, including discontinued operations, as of beginning-of-year 2,553 2,116 975 ---------- ---------- ---------- Cash and invested cash, including discontinued operations, as of end-of-year $ 1,904 $ 2,553 $ 2,116 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements S-7 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Lincoln National Life Insurance Company ("LNL" or the "Company," which also may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of Lincoln National Corporation ("LNC" or the "Parent Company"), is domiciled in the state of Indiana. We own 100% of the outstanding common stock of one insurance company subsidiary, Lincoln Life & Annuity Company of New York ("LLANY"). We also own several non-insurance companies, including Lincoln Financial Distributors ("LFD") and Lincoln Financial Advisors ("LFA"), LNC's wholesaling and retailing business units, respectively. LNL's principal businesses consist of underwriting annuities, deposit-type contracts and life insurance through multiple distribution channels. LNL is licensed and sells its products throughout the United States of America and several U.S. territories. See Note 23 for additional information. BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. On May 7, 2009, LNC made a capital contribution to LNL that transferred ownership of Lincoln Financial Media ("LFM") to LNL. LFM's results subsequent to May 7, 2009, are included in these consolidated financial statements. The insurance subsidiaries also submit financial statements to insurance industry regulatory authorities. Those financial statements are prepared on the basis of statutory accounting practices ("SAP") and are significantly different from financial statements prepared in accordance with GAAP. See Note 21 for additional discussion on SAP. Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications had no effect on net income or stockholder's equity of the prior years. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of LNL and all other entities in which we have a controlling financial interest and any variable interest entities ("VIEs") in which we are the primary beneficiary. See Note 4 below for additional details. Entities in which we do not have a controlling financial interest and do not exercise significant management influence over the operating and financing decisions are reported using the equity method. The carrying value of our investments that we account for using the equity method on our Consolidated Balance Sheets and equity in earnings on our Consolidated Statements of Income (Loss) is not material. All material inter-company accounts and transactions have been eliminated in consolidation. Our involvement with VIEs is primarily to obtain financing to either invest in assets that allow us to gain exposure to a broadly diversified pool of corporate issuers or to support our universal life ("UL") business with secondary guarantees. The factors used to determine whether or not we are the primary beneficiary and must consolidate a VIE in which we hold a variable interest changed effective January 1, 2010, upon the adoption of new accounting guidance. See "Consolidations Topic" in Note 2 for details. Beginning January 1, 2010, we continuously analyze the primary beneficiary of our VIEs, to determine whether we are the primary beneficiary, by applying a qualitative approach to identify the variable interest that has the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive returns that could potentially be significant to the VIE. ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, asset valuation allowances, deferred acquisition costs ("DAC"), value of business acquired ("VOBA"), deferred sales inducements ("DSI"), goodwill, future contract benefits, other contract holder funds which includes deferred front-end loads ("DFEL"), pension plans, income taxes and the potential effects of resolving litigated matters. BUSINESS COMBINATIONS For all business combination transactions occurring after January 1, 2009, we use the acquisition method of accounting, and accordingly generally, recognize the fair values of assets acquired, liabilities assumed and any noncontrolling interests. For all business combination transactions initiated after June 30, 2001, but before January 1, 2009, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information relative to the fair values as of the acquisition date becomes available. The consolidated financial statements include the results of operations of any acquired company since the acquisition date. FAIR VALUE MEASUREMENT Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability ("exit price") in the principal S-8 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability ("entry price"). Pursuant to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board ("FASB") ACCOUNTING STANDARDS CODIFICATION(TM) ("ASC"), we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows: Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to "blockage discounts" that are excluded; Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, that are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no mar- ket activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources. AVAILABLE-FOR-SALE SECURITIES -- FAIR VALUATION METHODOLOGIES AND ASSOCIATED INPUTS Securities classified as available-for-sale ("AFS") consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) ("OCI"), net of associated DAC, VOBA, DSI, other contract holder funds and deferred income taxes. See Notes 5 and 15 for additional details. We measure the fair value of our securities classified as AFS based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and we consistently apply the valuation methodology to measure the security's fair value. Our fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations or pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services' valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy. We use observable and unobservable inputs in our valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with senior business leaders and brokers and observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on management's judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity. The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our AFS securities. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all AFS securities on any given day. The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our AFS securities discussed above: Corporate bonds and U.S. Government bonds - We also use Trade Reporting and Compliance Engine(TM) reported tables for our corporate bonds and vendor trading platform data for our U. S. Government bonds. Mortgage- and asset-backed securities - We also utilize additional inputs which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down S-9 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) features and over collateralization features for each of our mortgage-backed securities ("MBS"), which include collateralized mortgage obligations ("CMOs"), mortgage pass through securities backed by residential mortgages ("MPTS") and MBS backed by commercial mortgages ("CMBS"), and for our asset-backed securities ("ABS") collateralized debt obligations ("CDOs"). State and municipal bonds - We also use additional inputs which include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds. Hybrid and redeemable preferred and equity securities - We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred and equity securities, including banking, insurance, other financial services and other securities. AFS SECURITIES -- EVALUATION FOR RECOVERY OF AMORTIZED COST We regularly review our AFS securities for declines in fair value that we determine to be other-than-temporary. For an equity security, if we do not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, we conclude that an other-than-temporary impairment ("OTTI") has occurred and the amortized cost of the equity security is written down to the current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Income (Loss). When assessing our ability and intent to hold the equity security to recovery, we consider, among other things, the severity and duration of the decline in fair value of the equity security as well as the cause of the decline, a fundamental analysis of the liquidity, and business prospects and overall financial condition of the issuer. For our fixed maturity AFS securities, we generally consider the following to determine that our unrealized losses are not OTTI: The estimated range and average period until recovery; The estimated range and average holding period to maturity; Remaining payment terms of the security; Current delinquencies and nonperforming assets of underlying collateral; Expected future default rates; Collateral value by vintage, geographic region, industry concentration or property type; Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and Contractual and regulatory cash obligations. For a debt security, if we intend to sell a security or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Income (Loss). If we do not intend to sell a debt security or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized gain (loss) on our Consolidated Statements of Income (Loss), as this amount is deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded in OCI to unrealized OTTI on AFS securities on our Consolidated Statements of Stockholder's Equity, as this amount is considered a noncredit (i.e., recoverable) impairment. When assessing our intent to sell a debt security or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying debt security. The effective interest rate is the original yield or the coupon if the debt security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, which we use to determine the amount of a credit loss. Our conclusion that it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows are equal to or greater than the amortized cost basis of the debt securities, or we have the ability to hold the equity AFS securities for a period of time sufficient for recovery is based upon our asset-liability management process. Management considers the following as part of the evaluation: The current economic environment and market conditions; Our business strategy and current business plans; The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk; Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies; The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts; The capital risk limits approved by management; and Our current financial condition and liquidity demands. To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following: Historic and implied volatility of the security; Length of time and extent to which the fair value has been less than amortized cost; S-10 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area; Failure, if any, of the issuer of the security to make scheduled payments; and Recoveries or additional declines in fair value subsequent to the balance sheet date. In periods subsequent to the recognition of an OTTI, the AFS security is accounted for as if it had been purchased on the measurement date of the OTTI. Therefore, for the fixed maturity AFS security, the original discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield. To determine recovery value of a corporate bond or ABS CDOs, we perform additional analysis related to the underlying issuer including, but not limited to, the following: Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading; Fundamentals of the industry in which the issuer operates; Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation; Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations); Expectations regarding defaults and recovery rates; Changes to the rating of the security by a rating agency; and Additional market information (e.g., if there has been a replacement of the corporate debt security). Each quarter we review the cash flows for the MBS to determine whether or not they are sufficient to provide for the recovery of our amortized cost. We revise our cash flow projections only for those securities that are at most risk for impairment based on current credit enhancement and trends in the underlying collateral performance. To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following: Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover; Level of creditworthiness of the home equity loans that back a CMO, residential mortgages that back a MPTS or commercial mortgages that back a CMBS; Susceptibility to fair value fluctuations for changes in the interest rate environment; Susceptibility to reinvestment risks, in cases where market yields are lower than the securities' book yield earned; Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security; Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and Susceptibility to variability of prepayments. When evaluating MBS and mortgage-related ABS, we consider a number of pool-specific factors as well as market level factors when determining whether or not the impairment on the security is temporary or other-than-temporary. The most important factor is the performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis include type of underlying collateral (e.g., prime, Alt-A or sub-prime), geographic distribution of underlying loans and timing of liquidations by state. Once default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur. Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Once default and severity assumptions are determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is reviewed for OTTI by comparing the expected cash flows to amortized cost. To the extent that the security has already been impaired or was purchased at a discount, such that the amortized cost of the security is less than or equal to the present value of cash flows expected to be collected, no impairment is required. Otherwise, if the amortized cost of the security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount greater than the expected principal loss, then impairment is recognized. We further monitor the cash flows of all of our AFS securities backed by pools on an ongoing basis. We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our AFS securities backed by pools of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable. If it is not recoverable, we record an impairment of the security. TRADING SECURITIES Trading securities consist of fixed maturity and equity securities in designated portfolios, some of which support modified coinsurance ("Modco") and coinsurance with funds withheld ("CFW") reinsurance arrangements. Investment results for the portfolios that support Modco and CFW reinsurance S-11 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) arrangements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements. Trading securities are carried at fair value and changes in fair value and changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance arrangements, are recorded in realized gain (loss) on our Consolidated Statements of Income (Loss) as they occur. ALTERNATIVE INVESTMENTS Alternative investments, which consist primarily of investments in Limited Partnerships ("LPs"), are included in other investments on our Consolidated Balance Sheets. We account for our investments in LPs using the equity method to determine the carrying value. Recognition of alternative investment income is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners. As a result, our venture capital, real estate and oil and gas portfolios are generally on a three-month delay and our hedge funds are on a one-month delay. In addition, the impact of audit adjustments related to completion of calendar-year financial statement audits of the in-vestees are typically received during the second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar-year period may not include the complete impact of the change in the underlying net assets for the partnership for that calendar-year period. PAYABLES FOR COLLATERAL ON INVESTMENTS When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash collateral received. This liability is included within payables for collateral on investments on our Consolidated Balance Sheets. Income and expenses associated with these transactions are recorded as investment income and investment expenses within net investment income on our Consolidated Statements of Income (Loss). Changes in payables for collateral on investments are reflected within cash flows from investing activities on our Consolidated Statements of Cash Flows. MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances. Interest income is accrued on the principal balance of the loan based on the loan's contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income on our Consolidated Statements of Income (Loss) along with mortgage loan fees, which are recorded as they are incurred. Our commercial loan portfolio is comprised of long-term loans secured by existing commercial real estate. As such, it does not exhibit risk characteristics unique to mezzanine, construction, residential, agricultural, land or other types of real estate loans. We believe all of the loans in our portfolio share three primary risks: borrower creditworthiness; sustainability of the cash flow of the property; and market risk; therefore, our methods for monitoring and assessing credit risk are consistent for our entire portfolio. Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated value. The loan's estimated value is based on: the present value of expected future cash flows discounted at the loan's effective interest rate; the loan's observable market price; or the fair value of the loan's collateral. Valuation allowances are maintained at a level we believe is adequate to absorb estimated probable credit losses of each specific loan. Our periodic evaluation of the adequacy of the allowance for losses is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. Trends in market vacancy and rental rates are incorporated into the analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for credit losses. In addition, we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit profiles. Where warranted, we establish or increase loss reserves for a specific loan based upon this analysis. Our process for determining past due or delinquency status begins when a payment date is missed, at which time the borrower is contacted. After the grace period expiration that may last up to 10 days, we send a default notice. The default notice generally provides a short time period to cure the default. Our policy is to report loans that are 60 or more days past due, which equates to two or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these loans is either applied to the principal or recorded in net investment income on our Consolidated Statements of Income (Loss) when received, depending on the assessment of the collectibility of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the allowance for losses, and subsequent recoveries, if any, are credited to the allowance for losses. All mortgage loans that are impaired have an established allowance for credit losses. Changes in valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Income (Loss). We measure and assess the credit quality of our mortgage loans by using loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio S-12 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) generally indicates a higher quality loan. The debt-service coverage ratio compares a property's net operating income to its debt-service payments. Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a higher debt-service coverage ratio generally indicates a higher quality loan. POLICY LOANS Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances. REAL ESTATE Real estate includes both real estate held for the production of income and real estate held-for-sale. Real estate held for the production of income is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. We periodically review properties held for the production of income for impairment. Properties whose carrying values are greater than their projected undiscounted cash flows are written down to estimated fair value, with impairment losses reported in realized gain (loss) on our Consolidated Statements of Income (Loss). The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate classified as held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs at the time classified as held-for-sale. Real estate is not depreciated while it is classified as held-for-sale. Also, valuation allowances for losses are established, as appropriate, for real estate held-for-sale and any changes to the valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Income (Loss). Real estate acquired through foreclosure proceedings is recorded at fair value at the settlement date. DERIVATIVE INSTRUMENTS We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by entering into derivative transactions. All of our derivative instruments are recognized as either assets or liabilities on our Consolidated Balance Sheets at estimated fair value. We categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique as discussed above in "Fair Value Measurement." The accounting for changes in the estimated fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument based upon the exposure being hedged: as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign subsidiary. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated OCI and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of change in estimated fair values. For derivative instruments not designated as hedging instruments but that are economic hedges, the gain or loss is recognized in net income. See Note 6 for details of where the gain or loss recognized in net income is reported on our Consolidated Statements of Income (Loss). We purchase and issue financial instruments and products that contain embedded derivative instruments. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the Consolidated Balance Sheets, is carried at fair value with changes in fair value recognized in net income during the period of change. See Note 6 for additional discussion of our derivative instruments, including details of where the gain or loss recognized in net income is reported on our Consolidated Statements of Income (Loss). We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market conditions. We calculate the present value of the cash flows to measure the current fair market value of the derivative. CASH AND CASH EQUIVALENTS Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with a maturity of three months or less. DAC, VOBA, DSI AND DFEL Commissions and other costs of acquiring UL insurance, variable universal life ("VUL") insurance, traditional life insurance, annuities and other investment contracts, which vary with and are related primarily to the production of new business, have been deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus S-13 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) credits and excess interest for dollar cost averaging contracts are considered DSI, and the unamortized balance is reported in other assets on our Consolidated Balance Sheets. Contract sales charges that are collected in the early years of an insurance contract are deferred (referred to as "DFEL"), and the un-amortized balance is reported in other contract holder funds on our Consolidated Balance Sheets. Both DAC and VOBA amortization is reported within underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). DSI amortization is reported in interest credited on our Consolidated Statements of Income (Loss). The amortization of DFEL is reported within insurance fees on our Consolidated Statements of Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits ("EGPs") from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 40 years and 30 years, respectively, based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 12 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that have demonstrated favorable lapse experience. Acquisition costs for all traditional contracts, including traditional life insurance, which include individual whole life, group business and term life insurance contracts, are amortized over periods of 7 to 30 years on either a straight-line basis or as a level percent of premium of the related policies depending on the block of business. There is currently no DAC, VOBA, DSI or DFEL balance or related amortization for fixed and variable payout annuities. The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as AFS and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated Statements of Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss). On a quarterly basis, we may record an adjustment to the amounts included within our Consolidated Balance Sheets for DAC, VOBA, DSI and DFEL with an offsetting benefit or charge to revenue or expense for the effect of the difference between future EGPs used in the prior quarter and the emergence of actual and updated future EGPs in the current quarter ("retrospective unlocking"). In addition, in the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. These assumptions include investment margins, mortality, retention, rider utilization and maintenance expenses (costs associated with maintaining records relating to insurance and individual and group annuity contracts and with the processing of premium collections, deposits, withdrawals and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL, included on our Consolidated Balance Sheets, are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change ("prospective unlocking - assumption changes"). We may have prospective unlocking in other quarters as we become aware of information that warrants updating prospective assumptions outside of our annual comprehensive review. We may also identify and implement actuarial modeling refinements ("prospective unlocking -- model refinements") that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. The primary distinction between retrospective and prospective unlocking is that retrospective unlocking is driven by the difference between actual gross profits compared to EGPs each period, while prospective unlocking is driven by changes in assumptions or projection models related to our expectations of future EGPs. DAC, VOBA, DSI and DFEL are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts. REINSURANCE Our insurance companies enter into reinsurance agreements with other companies in the normal course of business. Assets and liabilities and premiums and benefits from certain reinsurance contracts that grant statutory surplus relief to other insurance companies are netted on our Consolidated Balance Sheets and Consolidated Statements of Income (Loss), respectively, because there is a right of offset. All other reinsurance agreements are reported on a gross basis on our Consolidated Balance Sheets as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of Modco agreements for which the right of offset also exists. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance S-14 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) contracts. Premiums, benefits and DAC are reported net of insurance ceded. GOODWILL We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events, including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator or unanticipated competition, would cause us to review the carrying amounts of goodwill for impairment. We are required to perform a two-step test in our evaluation of the carrying value of goodwill for impairment. In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value is greater than the carrying value, then the carrying value is deemed to be sufficient and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist and Step 2 is required to be performed. In Step 2, the implied fair value of the reporting unit's goodwill is determined by assigning the reporting unit's fair value as determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value, and a charge is reported in impairment of intangibles on our Consolidated Statements of Income (Loss). SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS Specifically identifiable intangible assets, net of accumulated amortization, are reported in other assets on our Consolidated Balance Sheets. The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive environments in which the Company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of impairment, then the cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our Consolidated Statements of Income (Loss). Sales force intangibles are attributable to the value of the new business distribution system for certain life insurance products within the Insurance Solutions - Life Insurance segment acquired through business combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. Specifically identifiable intangible assets also include Federal Communications Commission ("FCC") licenses and other agreements reported within Other Operations. The FCC licenses are not amortized. OTHER LONG-LIVED ASSETS Property and equipment owned for company use is included in other assets on our Consolidated Balance Sheets and is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. SEPARATE ACCOUNT ASSETS AND LIABILITIES We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts. See Note 11 for additional information regarding arrangements with contractual guarantees. We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of guaranteed death benefit ("GDB"), guaranteed withdrawal benefit ("GWB") and guaranteed income benefit ("GIB") features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals ("return of net deposits"); total deposits made to the contract less any partial withdrawals plus a minimum return ("minimum return"); or the highest contract value on any contract anniversary date through age S-15 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 80 minus any payments or withdrawals following the contract anniversary ("anniversary contract value"). As discussed in Note 6, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees are accounted for as benefit reserves. Other guarantees contain characteristics of both and are accounted for under an approach that calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each guaranteed living benefit ("GLB") feature. We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in the value of the associated reserves. The net impact of these changes is reported as a component of realized gain (loss) on our Consolidated Statements of Income (Loss) in a category referred to as GLBs. The "market consistent scenarios" used in the determination of the fair value of the GWB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. In our calculation, risk-neutral Monte-Carlo simulations resulting in over 10 million scenarios are utilized to value the entire block of guarantees. The market consistent scenario assumptions, as of each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include assumptions for the capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, benefit utilization, mortality, etc.), risk margins, administrative expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to pay for future benefits and claims. Other contract holder funds represent liabilities for account values, dividends payable, premium deposit funds, undistributed earnings on participating business and other contract holder funds as well the carrying value of DFEL discussed above. The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that accrue to the benefit of the contract holders, excluding surrender charges. The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.75% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.00% to 13.50% . These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable. The liabilities for future claim reserves for variable annuity products containing GDB features are calculated by estimating the present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments over the life of the contract ("benefit ratio") multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GDB payments plus interest on the reserves. The change in the reserve for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. With respect to our future contract benefits and other contract holder funds, we continually review: overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur. The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. UL and VUL products with secondary guarantees represented approximately 40% of permanent life insurance in force as of December 31, 2010, and approximately 52% of sales for these products in 2010. Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI. Future contract benefits on our Consolidated Balance Sheets include GLB features and remaining guaranteed interest and similar contracts that are carried at fair value, which represents approximate surrender value including an estimate for our nonperformance risk. Our LINCOLN SMARTSECURITY(R) Advantage GWB feature, GIB and 4LATER(R) features have elements of both insurance benefits and embedded derivatives. We weight these features and their associated reserves accordingly based on their hybrid nature. We classify these items in S-16 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Level 3 within the hierarchy levels described above in "Fair Value Measurement." The fair value of our indexed annuity contracts is based on their approximate surrender values. BORROWED FUNDS LNL's short-term borrowings are defined as borrowings with contractual or expected maturities of one year or less. Long-term borrowings have contractual or expected maturities greater than one year. DEFERRED GAIN ON BUSINESS SOLD THROUGH REINSURANCE Our reinsurance operations were acquired by Swiss Re Life & Health America, Inc. ("Swiss Re") in December 2001 through a series of indemnity reinsurance transactions. We are recognizing the gain related to these transactions at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale. COMMITMENTS AND CONTINGENCIES Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable. INSURANCE FEES Insurance fees for investment and interest-sensitive life insurance contracts consist of asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance. In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the "attributed fees"), which are not reported within insurance fees on our Consolidated Statements of Income (Loss). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Income (Loss). The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms. For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue. INSURANCE PREMIUMS Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Our group non-medical insurance products consist primarily of term life, disability and dental. NET INVESTMENT INCOME Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield. For ABS and MBS, included in the trading and AFS fixed maturity securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on our Consolidated Statements of Income (Loss). REALIZED GAIN (LOSS) Realized gain (loss) on our Consolidated Statements of Income (Loss) includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, certain derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivative and trading securities. Realized gains and losses on the sale of investments are determined using the specific identification method. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation. OTHER REVENUES AND FEES Other revenues and fees consists primarily of fees attributable to broker-dealer services recorded as earned at the time of sale, S-17 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) changes in the market value of our seed capital investments and communications sales recognized as earned, net of agency and representative commissions. INTEREST CREDITED Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in our general account during 2008 through 2010 ranged from 3.00% to 9.00%. BENEFITS Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits and annuity products with guaranteed death benefits. For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate. See Note 18 for additional information. STOCK-BASED COMPENSATION In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date LNC's Board of Directors approves stock awards, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholder's equity. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on our consolidated balance sheet and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). See Note 20 for additional information. INTEREST AND DEBT EXPENSES Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts, and costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. In addition, gains or losses related to certain derivative instruments associated with debt are recognized in interest expense during the period of the change. INCOME TAXES We have elected to file consolidated federal income tax returns with LNC and its subsidiaries. Pursuant to an intercompany tax sharing agreement with LNC, we provide for income taxes on a separate return filing basis. The tax sharing agreement also provides that we will receive benefit for net operating losses, capital losses and tax credits which are not usable on a separate return basis to the extent such items may be utilized in the consolidated income tax returns of LNC. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required to reduce the deferred tax asset to an amount that we expect, more likely than not, will be realized. See Note 7 for additional information. 2. NEW ACCOUNTING STANDARDS ADOPTION OF NEW ACCOUNTING STANDARDS CONSOLIDATIONS TOPIC In June 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities" ("ASU 2009-17"), which amended the consolidation guidance for VIEs. Primarily, the quantitative analysis previously required under the Consolidations Topic of the FASB ASC was eliminated and replaced with a qualitative approach for identifying the variable interest that has the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive returns that could potentially be significant to the VIE. In addition, variable interest holders are required to perform an ongoing reassessment of the primary beneficiary of the VIE. Upon adoption of ASU 2009-17, an entity was required to reconsider prior consolidation assessments for VIEs in which the entity continues to hold a variable interest. In February 2010, the FASB issued ASU No. 2010-10, "Amendments for Certain Investment Funds" ("ASU 2010-10"), which deferred application of the guidance in ASU 2009-17 for reporting entities with interests in an entity that applies the specialized accounting guidance for investment companies. Effective January 1, 2010, we adopted the amendments in ASU 2009-17 and ASU 2010-10, and accordingly reconsidered our involvement with all our VIEs and the primary beneficiary of the VIEs. In accordance with ASU 2009-17, we are the primary beneficiary of the VIEs associated with our investments S-18 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARDS (CONTINUED) in Credit-Linked Notes ("CLN"), and as such, we consolidated all of the assets and liabilities of these VIEs and recorded a cumulative effect adjustment of $169 million, after-tax, to the beginning balance of retained earnings as of January 1, 2010. The following summarizes the increases or (decreases) recorded effective January 1, 2010, to the categories (in millions) on our Consolidated Balance Sheets for this cumulative effect adjustment:
ASSETS AFS securities, at fair value: Fixed maturity securities -- ABS CLNs $(322) VIEs' fixed maturity securities 565 -------- Total assets $ 243 ======== LIABILITIES VIEs' liabilities: Derivative instruments $ 225 Federal income tax (91) -------- Total VIEs' liabilities 134 Other liabilities -- deferred income taxes 97 -------- Total liabilities $ 231 ======== STOCKHOLDER'S EQUITY Retained earnings $(169) Accumulated OCI -- unrealized gain (loss) on AFS securities 181 -------- Total stockholder's equity 12 -------- Total liabilities and stockholder's equity $ 243 ========
In addition, we considered our investments in LPs and other alternative investments, and concluded these investments are within the scope of the deferral in ASU 2010-10, and as such they are not subject to the amended consolidation guidance in ASU 2009-17. As a result, we will continue to account for our alternative investments consistent with the accounting policy in Note 1. See Note 4 for more detail regarding the consolidation of our VIEs. DERIVATIVES AND HEDGING TOPIC In March 2010, the FASB issued ASU No. 2010-11, "Scope Exception Related to Embedded Credit Derivatives" ("ASU 2010-11"), to clarify the scope exception when evaluating an embedded credit derivative, which may potentially require separate accounting. Specifically, ASU 2010-11 states that only an embedded credit derivative feature related to the transfer of credit risk that is solely in the form of subordination of one financial instrument to another is not subject to further analysis as a potential embedded derivative under the Derivatives and Hedging Topic of the FASB ASC. Embedded credit derivatives, which no longer qualify for the scope exception, are subject to a bifurcation analysis. The fair value option may be elected for investments within the scope of ASU 2010-11 on an instrument-by-instrument basis. If the fair value option is not elected, preexisting contracts acquired, issued or subject to a remeasurement event on or after January 1, 2007 are within the scope of ASU 2010-11. We adopted ASU 2010-11 at the beginning of the interim reporting period ended September 30, 2010. The adoption did not have a material impact on our consolidated financial condition and results of operations. FAIR VALUE MEASUREMENTS AND DISCLOSURES TOPIC In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"), which requires additional disclosure related to the three-level fair value hierarchy. Entities are required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy, and separately present information related to purchases, sales, issuances and settlements in the reconciliation of fair value measurements classified as Level 3. In addition, ASU 2010-06 amended the fair value disclosure requirement for pension and postretirement benefit plan assets to require this disclosure at the investment class level. We adopted the amendments in ASU 2010-06 effective January 1, 2010, and have prospectively included the required disclosures in Note 18 related to benefit plans and Note 22 related to Levels 1 and 2 of the fair value hierarchy. The disclosures related to purchases, sales, issuances and settlements for Level 3 fair value measurements are effective for reporting periods beginning after December 15, 2010, and as such, these disclosures will be included in the Notes to Consolidated Financial Statements effective January 1, 2011. INVESTMENTS -- DEBT AND EQUITY SECURITIES TOPIC In April 2009, the FASB replaced the guidance in the Investments - Debt and Equity Securities Topic of the FASB ASC related to OTTI. Under this new accounting guidance, management's assertion that it has the intent and ability to hold an impaired debt security until recovery was replaced by the requirement for management to assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis. Our accounting policy for OTTI, included in Note 1, reflects these changes to the accounting guidance adopted by FASB. As permitted by the transition guidance, we early adopted these amendments to the Investments - Debt and Equity Securities Topic effective January 1, 2009, by recording an increase of $97 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on our Consolidated Statements of Stockholder's Equity to reclassify the noncredit portion of previously other-than-temporarily impaired debt securities held as of January 1, 2009. The following summarizes the components (in millions) for this cumulative effect adjustment:
NET UNREALIZED UNREALIZED OTTI LOSS ON AFS ON AFS SECURITIES SECURITIES TOTAL ------------- ------------- -------- Increase in amortized cost of fixed maturity AFS securities $33 $152 $185 Change in DAC, VOBA, DSI, and DFEL (6) (30) (36) Income tax (9) (43) (52) ------------- ------------- -------- Net cumulative effect adjustment $18 $ 79 $ 97 ============= ============= ========
S-19 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARDS (CONTINUED) The cumulative effect adjustment was calculated for all debt securities held as of January 1, 2009, for which an OTTI was previously recognized, and for which we did not intend to sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of January 1, 2009, to the amortized cost basis of the debt securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective debt security in effect before recognizing any OTTI. In addition, because the carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on fixed maturity AFS securities, we recognized a true-up to our DAC, VOBA, DSI and DFEL balances for this cumulative effect adjustment. The following summarizes the increase to the amortized cost of our fixed maturity AFS securities (in millions) as of January 1, 2009, resulting from the recognition of the cumulative effect adjustment: Corporate bonds $121 CMOs 62 CDOs 2 ---- Total fixed maturity AFS securities $185 ====
In addition, we include on the face of our Consolidated Statements of Income (Loss) the total OTTI recognized in realized gain (loss), with an offset for the amount of noncredit impairments recognized in accumulated OCI. We disclose the amount of OTTI recognized in accumulated OCI in Note 15, and the enhanced disclosures related to OTTI are included in Note 5. RECEIVABLES TOPIC In July 2010, the FASB issued ASU No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" ("ASU 2010-20"), in order to enhance and expand the financial statement disclosures. These amendments are intended to provide more information regarding the nature of the risk associated with financing receivables and how the assessment of the risk is used to estimate the allowance for credit losses. In addition, expanded disclosures provide more information regarding changes recognized during the reporting period to the allowance for credit losses. Comparative disclosures are not required for earlier reporting periods ending prior to the initial adoption date, and the amendments in ASU 2010-20 are effective in phases over two reporting periods. We adopted the amendments related to information required as of the end of the reporting period for the reporting period ending December 31, 2010, and have included the required disclosures in Notes 1 and 5. Disclosures that provide information about the activity during a reporting period, primarily the allowance for credit losses and modifications of financing receivables, are effective for interim and annual reporting periods beginning on or after December 15, 2010, and will be included in the Notes to Consolidated Financial Statements beginning with the reporting period ending March 31, 2011. TRANSFERS AND SERVICING TOPIC In June 2009, the FASB issued ASU No. 2009-16, "Accounting for Transfers of Financial Assets" ("ASU 2009-16"), which, among other things, eliminated the concept of a qualifying special-purpose entity ("SPE") and removed the scope exception for a qualifying SPE from the Consolidations Topic of the FASB ASC. As a result, previously unconsolidated qualifying SPEs were required to be re-evaluated for consolidation by the sponsor or transferor. We adopted ASU 2009-16 effective January 1, 2010. The adoption did not have a material impact on our consolidated financial condition and results of operations. See "Consolidations Topic" above for additional information and Note 4 for further discussion of the accounting treatment of our VIEs. FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS FINANCIAL SERVICES -- INSURANCE INDUSTRY TOPIC In April 2010, the FASB issued ASU No. 2010-15, "How Investments Held through Separate Accounts Affect an Insurer's Consolidation Analysis of Those Investments" ("ASU 2010-15"), to clarify a consolidation issue for insurance entities that hold a controlling interest in an investment fund either partially or completely through separate accounts. ASU 2010-15 concludes that an insurance entity would not be required to consider interests held in separate accounts when determining whether or not to consolidate an investment fund, unless the separate account interest is held for the benefit of a related party. If an investment fund is consolidated, the portion of the assets representing interests held in separate accounts would be recorded as a separate account asset with a corresponding separate account liability. The remaining investment fund assets would be consolidated in the insurance entity's general accounts. ASU 2010-15 will be applied retrospectively for fiscal years and interim periods within those fiscal years beginning after December 15, 2010, with early application permitted. We will adopt ASU 2010-15 as of the beginning of the reporting period ending March 31, 2011, and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations. In October 2010, the FASB issued ASU No. 2010-26, "Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts" ("ASU 2010-26"), which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts. Only those costs incurred which result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized. Incremental costs related to unsuccessful attempts to acquire insurance contracts must be expensed as incurred. Under ASU 2010-26, the capitalization criteria in the direct-response advertising guidance of the Other Assets and Deferred Costs Topic of the FASB ASC must be met in order to capitalize advertising costs. The amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted, and an entity may elect to apply the guidance prospectively or retrospectively. We will adopt the provisions of ASU 2010-26 effective January 1, 2012, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations. S-20 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARDS (CONTINUED) INTANGIBLES -- GOODWILL AND OTHER TOPIC In December 2010, the FASB issued ASU No. 2010-28, "When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts" ("ASU 2010-28"). Generally, reporting units with zero or negative carrying amounts will pass Step 1 of the goodwill impairment test as the fair value will exceed carrying value; therefore, goodwill impairment is not assessed under Step 2. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts, and requires these reporting units to perform Step 2 of the impairment test to determine if it is more likely than not that goodwill impairment exists. The amendments are effective for fiscal years and interim periods beginning after December 15, 2010, and early adoption is not permitted. Upon adoption of this ASU, all reporting units within scope must be evaluated under the new accounting guidance, and any resulting impairment will be recognized as a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Impairments identified after the period of adoption must be recognized in earnings. We will adopt the amendments in ASU 2010-28 effective as of the beginning of the reporting period ending March 31, 2011, and do not expect the adoption will have a material impact on our consolidated financial condition and result of operations. 3. REINSURANCE CEDED, REINSURANCE RECAPTURED, FUNDS WITHHELD AGREEMENT, REINSURANCE ASSUMED AND CAPITAL CONTRIBUTION REINSURANCE CEDED TO LINCOLN NATIONAL REINSURANCE COMPANY (BARBADOS) LIMITED ("LNBAR") We completed a reinsurance transaction during the fourth quarter of 2010 whereby we ceded a block of business to LNBAR, a wholly-owned subsidiary of LNC, which resulted in the release of approximately $151 million of capital previously supporting a portion of statutory reserves related to our term insurance products. The following summarizes the impact of this transaction (in millions) on our Consolidated Balance Sheets:
ASSETS Deferred acquisition costs $(148) Other assets (40) -------- Total assets $(188) ======== LIABILITIES Future contract benefits $ (72) Deferred gain (loss) on business sold through reinsurance (76) Other liabilities (40) -------- Total liabilities $(188) ========
REINSURANCE RECAPTURED FROM LNBAR During the third quarter of 2010, we completed a reinsurance transaction whereby we recaptured a portion of business previously ceded to LNBAR. The following summarizes the impact of this transaction (in millions) on our Consolidated Balance Sheets:
ASSETS Cash $ 25 Deferred acquisition costs 110 -------- Total assets $ 135 ======== LIABILITIES Future contract benefits $ 387 Other contract holder funds 22 Funds withheld reinsurance liabilities (346) Deferred gain (loss) on business sold through reinsurance 42 Other liabilities 10 -------- Total liabilities $ 115 ======== REVENUES AND EXPENSES Amortization of deferred gain on business sold through reinsurance: Write-off of unamortized deferred loss $ (42) Gain on recapture 17 Benefits 55 Federal income tax expense (10) -------- Net income $ 20 ========
FUNDS WITHHELD AGREEMENT WITH LNBAR We completed a funds withheld transaction with LNBAR during the fourth quarter of 2009 whereby we acquired the hedging program for certain GLB variable annuity products with GWB and GIB features. This transaction resulted in the receipt of cash of $162 million, an increase to derivative investments of $790 million and an increase in funds withheld reinsurance liabilities of $952 million. For further information on our hedging program regarding this matter, see "Guaranteed Living Benefit Embedded Derivative Reserves" in Note 6. REINSURANCE ASSUMED FROM FIRST PENN-PACIFIC LIFE INSURANCE COMPANY ("FPP") We completed a reinsurance transaction during the fourth quarter of 2009 whereby we assumed a block of business from FPP, a wholly-owned subsidiary of LNC. The following S-21 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. REINSURANCE CEDED, REINSURANCE RECAPTURED, FUNDS WITHHELD AGREEMENT, REINSURANCE ASSUMED AND CAPITAL CONTRIBUTION (CONTINUED) summarizes the impact of this transaction (in millions) on our Consolidated Balance Sheets:
ASSETS Deferred acquisition costs $48 Other assets 15 --- Total assets $63 === LIABILITIES Future contract benefits $15 Deferred gain (loss) on business sold through reinsurance 47 Other liabilities 1 --- Total liabilities $63 ===
CAPITAL CONTRIBUTION OF LFM On May 7, 2009, LNC made a capital contribution to LNL that transferred ownership of LFM to LNL. The following summarizes the impact of this capital contribution (in millions):
CAPITAL CONTRIBUTION VALUE --------------- Cash and invested cash $ 1 Goodwill 174 Specifically identifiable intangible assets 168 Other assets 21 Short-term debt (14) Other liabilities (70) --------------- Total capital contribution of LFM(1) $280 ===============
(1) Reported in capital contribution from LNC on our Consolidated Statements of Stockholder's Equity. 4. VARIABLE INTEREST ENTITIES CONSOLIDATED VIES In 2006 and 2007, we issued two funding agreements and used the proceeds to invest in the Class 1 Notes of two CLN structures, which represent special purpose trusts combining asset-backed securities with credit default swaps to produce multi-class structured securities. The CLN structures also include subordinated Class 2 Notes, which are held by third parties, and, together with the Class 1 Notes, represent 100% of the outstanding notes of the CLN structures. The entities that issued the CLNs are financed by the note holders, and, as such, the note holders participate in the expected losses and residual returns of the entities. Because the note holders do not have voting rights or similar rights, we determined the entities issuing the CLNs are VIEs, and as a note holder, our interest represented a variable interest. As of December 31, 2009, these VIEs were not consolidated because under the authoritative accounting guidance at that time, we were not the primary beneficiary of the VIEs because the Class 2 Notes absorbed the majority of the expected losses of the CLN structures. The carrying value of the CLNs as of December 31, 2009, was recognized as a fixed maturity security within AFS on our Consolidated Balance Sheets, and the funding agreements we issued were reported in other contract holder funds on our Consolidated Balance Sheets as of December 31, 2010 and 2009. Effective January 1, 2010, we adopted the new accounting guidance noted above and evaluated the primary beneficiary of the CLN structures using qualitative factors. Based on our evaluation, we concluded that the ability to actively manage the reference portfolio underlying the credit default swaps is the most significant activity impacting the performance of the CLN structures, because the subordination and participation in credit losses may change. We concluded that we have the power to direct this activity. In addition, we receive returns from the CLN structures and may absorb losses that could potentially be significant to the CLN structures. As such, we concluded that we are the primary beneficiary of the VIEs associated with the CLNs. We consolidated all of the assets and liabilities of the CLN structures through a cumulative effect adjustment to the beginning balance of retained earnings as of January 1, 2010, and recognized the results of operations of these VIEs on our consolidated financial statements beginning in the first quarter of 2010. See "Consolidations Topic" in Note 2 for more detail regarding the effect of the adoption. Asset and liability information (dollars in millions) for these S-22 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. VARIABLE INTEREST ENTITIES (CONTINUED) consolidated VIEs included on our Consolidated Balance Sheets as of December 31, 2010, was as follows:
NUMBER OF NOTIONAL CARRYING INSTRUMENTS AMOUNTS VALUE ----------- -------- ----------- ASSETS Fixed maturity corporate asset-backed credit card loan securities(1) N/A $ -- $584 =========== ======== =========== LIABILITIES Derivative instruments not designated and not qualifying as hedging instruments: Credit default swaps(2) 2 $600 $215 Contingent forwards(2) 2 -- (6) ----------- -------- ----------- Total derivative instruments not designated and not qualifying as hedging instruments 4 600 209 Federal income tax(2) N/A -- (77) ----------- -------- ----------- Total liabilities 4 $600 $132 =========== ======== ===========
(1) Reported in VIEs' fixed maturity securities on our Consolidated Balance Sheets. (2) Reported in VIEs' liabilities on our Consolidated Balance Sheets. For details related to the fixed maturity AFS securities for these VIEs, see Note 5. The credit default swaps create variability in the CLN structures and expose the note holders to the credit risk of the referenced portfolio. The contingent forwards transfer a portion of the loss in the underlying fixed maturity corporate asset-backed credit card loan securities back to the counterparty after credit losses reach our attachment point. The gains (losses) for these consolidated VIEs (in millions) recorded on our Consolidated Statements of Income (Loss) were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2010 --------------- DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS Credit default swaps(1) $25 Contingent forwards(1) (9) --------------- Total derivative instruments not designated and not qualifying as hedging instruments $16 ===============
(1) Reported in realized gain (loss) on our Consolidated Statements of Income (Loss). The following summarizes information regarding the CLN structures (dollars in millions) as of December 31, 2010:
AMOUNT AND DATE OF ISSUANCE -------------------------- $400 $200 DECEMBER APRIL 2006 2007 ------------- ------------ Original attachment point (subordination) 5.50% 2.05% Current attachment point (subordination) 4.17% 1.48% Maturity 12/20/2016 3/20/2017 Current rating of tranche B- Ba2 Current rating of underlying collateral pool Aa1-B3 Aaa-B1 Number of defaults in underlying collateral pool 2 2 Number of entities 123 99 Number of countries 19 22
There has been no event of default on the CLNs themselves. Based upon our analysis, the remaining subordination as represented by the attachment point should be sufficient to absorb future credit losses, subject to changing market conditions. Similar to other debt market instruments, our maximum principal loss is limited to our original investment as of December 31, 2010. As described more fully in Note 1, we regularly review our investment holdings for OTTIs. Based upon this review, we believe that the fixed maturity corporate asset-backed credit card loan securities were not other-than-temporarily impaired as of December 31, 2010. S-23 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. VARIABLE INTEREST ENTITIES (CONTINUED) The following summarizes the exposure of the CLN structures' underlying collateral by industry and rating as of December 31, 2010:
AAA AA A BBB BB B CCC TOTAL ------- ------- ------- ------- ------- ------- ------- -------- INDUSTRY Telecommunications --% --% 6.4% 3.7% 1.1% --% --% 11.2% Financial intermediaries 0.4% 4.0% 6.2% 0.5% --% --% --% 11.1% Oil and gas --% 1.0% 1.2% 4.1% --% --% --% 6.3% Utilities --% --% 3.1% 1.4% --% --% --% 4.5% Chemicals and plastics --% --% 2.4% 1.2% 0.3% --% --% 3.9% Drugs 0.3% 2.2% 1.2% --% --% --% --% 3.7% Retailers (except food and drug) --% --% 0.6% 1.8% 1.1% --% --% 3.5% Industrial equipment --% --% 3.0% 0.3% --% --% --% 3.3% Sovereign --% 0.6% 1.6% 1.0% --% --% --% 3.2% Food products --% 0.3% 1.8% 1.1% --% --% --% 3.2% Conglomerates --% 2.7% 0.5% --% --% --% --% 3.2% Forest products --% --% --% 1.6% 1.4% --% --% 3.0% Other industry < 3% (28 industries) --% 2.0% 15.4% 17.3% 3.5% 1.4% 0.3% 39.9% ------- ------- ------- ------- ------- ------- ------- -------- Total by industry 0.7% 12.8% 43.4% 34.0% 7.4% 1.4% 0.3% 100.0% ======= ======= ======= ======= ======= ======= ======= ========
UNCONSOLIDATED VIES Effective December 31, 2010, we issued a $500 million long-term senior note in exchange for a corporate bond AFS security of like principal and duration from a non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, as well as pay and collect interest on the notes and loans. We have concluded that we are not the primary beneficiary of this VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us with a set-off right to the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. We assigned the corporate bond AFS security to one of our subsidiaries and issued a guarantee to our subsidiary for the timely payment of the corporate bond's principle. Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our MBS, which include CMOs, MPTS and CMBS and our ABS CDOs. We have not provided financial or other support with respect to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination which reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value on our consolidated financial statements. For information about these structured securities, see Note 5. 5. INVESTMENTS AFS SECURITIES Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1, which also includes additional disclosures regarding our fair value measurements. S-24 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:
AS OF DECEMBER 31, 2010 ----------------------------------------- GROSS UNREALIZED AMORTIZED ----------------------- FAIR COST GAINS LOSSES OTTI VALUE --------- ------ ------ --------- ------- FIXED MATURITY SECURITIES Corporate bonds $47,920 $3,470 $ 597 $ 78 $50,715 U.S. Government bonds 106 16 -- -- 122 Foreign government bonds 459 37 2 -- 494 MBS: CMOs 5,423 309 107 140 5,485 MPTS 2,801 100 5 -- 2,896 CMBS 2,047 89 165 6 1,965 ABS CDOs 173 21 13 8 173 State and municipal bonds 3,150 26 91 -- 3,085 Hybrid and redeemable preferred securities 1,433 55 134 -- 1,354 VIEs' fixed maturity securities 570 14 -- -- 584 --------- ------ ------ --------- ------- Total fixed maturity securities 64,082 4,137 1,114 232 66,873 --------- ------ ------ --------- ------- EQUITY SECURITIES Banking securities 2 -- -- -- 2 Insurance securities 32 4 -- -- 36 Other financial services securities 18 14 -- -- 32 Other securities 67 7 4 -- 70 --------- ------ ------ --------- ------- Total equity securities 119 25 4 -- 140 --------- ------ ------ --------- ------- Total AFS securities $64,201 $4,162 $1,118 $232 $67,013 ========= ====== ====== ========= =======
AS OF DECEMBER 31, 2009 ----------------------------------------- GROSS UNREALIZED AMORTIZED ----------------------- FAIR COST GAINS LOSSES OTTI VALUE --------- ------ ------ --------- ------- FIXED MATURITY SECURITIES Corporate bonds $43,028 $2,195 $1,084 $ 63 $44,076 U.S. Government bonds 136 12 -- -- 148 Foreign government bonds 473 25 9 -- 489 MBS: CMOs 5,819 246 289 149 5,627 MPTS 2,874 61 26 -- 2,909 CMBS 2,332 46 330 -- 2,048 ABS: CDOs 189 10 33 9 157 CLNs 600 -- 278 -- 322 State and municipal bonds 1,983 14 54 -- 1,943 Hybrid and redeemable preferred securities 1,382 33 245 -- 1,170 --------- ------ ------ --------- ------- Total fixed maturity securities 58,816 2,642 2,348 221 58,889 --------- ------ ------ --------- ------- EQUITY SECURITIES Banking securities 25 -- 1 -- 24 Insurance securities 44 2 -- -- 46 Other financial services securities 22 12 6 -- 28 Other securities 50 7 -- -- 57 --------- ------ ------ --------- ------- Total equity securities 141 21 7 -- 155 --------- ------ ------ --------- ------- Total AFS securities $58,957 $2,663 $2,355 $221 $59,044 ========= ====== ====== ========= =======
S-25 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) were as follows:
AS OF DECEMBER 31, 2010 ----------------------- AMORTIZED FAIR COST VALUE --------- ------------- Due in one year or less $ 2,236 $ 2,281 Due after one year through five years 11,815 12,631 Due after five years through ten years 19,298 20,601 Due after ten years 20,289 20,841 --------- ------------- Subtotal 53,638 56,354 --------- ------------- MBS 10,271 10,346 CDOs 173 173 --------- ------------- Total fixed maturity AFS securities $64,082 $66,873 ========= =============
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations. The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AS OF DECEMBER 31, 2010 ------------------------------------------------------------------------ LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ----------------------------- ----------------------- ------------------ GROSS GROSS GROSS UNREALIZED UNREALIZED UNREALIZED FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND VALUE OTTI VALUE OTTI VALUE OTTI ------------------ ---------- ------ ---------------- ------- ---------- FIXED MATURITY SECURITIES Corporate bonds $5,155 $289 $1,944 $386 $ 7,099 $ 675 Foreign government bonds 19 -- 9 2 28 2 MBS: CMOs 447 116 700 131 1,147 247 MPTS 181 5 2 -- 183 5 CMBS 73 8 278 163 351 171 ABS CDOs -- -- 146 21 146 21 State and municipal bonds 1,849 81 26 10 1,875 91 Hybrid and redeemable preferred securities 199 9 547 125 746 134 ------------------ ---------- ------ ---------------- ------- ---------- Total fixed maturity securities 7,923 508 3,652 838 11,575 1,346 ------------------ ---------- ------ ---------------- ------- ---------- EQUITY SECURITIES Other securities 3 4 -- -- 3 4 ------------------ ---------- ------ ---------------- ------- ---------- Total equity securities 3 4 -- -- 3 4 ------------------ ---------- ------ ---------------- ------- ---------- Total AFS securities $7,926 $512 $3,652 $838 $11,578 $1,350 ================== ========== ====== ================ ======= ========== Total number of AFS securities in an unrealized loss position 1,196 ==========
S-26 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED)
AS OF DECEMBER 31, 2009 ------------------------------------------------------------------------ LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ----------------------------- ----------------------- ------------------ GROSS GROSS GROSS UNREALIZED UNREALIZED UNREALIZED FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND VALUE OTTI VALUE OTTI VALUE OTTI ------------------ ---------- ------ ---------------- ------- ---------- FIXED MATURITY SECURITIES Corporate bonds $4,163 $221 $5,638 $ 926 $ 9,801 $1,147 Foreign government bonds 30 -- 46 9 76 9 MBS: CMOs 382 151 870 287 1,252 438 MPTS 1,227 14 81 12 1,308 26 CMBS 152 13 619 317 771 330 ABS: CDOs 9 6 127 36 136 42 CLNs -- -- 322 278 322 278 State and municipal bonds 1,190 45 53 9 1,243 54 Hybrid and redeemable preferred securities 105 5 795 240 900 245 ------------------ ---------- ------ ---------------- ------- ---------- Total fixed maturity securities 7,258 455 8,551 2,114 15,809 2,569 ------------------ ---------- ------ ---------------- ------- ---------- EQUITY SECURITIES Banking securities 1 1 -- -- 1 1 Other financial services securities 4 6 -- -- 4 6 ------------------ ---------- ------ ---------------- ------- ---------- Total equity securities 5 7 -- -- 5 7 ------------------ ---------- ------ ---------------- ------- ---------- Total AFS securities $7,263 $462 $8,551 $2,114 $15,814 $2,576 ================== ========== ====== ================ ======= ========== Total number of AFS securities in an unrealized loss position 1,696 ==========
For information regarding our investments in VIEs, see Note 4. The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
AS OF DECEMBER 31, 2010 ---------------------------------------------- GROSS UNREALIZED NUMBER FAIR ----------------------- OF VALUE LOSSES OTTI SECURITIES(1) ------ ------ ---------------- --------------- Less than six months $ 169 $ 73 $ 4 41 Six months or greater, but less than nine months 55 20 -- 13 Nine months or greater, but less than twelve months 39 15 1 13 Twelve months or greater 884 501 171 224 ------ ------ ---------------- --------------- Total $1,147 $609 $176 291 ====== ====== ================ =============== AS OF DECEMBER 31, 2009 ---------------------------------------------- GROSS UNREALIZED NUMBER FAIR ----------------------- OF VALUE LOSSES OTTI SECURITIES(1) ------ ------ ---------------- --------------- Less than six months $ 415 $ 125 $ 4 80 Six months or greater, but less than nine months 115 60 -- 25 Nine months or greater, but less than twelve months 409 160 93 96 Twelve months or greater 1,623 1,264 116 309 ------ ------ ---------------- --------------- Total $2,562 $1,609 $213 510 ====== ====== ================ ===============
(1) We may reflect a security in more than one aging category based on various purchase dates. S-27 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) We regularly review our investment holdings for OTTI. Our gross unrealized losses on AFS securities as of December 31, 2010, decreased $1.2 billion in comparison to December 31, 2009. This change was attributable to a decline in overall market yields, which was driven, in part, by improved credit fundamentals (i.e., market improvement and narrowing credit spreads). As discussed further below, we believe the unrealized loss position as of December 31, 2010, does not represent OTTI as we did not intend to sell these fixed maturity AFS securities, it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities or we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery. Based upon this evaluation as of December 31, 2010, management believed we had the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities. As of December 31, 2010, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security. As of December 31, 2010, the unrealized losses associated with our MBS and ABS CDOs were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model as discussed above. The key assumptions included default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each security. As of December 31, 2010, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined we expected to recover the entire amortized cost of each security. Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 ------- -------------- Balance as of beginning-of-year $260 $ -- Cumulative effect from adoption of new accounting standard -- 30 Increases attributable to: Credit losses on securities for which an OTTI was not previously recognized 13 259 Credit losses on securities for which an OTTI was previously recognized 61 -- Decreases attributable to: Securities sold (25) (29) ------- -------------- Balance as of end-of-year $309 $260 ======= ==============
During the years ended December 31, 2010 and 2009, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons: Failure of the issuer of the security to make scheduled payments; Deterioration of creditworthiness of the issuer; Deterioration of conditions specifically related to the security; Deterioration of fundamentals of the industry in which the issuer operates; Deterioration of fundamentals in the economy including, but not limited to, higher unemployment and lower housing prices; and Deterioration of the rating of the security by a rating agency. We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities. S-28 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) TRADING SECURITIES Trading securities at fair value (in millions) consisted of the following:
AS OF DECEMBER 31, ------------------ 2010 2009 ------ ----------- FIXED MATURITY SECURITIES Corporate bonds $1,674 $1,641 U.S. Government bonds 362 370 Foreign government bonds 29 29 MBS: CMOs 124 124 MPTS 123 60 CMBS 67 81 ABS CDOs 5 -- State and municipal bonds 22 18 Hybrid and redeemable preferred securities 51 41 ------ ----------- Total fixed maturity securities 2,457 2,364 EQUITY SECURITIES Other securities 2 2 ------ ----------- Total equity securities 2 2 ------ ----------- Total trading securities $2,459 $2,366 ====== ===========
The portion of the market adjustment for losses that relate to trading securities still held as of December 31, 2010, 2009 and 2008, was $86 million, $126 million and $172 million, respectively. MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for approximately 31% and 29% of mortgage loans as of December 31, 2010 and 2009, respectively. The following provides the current and past due composition of our mortgage loans on real estate (in millions):
AS OF DECEMBER 31, --------------------- 2010 2009 --------- ----------- Current $6,419 $6,815 Valuation allowance associated with impaired mortgage loans on real estate (8) (8) Unamortized premium (discount) 20 28 --------- ----------- Total carrying value $6,431 $6,835 ========= ===========
The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ------- ------------- Number of impaired mortgage loans on real estate 6 2 ======= ============= Principal balance of impaired mortgage loans on real estate $52 $22 Valuation allowance associated with impaired mortgage loans on real estate (8) (8) ------- ------------- Carrying value of impaired mortgage loans on real estate $44 $14 ======= =============
The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ---- ------------ ---- Average carrying value for impaired mortgage loans on real estate $29 $ 8 $-- Interest income recognized on impaired mortgage loans on real estate 3 -- -- Amount of interest income collected on impaired mortgage loans on real estate 3 -- -- ==== ============ ====
As described in Note 1, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans on real estate, which were as follows (dollars in millions):
AS OF DECEMBER 31, 2010 --------------------------- DEBT- SERVICE PRINCIPAL COVERAGE AMOUNT % RATIO --------- -------- -------- LOAN-TO-VALUE Less than 65% $4,677 72.9% 1.61 65% to 74% 1,429 22.3% 1.41 75% to 100% 143 2.2% 0.86 Greater than 100% 170 2.6% 1.15 --------- -------- Total mortgage loans on real estate $6,419 100.0% ========= ========
ALTERNATIVE INVESTMENTS As of December 31, 2010 and 2009, alternative investments included investments in approximately 95 and 99 different partnerships, respectively, and the portfolio represented less than 1% of our overall invested assets. S-29 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) NET INVESTMENT INCOME The major categories of net investment income (in millions) on our Consolidated Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 --------- --------------- --------- Fixed maturity AFS securities $3,624 $3,373 $3,236 VIEs' fixed maturity AFS securities 14 -- -- Equity AFS securities 5 7 8 Trading securities 148 148 154 Mortgage loans on real estate 421 451 473 Real estate 16 17 20 Standby real estate equity commitments 1 1 3 Policy loans 167 169 177 Invested cash 5 8 45 Alternative investments 93 (54) (34) Consent fees 8 5 5 Other investments (7) 8 -- --------- --------------- --------- Investment income 4,495 4,133 4,087 Investment expense (133) (127) (112) --------- --------------- --------- Net investment income $4,362 $4,006 $3,975 ========= =============== =========
REALIZED GAIN (LOSS) RELATED TO CERTAIN INVESTMENTS The detail of the realized gain (loss) related to certain investments (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2010 2009 2008 -------- --------------- --------- Fixed maturity AFS securities: Gross gains $ 100 $ 154 $ 49 Gross losses (241) (687) (1,059) Equity AFS securities: Gross gains 9 5 1 Gross losses (4) (27) (33) Gain (loss) on other investments (4) (100) 31 Associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds 8 157 244 -------- --------------- --------- Total realized gain (loss) related to certain investments $(132) $(498) $ (767) ======== =============== =========
Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2010 2009 2008 -------- --------------- ----------- OTTI RECOGNIZED IN NET INCOME (LOSS) Fixed maturity securities: Corporate bonds $ (88) $(209) $(527) MBS: CMOs (61) (237) (289) CMBS (41) -- (1) ABS CDOs (1) (39) (1) Hybrid and redeemable preferred securities (5) (67) (50) -------- --------------- ----------- Total fixed maturity securities (196) (552) (868) -------- --------------- ----------- Equity securities: Banking securities -- (10) -- Insurance securities -- (8) (1) Other financial services securities (3) (3) (24) Other securities -- (6) (7) -------- --------------- ----------- Total equity securities (3) (27) (32) -------- --------------- ----------- Gross OTTI recognized in net income (loss) (199) (579) (900) Associated amortization of DAC, VOBA, DSI and DFEL 51 198 218 -------- --------------- ----------- Net OTTI recognized in net income (loss), pre-tax $(148) $(381) $(682) ======== =============== =========== PORTION OF OTTI RECOGNIZED IN OCI Gross OTTI recognized in OCI $ 93 $ 339 $ -- Change in DAC, VOBA, DSI and DFEL (10) (77) -- -------- --------------- ----------- Net portion of OTTI recognized in OCI, pre-tax $ 83 $ 262 $ -- ======== =============== ===========
DETERMINATION OF CREDIT LOSSES ON CORPORATE BONDS AND ABS CDOS As of December 31, 2010 and 2009, we reviewed our corporate bond and ABS CDO portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers. S-30 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) DETERMINATION OF CREDIT LOSSES ON MBS As of December 31, 2010 and 2009, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 25% to 100% depending on loan type and severity of delinquency status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) in the pool to project the future expected cash flows. We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further housing price depreciation. PAYABLES FOR COLLATERAL ON INVESTMENTS The carrying values of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:
AS OF DECEMBER 31, ------------------------------------------ 2010 2009 -------------------- --------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------ ----------- ------ Collateral payable held for derivative investments(1) $ 853 $ 853 $ 634 $ 634 Securities pledged under securities lending agreements(2) 199 192 501 479 Securities pledged under reverse repurchase agreements(3) 280 294 344 359 Securities pledged for Term Asset-Backed Securities Loan Facility ("TALF")(4) 280 318 345 386 Securities pledged for Federal Home Loan Bank of Indianapolis Securities ("FHLBI")(5) 100 115 100 111 -------- ------ ----------- ------ Total payables for collateral on investments $1,712 $1,772 $1,924 $1,969 ======== ====== =========== ======
(1) We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties' credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that once exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for details about maximum collateral potentially required to post on our credit default swaps. (2) Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities. (3) Our pledged securities under reverse repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our reverse repurchase program is typically invested in fixed maturity AFS securities. (4) Our pledged securities for TALF are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount that has typically averaged 90% of the fair value of the TALF securities. The cash received in these transactions is invested in fixed maturity AFS securities. (5) Our pledged securities for FHLBI are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 85% to 95% of the fair value of the FHLBI securities. The cash received in these transactions is typically invested in cash and invested cash or fixed maturity AFS securities. S-31 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) Increase (decrease) in payables for collateral on investments (in millions) included on the Consolidated Statements of Cash Flows consisted of the following:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2010 2009 2008 --------- --------------- -------- Collateral payable held for derivative investments $ 219 $ 651 $ (17) Securities pledged under securities lending agreements (302) 74 (228) Securities pledged under reverse repurchase agreements (64) (126) (10) Securities pledged for TALF (65) 345 -- Securities pledged for FHLBI -- 100 -- --------- --------------- -------- Total increase (decrease) in payables for collateral on investments $ (212) $1,044 $(255) ========= =============== ========
INVESTMENT COMMITMENTS As of December 31, 2010, our investment commitments were $887 million, which included $292 million of LPs, $53 million of standby commitments to purchase real estate upon completion and leasing, $354 million of private placements and $188 million of mortgage loans. CONCENTRATIONS OF FINANCIAL INSTRUMENTS As of December 31, 2010 and 2009, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $4.7 billion and $4.5 billion, or 6% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $2.8 billion and $2.9 billion, or 3% and 4% of our invested assets portfolio, respectively. These investments are included in corporate bonds in the tables above. As of December 31, 2010, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $6.4 billion, or 8% of our invested assets portfolio, and our investment securities in the CMO industry with a fair value of $6.2 billion, or 8% of our invested assets portfolio. As of December 31, 2009, our most significant investment in one industry was our investment securities in the CMO industry with a fair value of $6.6 billion, or 9% of the invested assets portfolio. We utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the AFS securities table above. 6. DERIVATIVE INSTRUMENTS TYPES OF DERIVATIVE INSTRUMENTS AND DERIVATIVE STRATEGIES We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and credit risk. We assess these risks by continually identifying and monitoring changes in interest rate exposure, foreign currency exposure, equity market exposure and credit exposure that may adversely impact expected future cash flows and by evaluating hedging opportunities. Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swap agreements, interest rate cap agreements, interest rate futures, forward-starting interest rate swaps, consumer price index swaps, interest rate cap corridors, treasury locks and reverse treasury locks. Derivative instruments that are used as part of our foreign currency risk management strategy include foreign currency swaps, currency futures and foreign currency forwards. Call options based on LNC stock, call options based on the Standard & Poor's ("S&P") 500 Index(R) ("S&P 500"), total return swaps, variance swaps, put options and equity futures are used as part of our equity market risk management strategy. We also use credit default swaps as part of our credit risk management strategy. We evaluate and recognize our derivative instruments in accordance with the Derivatives and Hedging Topic of the FASB ASC. As of December 31, 2010, we had derivative instruments that were designated and qualifying as cash flow hedges. We also had embedded derivatives that were economic hedges, but were not designed to meet the requirements for hedge accounting treatment. See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. Our derivative instruments are monitored by LNC's Asset Liability Management Committee and LNC's Equity Risk Management Committee as part of those committees' oversight of our derivative activities. These committees are responsible for implementing various hedging strategies that are developed through their analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies. We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with living benefit guarantees offered in our variable annuity products, including the LINCOLN SMARTSECURITY(R) Advantage GWB feature, the 4LATER(R) Advantage GIB feature and the I4LIFE(R) Advantage GIB feature. See "GLB Reserves Embedded Derivatives" below for further details. S-32 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) See Note 22 for additional disclosures related to the fair value of our financial instruments and see Note 4 for derivative instruments related to our consolidated VIEs. We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the credit exposure. Outstanding derivative instruments with off-balance-sheet risks (dollars in millions) were as follows:
AS OF DECEMBER 31, 2010 ---------------------------------------------------------------------- ASSET CARRYING (LIABILITY) CARRYING NUMBER OR FAIR VALUE OR FAIR VALUE OF NOTIONAL ------------------------ ----------------------- INSTRUMENTS AMOUNTS GAIN LOSS GAIN LOSS ----------- -------- ------ ----------------- ---- ------------------ DERIVATIVE INSTRUMENTS DESIGNATED AND QUALIFYING AS HEDGING INSTRUMENTS Cash flow hedges: Interest rate swap agreements(1) 151 $ 926 $ 24 $ (71 -- $ -- Forward-starting interest rate swaps(1) 2 150 1 -- -- -- Foreign currency swaps(1) 13 340 43 (13) -- -- Reverse treasury locks(1) 5 1,000 11 (5) -- -- ----------- -------- ------ ----------------- ---- ------------------ Total derivative instruments designated and qualifying as hedging instruments 171 2,416 79 (89) -- -- ----------- -------- ------ ----------------- ---- ------------------ DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS Interest rate cap agreements(1) 3 150 -- -- -- -- Interest rate futures(1) 15,881 2,251 -- -- -- -- Equity futures(1) 13,375 907 -- -- -- -- Interest rate swap agreements(1) 81 7,955 34 (511) -- -- Credit default swaps(2) 9 145 -- -- -- (16) Total return swaps(1) 8 800 -- (21) -- -- Put options(1) 145 5,602 1,151 -- -- -- Call options (based on S&P 500)(1) 544 4,083 301 -- -- -- Variance swaps(1) 50 30 46 (34) -- -- Currency futures(1) 1,589 219 -- -- -- -- Consumer price index swaps(1) 100 55 -- (2) -- -- Interest rate cap corridors(1) 73 8,050 52 -- -- -- Embedded derivatives: Deferred compensation plans(2) 6 -- -- -- -- (315) Indexed annuity contracts(3) 132,260 -- -- -- -- (497) GLB reserves(3) 305,962 -- -- -- 518 (926) Reinsurance related(4) -- -- 417 -- -- (305) AFS securities(1) 1 -- 15 -- -- -- ----------- -------- ------ ----------------- ---- ------------------ Total derivative instruments not designated and not qualifying as hedging instruments 470,087 30,247 2,016 (568) 518 (2,059) ----------- -------- ------ ----------------- ---- ------------------ Total derivative instruments 470,258 $32,663 $2,095 $(657) $518 $(2,059) =========== ======== ====== ================= ==== ==================
S-33 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED)
AS OF DECEMBER 31, 2009 ----------------------------------------------------------------------- ASSET CARRYING (LIABILITY) CARRYING NUMBER OR FAIR VALUE OR FAIR VALUE OF NOTIONAL ------------------------ ----------------------- INSTRUMENTS AMOUNTS GAIN LOSS GAIN LOSS ----------- -------- ------ ----------------- ---- ------------------ DERIVATIVE INSTRUMENTS DESIGNATED AND QUALIFYING AS HEDGING INSTRUMENTS Cash flow hedges: Interest rate swap agreements(1) 85 $ 620 $ 24 $ (45) $ -- $ -- Foreign currency swaps(1) 13 340 33 (19) -- -- ----------- -------- ------ ------------------- ---- ------------------ Total derivative instruments designated and qualifying as hedging instruments 98 960 57 (64) -- -- ----------- -------- ------ ------------------- ---- ------------------ DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS Interest rate cap agreements(1) 20 1,000 -- -- -- -- Interest rate futures(1) 19,073 2,333 -- -- -- -- Equity futures(1) 21,149 1,147 -- -- -- -- Interest rate swap agreements(1) 81 6,232 63 (349) -- -- Foreign currency forwards(1) 17 1,035 12 (91) -- -- Credit default swaps(2) 14 220 -- -- -- (65) Put options(1) 114 4,093 935 -- -- -- Call options (based on LNC stock)(1) 1 9 -- -- -- -- Call options (based on S&P 500)(1) 559 3,440 215 -- -- -- Variance swaps(1) 36 26 66 (22) -- -- Currency futures(1) 3,664 505 -- -- -- -- Embedded derivatives: Deferred compensation plans(2) 6 -- -- -- -- (314) Indexed annuity contracts(3) 108,119 -- -- -- -- (419) GLB reserves(3) 261,309 -- -- -- 308 (984) Reinsurance related(4) -- -- 417 -- -- (140) AFS securities(1) 2 -- 19 -- -- -- ----------- -------- ------ ------------------- ---- ------------------ Total derivative instruments not designated and not qualifying as hedging instruments 414,164 20,040 1,727 (462) 308 (1,922) ----------- -------- ------ ------------------- ---- ------------------ Total derivative instruments 414,262 $21,000 $1,784 $(526) $308 $(1,922) =========== ======== ====== =================== ==== ==================
(1) Reported in derivative investments on our Consolidated Balance Sheets. (2) Reported in other liabilities on our Consolidated Balance Sheets. (3) Reported in future contract benefits on our Consolidated Balance Sheets. (4) Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets. S-34 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) The maturity of the notional amounts of derivative instruments (in millions) was as follows:
REMAINING LIFE AS OF DECEMBER 31, 2010 -------------------------------------------------------- LESS THAN 1 - 5 6 - 10 11 - 30 OVER 30 1 YEAR YEARS YEARS YEARS YEARS TOTAL --------- ------ ------- -------- -------------- ------- DERIVATIVE INSTRUMENTS DESIGNATED AND QUALIFYING AS HEDGING INSTRUMENTS Cash flow hedges: Interest rate swap agreements $ 24 $ 84 $ 264 $ 540 $14 $ 926 Forward-starting interest rate swaps -- -- 50 100 -- 150 Foreign currency swaps -- 124 135 81 -- 340 Reverse treasury locks -- 850 150 -- -- 1,000 --------- ------ ------- -------- -------------- ------- Total derivative instruments designated and qualifying as hedging instruments 24 1,058 599 721 14 2,416 --------- ------ ------- -------- -------------- ------- DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS Interest rate cap agreements 150 -- -- -- -- 150 Interest rate futures 2,251 -- -- -- -- 2,251 Equity futures 907 -- -- -- -- 907 Interest rate swap agreements 203 1,819 1,719 4,214 -- 7,955 Credit default swaps -- 40 105 -- -- 145 Total return swaps 650 150 -- -- -- 800 Put options -- 1,589 4,013 -- -- 5,602 Call options (based on S&P 500) 3,311 772 -- -- -- 4,083 Variance swaps -- 4 26 -- -- 30 Currency futures 219 -- -- -- -- 219 Consumer price index swaps 4 15 15 19 2 55 Interest rate cap corridors -- -- 8,050 -- -- 8,050 --------- ------ ------- -------- -------------- ------- Total derivative instruments not designated and not qualifying as hedging instruments 7,695 4,389 13,928 4,233 2 30,247 --------- ------ ------- -------- -------------- ------- Total derivative instruments with notional amounts $7,719 $5,447 $14,527 $4,954 $16 $32,663 ========= ====== ======= ======== ============== =======
S-35 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) The change in our unrealized gain (loss) on derivative instruments in accumulated OCI (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 ------- -------------- UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS Balance as of beginning-of-year $(13) $(15) Other comprehensive income (loss): Unrealized holding gains (losses) arising during the year: Cash flow hedges: Interest rate swap agreements (24) 33 Forward-starting interest rate swaps 1 -- Foreign currency swaps 14 (21) Reverse treasury locks 5 -- AFS securities embedded derivatives 2 -- Change in foreign exchange rate adjustment 4 (31) Change in DAC, VOBA, DSI and DFEL (11) 11 Income tax benefit (expense) 3 5 Less: Reclassification adjustment for gains (losses) included in net income (loss): Cash flow hedges: Interest rate swap agreements(1) 4 4 Foreign currency swaps(1) 2 -- Associated amortization of DAC, VOBA, DSI and DFEL (9) (11) Income tax benefit (expense) 1 2 ------- -------------- Balance as of end-of-year $(17) $(13) ======= ==============
(1) The OCI offset is reported within net investment income on our Consolidated Statements of Income (Loss). (2) The OCI offset is reported within interest and debt ex- pense on our Consolidated Statements of Income (Loss). The gains (losses) on derivative instruments (in millions) recorded within net income (loss) on our Consolidated Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 -------- --------------- ---------- DERIVATIVE INSTRUMENTS DESIGNATED AND QUALIFYING AS HEDGING INSTRUMENTS Cash flow hedges: Interest rate swap agreements(1) $ 4 $ 3 $ (3) Forward-starting interest rate swaps(1) (1) -- -- Foreign currency swaps(1) 2 1 (1) -------- --------------- ---------- Total derivative instruments designated and qualifying as hedging instruments 5 4 (4) -------- --------------- ---------- DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS Interest rate cap agreements(2) -- -- (1) Interest rate futures(2) 183 (60) -- Equity futures(2) (248) (55) -- Interest rate swap agreements(2) (8) (150) -- Foreign currency forwards(1) 43 23 -- Credit default swaps -- fees(1) 1 1 1 Credit default swaps -- marked-to-market(3) 7 (37) (51) Total return swaps(3) (133) -- -- Put options(2) (217) (136) -- Call options (based on LNC stock)(2) -- -- (8) Call options (based on S&P 500)(2) 114 84 (214) Variance swaps(2) (34) (38) -- Currency futures(2) (13) (18) -- Consumer price index swaps(2) (1) -- -- Interest rate cap corridors(1) 5 -- -- Embedded derivatives: Deferred compensation plans(3) (33) (50) 43 Indexed annuity contracts(2) (81) (75) 196 GLB reserves(2) 268 2,228 (2,625) Reinsurance related(2) (165) (155) 226 AFS securities(1) (4) 4 -- -------- --------------- ---------- Total derivative instruments not designated and not qualifying as hedging instruments (316) 1,566 (2,433) -------- --------------- ---------- Total derivative instruments $(311) $1,570 $(2,437) ======== =============== ==========
(1) Reported in net investment income on our Consolidated Statements of Income (Loss). (2) Reported in realized gain (loss) on our Consolidated State- ments of Income (Loss). (3) Reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). S-36 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) The location in the Consolidated Statements of Income (Loss) where the gains (losses) are recorded for each of the derivative instruments discussed below is specified in the table above. DERIVATIVE INSTRUMENTS DESIGNATED AND QUALIFYING AS CASH FLOW HEDGES Gains (losses) (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2010 2009 2008 ---- --------------- ---- Ineffective portion recognized in realized gain (loss) $ -- $ (1) $1 Gain (loss) recognized as a component of OCI with the offset to net investment income 6 4 2
As of December 31, 2010, $19 million of the deferred net losses on derivative instruments in accumulated OCI were expected to be reclassified to earnings during the next twelve months. This reclassification would be due primarily to the interest rate variances related to the interest rate swap agreements. For the years ended December 31, 2010, 2009 and 2008, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period. INTEREST RATE SWAP AGREEMENTS We use a portion of our interest rate swap agreements to hedge the interest rate risk of our exposure to floating rate bond coupon payments, replicating a fixed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or more times based on the actual or expected price level, performance or value of one or more underlying interest rates. We are required to pay the counterparty the stream of variable interest payments based on the coupon payments from the hedged bonds, and in turn, receive a fixed payment from the counterparty at a predetermined interest rate. The gains or losses on interest rate swaps hedging our interest rate exposure on floating rate bond coupon payments are reclassified from accumulated OCI to net income (loss) as the related bond interest is accrued. In addition, we use interest rate swap agreements to hedge our exposure to fixed rate bond coupon payments and the change in underlying asset values as interest rates fluctuate. As of December 31, 2010, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 2042. FORWARD-STARTING INTEREST RATE SWAPS We use forward-starting interest rate swaps to hedge our exposure to interest rate fluctuations related to the forecasted purchase of certain AFS securities. The gains or losses resulting from the swap agreements are recorded in OCI. The gains or losses are reclassified from accumulated OCI to earnings over the life of the assets once the assets are purchased. FOREIGN CURRENCY SWAPS We use foreign currency swaps, which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries at a specified rate of exchange in the future. The gains or losses on foreign currency swaps hedging foreign exchange risk exposure on foreign currency bond coupon payments are reclassified from accumulated OCI to net income (loss) as the related bond interest is accrued. As of December 31, 2010, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was July 2022. REVERSE TREASURY LOCKS We use reverse treasury locks to hedge the interest rate exposure related to the purchase of fixed rate securities or the anticipated future cash flows of floating rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities. The gains or losses resulting from the reverse treasury locks are recorded in OCI and are reclassified from accumulated OCI to earnings over the life of the assets once the assets are purchased. DERIVATIVE INSTRUMENTS NOT DESIGNATED AND NOT QUALIFYING AS HEDGING INSTRUMENTS We use various other derivative instruments for risk management and income generation purposes that either do not qualify for hedge accounting treatment or have not currently been designated by us for hedge accounting treatment. INTEREST RATE CAP AGREEMENTS We use interest rate cap agreements to provide a level of protection from the effect of rising interest rates for our annuity business, within our Retirement Solutions - Annuities and Retirement Solutions - Defined Contribution segments. Interest rate cap agreements entitle us to receive quarterly 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. Our interest rate cap agreements provide an economic hedge of our annuity business. INTEREST RATE FUTURES AND EQUITY FUTURES We use interest rate futures and equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price. INTEREST RATE SWAP AGREEMENTS We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products. S-37 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) FOREIGN CURRENCY FORWARDS We used foreign currency forward contracts to hedge dividends received from LNC's former subsidiary, Lincoln UK. The foreign currency forward contracts obligated us to deliver a specified amount of currency at a future date and a specified exchange rate. CREDIT DEFAULT SWAPS We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counter-party at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. We sold credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. Information related to our open credit default swap liabilities for which we are the seller (dollars in millions) was as follows:
AS OF DECEMBER 31, 2010 ----------------------------------------------------------------------------------------------------- CREDIT RATING MAXIMUM REASON FOR NATURE OF OF UNDERLYING NUMBER OF POTENTIAL MATURITY ENTERING RECOURSE OBLIGATION(1) INSTRUMENTS FAIR VALUE(2) PAYOUT --------------- ------------- ------------ --------------- ----------- ------------------ --------- 12/20/2012(3) (5) (6) BBB+ 4 $ -- $ 40 12/20/2016(4) (5) (6) BBB 3 (12) 65 03/20/2017(4) (5) (6) BBB- 2 (4) 40 ----------- ------------------ --------- 9 $(16) $145 =========== ================== ========= 03/20/2010(3) (7) (6) A- 1 $ -- $ 10 06/20/2010(3) (7) (6) A 1 -- 10 12/20/2012(3) (5) (6) BBB+ 4 -- 40 12/20/2016(4) (5) (6) B- 2 (19) 48 03/20/2017(4) (5) (6) BB+ 6 (46) 112 ----------- ------------------ --------- 14 $(65) $220 =========== ================== =========
(1) Represents average credit ratings based on the midpoint of the applicable ratings among Moody's, S&P and Fitch Ratings. (2) Broker quotes are used to determine the market value of credit default swaps. (3) These credit default swaps were sold to our contract holders, prior to 2007, where we determined there was a spread versus premium mismatch. (4) These credit default swaps were sold to a counter-party of the consolidated VIEs as discussed in Note 1. (5) Credit default swap was entered into in order to generate income by providing default protection in return for a quarterly payment. (6) Seller does not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract. (7) Credit default swap was entered into in order to generate income by providing protection on a highly rated basket of securities in return for a quarterly payment. Details underlying the associated collateral of our open credit default swaps for which we are the seller, if credit risk related contingent features were triggered (in millions) are as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ---- ------------- Maximum potential payout $145 $220 Less: Counterparty thresholds 10 30 ---- ------------- Maximum collateral potentially required to post $135 $190 ==== =============
Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, we would have been required to post approximately $6 million as of December 31, 2010, after considering the fair values of the associated investments counter-parties' credit ratings as compared to ours and specified thresholds that once exceeded result in the payment of cash. TOTAL RETURN SWAPS We use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total S-38 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) return on a portfolio of indexes and pay a floating rate of interest. PUT OPTIONS We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount. CALL OPTIONS (BASED ON LNC STOCK) We use call options on LNC stock to hedge the expected increase in liabilities arising from SARs granted on LNC stock. CALL OPTIONS (BASED ON S&P 500) We use indexed annuity contracts to permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, subject to minimum guarantees. We purchase call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the indexed annuity. VARIANCE SWAPS We use variance swaps to hedge the liability exposure on certain options in variable annuity products. Variance swaps are contracts entered into at no cost and whose payoff is the difference between the realized variance rate of an underlying index and the fixed variance rate determined as of inception. CURRENCY FUTURES We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate. CONSUMER PRICE INDEX SWAPS We use consumer price index swaps to hedge the liability exposure on certain options in fixed/indexed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed rate determined as of inception. INTEREST RATE CAP CORRIDORS We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for our annuity business, within our Retirement Solutions - Annuities and Retirement Solutions - Defined Contribution segments. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor. Our interest rate cap corridors provide an economic hedge of our annuity business. DEFERRED COMPENSATION PLANS EMBEDDED DERIVATIVES We have certain deferred compensation plans that have embedded derivative instruments. The liability related to these plans varies based on the investment options selected by the participants. The liability related to certain investment options selected by the participants is marked-to-market through net income (loss). INDEXED ANNUITY CONTRACTS EMBEDDED DERIVATIVES We distribute indexed annuity contracts that permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. This feature represents an embedded derivative under the Derivatives and Hedging Topic of the FASB ASC. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, subject to minimum guarantees. We purchase S&P 500 call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the indexed annuity. GLB RESERVES EMBEDDED DERIVATIVES We have certain GLB variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees, notably our GIB, 4LATER([R]) and LINCOLN LIFETIME INCOME(SM)ADVANTAGE features, have elements of both insurance benefits accounted for under the Financial Services Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC ("benefit reserves") and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC ("embedded derivative reserves"). We calculate the value of the embedded derivative reserve and the benefit reservexx based on the specific characteristics of each GLB feature. As of December 31, 2010, we had $30.3 billion of account values that were attributable to variable annuities with a GWB feature and $11.4 billion of account values that were attributable to variable annuities with a GIB feature. We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GWB and GIB features. The hedging strategy is designed such that changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities move in the opposite direction of changes in embedded derivative reserves of the GWB and GIB caused by those same factors. As part of our current hedging program, equity markets, interest rates and volatility in market conditions are monitored on a S-39 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE INSTRUMENTS (CONTINUED) daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off. However, the hedging results do not impact LNL due to a funds withheld agreement with LNBAR, which causes the financial impact of the derivatives as well as the cash flow activity to be reflected on LNBAR. REINSURANCE RELATED EMBEDDED DERIVATIVES We have certain Modco and CFW reinsurance arrangements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance arrangements. Changes in the estimated fair value of these derivatives as they occur are recorded through net income (loss). Offsetting these amounts are corresponding changes in the estimated fair value of trading securities in portfolios that support these arrangements. These embedded derivatives, which are included in reinsurance related embedded derivatives on our Consolidated Balance Sheets, were $(305) million and $(140) million as of December 31, 2010 and 2009, respectively. We are involved in an inter-company reinsurance agreement where we cede to LNBAR the risk under certain UL contracts for no lapse benefit guarantees. If our contract holders' account value is not sufficient to pay the cost of insurance charges required to keep the policy inforce, and the contract holder has made required deposits, LNBAR will reimburse us for the charges. These embedded derivatives, which are included in reinsurance related embedded derivatives on our Consolidated Balance Sheets, were $417 million as of Decem-ber 31, 2010 and 2009. AFS SECURITIES EMBEDDED DERIVATIVES We own various debt securities that either contain call options to exchange the debt security for other specified securities of the borrower, usually common stock, or contain call options to receive the return on equity-like indexes. The change in fair value of these embedded derivatives flows through net income (loss). CREDIT RISK We are exposed to credit loss in the event of nonperformance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or nonperformance risk. The nonperformance risk is based upon assumptions for each counterparty's credit spread over the estimated weighted average life of the counterparty exposure less collateral held. As of December 31, 2010, the nonperformance risk adjustment was $10 million. The credit risk associated with such agreements is minimized by purchasing such agreements from financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, we have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of the derivatives contract, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contract. In certain transactions, we and the counterparty have entered into a collateral support agreement requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. We do not believe the inclusion of termination or collateralization events pose any material threat to the liquidity position of the Company. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. As of December 31, 2010, the exposure was $175 million. The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows:
AS OF DECEMBER 31, 2010 AS OF DECEMBER 31, 2009 ----------------------- -------------------------- COLLATERAL COLLATERAL COLLATERAL COLLATERAL POSTED BY POSTED BY POSTED BY POSTED BY S&P COUNTER- LNC COUNTER- LNC CREDIT PARTY (HELD BY PARTY (HELD BY RATING OF (HELD BY COUNTER- (HELD BY COUNTER- COUNTERPARTY LNC) PARTY) LNC) PARTY) ------------ ---------- ------------ ---------- --------------- AAA $ 1 $ -- $ 3 $ -- AA 99 -- 140 -- AA- 65 -- 272 -- A+ 548 43 171 (13) A 422 202 328 (240) ---------- ------------ ---------- --------------- $1,135 $245 $914 $(253) ========== ============ ========== ===============
S-40 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. FEDERAL INCOME TAXES The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2010 2009 2008 --------- --------------- -------- Current $ (179) $ 172 $(292) Deferred 526 (9) 224 --------- --------------- -------- Federal income tax expense (benefit) $ 347 $ 163 $ (68) ========= =============== ========
A reconciliation of the effective tax rate differences (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 -------- -------- ----------- Tax rate times pre-tax income $ 498 $ 88 $ 65 Effect of: Separate account dividend received deduction (94) (77) (82) Tax credits (42) (47) (25) Goodwill -- 238 -- Prior year tax return adjustment (13) (60) (34) Other items (2) 21 8 -------- -------- --- ------- Federal income tax expense (benefit) $ 347 $ 163 $ (68) ======== ======== =========== Effective tax rate 24% N/M N/M ======== ======== === =======
The effective tax rate is a ratio of tax expense over pre-tax income (loss). Since the pre-tax income of $251 million and $186 million in 2009 and 2008, respectively, resulted in a tax expense of $163 million in 2009 and a tax benefit of $68 million in 2008, the effective tax rate was not meaningful. The separate account dividend received deduction included in the table above is exclusive of any prior years' tax return resolution. The federal income tax asset (liability) (in millions), which is included in other liabilities on our Consolidated Balance Sheets, was as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ---------- ---------- Current $ (412) $ (250) Deferred (1,500) (523) ---------- ---------- Total federal income tax asset (liability) $(1,912) $ (773) ========== ==========
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ---------- ---------- DEFERRED TAX ASSETS Future contract benefits and other contract holder funds $ 1,116 $1,676 Other investments 625 338 Reinsurance deferred gain 138 163 Modco embedded derivative asset 93 49 Compensation and benefit plans 136 151 Net capital loss 96 112 VIE 77 -- Other 73 58 ---------- ---------- Total deferred tax assets 2,354 2,547 ---------- ---------- DEFERRED TAX LIABILITIES DAC 1,982 1,947 VOBA 483 734 Net unrealized gain on AFS securities 988 38 Net unrealized gain on trading securities 86 55 Intangibles 179 192 Other 136 104 ---------- ---------- Total deferred tax liabilities 3,854 3,070 ---------- ---------- Net deferred tax asset (liability) $(1,500) $ (523) ========== ==========
LNL and its affiliates, with the exception of Jefferson-Pilot Life Insurance Company ("JPL"), Jefferson Pilot Financial Insurance Company ("JPFIC") and Jefferson Pilot LifeAmerica Insurance Company ("JPLA") as noted below, are part of a consolidated federal income tax filing with LNC. JPL filed a separate federal income tax return until its merger with LNL on April 2, 2007. JPFIC filed a separate federal income tax return until its merger into LNL on July 2, 2007. JPLA was part of a consolidated federal income tax filing with JPFIC until its merger with LLANY on April 2, 2007. As of December 31, 2010, LNL had net capital loss carryforwards of $275 million which will expire in 2014. LNL believes that it is more likely than not that the capital losses will be fully utilized within the allowable carryforward period. The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary, to reduce our deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is S-41 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. FEDERAL INCOME TAXES more likely than not that the deferred tax assets, including our capital loss deferred tax asset, will be realized. As of December 31, 2010 and 2009, $181 million and $180 million, of our unrecognized tax benefits presented below, if recognized, would have impacted our income tax expense and our effective tax rate. We anticipate a change to our unrecognized tax benefits during 2011 in the range of none to $107 million.
FOR THE YEARS ENDED DECEMBER 31, ------------------ 2010 2009 ---------- ------- Balance as of beginning-of-year $293 $264 Increases for prior year tax positions 2 26 Decreases for prior year tax positions (6) (1) Increases for current year tax positions 8 11 Decreases for current year tax positions (7) (7) Decreases for settlements with taxing authorities (10) -- Decreases for lapse of statute of limitations (2) -- ---------- ------- Balance as of end-of-year $278 $293 ========== =======
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. During the years ended December 31, 2010, 2009 and 2008, we recognized interest and penalty expense related to uncertain tax positions of $6 million, $11 million and $1 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $81 million and $75 million as of December 31, 2010 and 2009, respectively. We are subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the third quarter of 2008, the IRS completed its examination for tax years 2003 and 2004 resulting in a proposed assessment. During the second quarter of 2010, the IRS completed its examination for tax years 2005 and 2006 resulting in a proposed assessment. Also, during the second quarter of 2010, the IRS completed its examination of tax year 2006 for the former Jefferson-Pilot Corporation ("JP") and its subsidiaries. We believe a portion of the assessments is inconsistent with the existing law and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our consolidated results of operations or financial condition. We are currently under audit by the IRS for years 2007 and 2008. The JP subsidiaries acquired in the April 2006 merger are subject to a separate IRS examination cycle. For the former JP subsidiaries, JPL and JPFIC, the IRS is examining the tax years ended April 1, 2007 and July 1, 2007, respectively. 8. DAC, VOBA, DSI AND DFEL During the fourth quarter of 2008, we recorded a decrease to income (loss) totaling $242 million, for a reversion to the mean prospective unlocking of DAC, VOBA, DSI and DFEL as a result of significant and sustained declines in the equity markets during 2008. During 2010 and 2009, we did not have a reversion to the mean prospective unlocking of DAC, VOBA, DSI and DFEL. The pre-tax impact for these items is included within the prospective unlocking line items in the changes in DAC, VOBA, DSI and DFEL tables below. Changes in DAC (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 --------- --------- --------- Balance as of beginning-of-year $7,310 $7,421 $5,765 Reinsurance assumed (ceded) (38) 48 (230) Transfer of business to a third party -- (37) -- Deferrals 1,636 1,614 1,811 Amortization, net of interest: Prospective unlocking -- assumption changes (30) (15) (368) Prospective unlocking -- model refinements 145 -- 44 Retrospective unlocking 17 82 (120) Other amortization, net of interest (841) (748) (712) Adjustment related to realized (gains) losses (61) 91 137 Adjustment related to unrealized (gains) losses (662) (1,146) 1,094 --------- --------- --------- Balance as of end-of-year $7,476 $7,310 $7,421 ========= ========= =========
S-42 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DAC, VOBA, DSI AND DFEL (CONTINUED) Changes in VOBA (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 --------- --------- --------- Balance as of beginning-of-year $2,086 $3,763 $2,809 Transfer of business to a third party -- (255) -- Deferrals 26 30 40 Amortization: Prospective unlocking -- assumption changes (41) (20) (7) Prospective unlocking -- model refinements (7) -- 6 Retrospective unlocking 11 (44) (38) Other amortization (361) (349) (335) Accretion of interest(1) 89 102 116 Adjustment related to realized (gains) losses (7) 43 98 Adjustment related to unrealized (gains) losses (418) (1,184) 1,074 --------- --------- --------- Balance as of end-of-year $1,378 $2,086 $3,763 ========= ========= =========
(1) The interest accrual rates utilized to calculate the accretion of interest ranged from 3.50% to 7.25%. Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2010, was as follows: 2011 $213 2012 187 2013 166 2014 140 2015 126
Changes in DSI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2010 2009 2008 ------- ------- -------- Balance as of beginning-of-year $361 $310 $ 279 Deferrals 66 76 96 Amortization, net of interest: Prospective unlocking -- assumption changes (3) -- (37) Retrospective unlocking 5 11 (6) Other amortization, net of interest (53) (38) (28) Adjustment related to realized (gains) losses (11) 3 6 Adjustment related to unrealized (gains) losses (41) (1) -- ------- ------- -------- Balance as of end-of-year $324 $361 $ 310 ======= ======= ========
Changes in DFEL (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2010 2009 2008 --------- ------- ------- Balance as of beginning-of-year $1,273 $ 948 $ 768 Reinsurance assumed (ceded) 22 -- (47) Transfer of business to a third party . -- (11) -- Deferrals 546 496 428 Amortization, net of interest: Prospective unlocking -- assumption changes (57) (22) (37) Prospective unlocking -- model refinements 56 -- 25 Retrospective unlocking (23) (3) (41) Other amortization, net of interest (167) (141) (150) Adjustment related to realized (gains) losses (4) 5 2 Adjustment related to unrealized (gains) losses (174) 1 -- --------- ------- ------- Balance as of end-of-year $1,472 $1,273 $ 948 =========================
S-43 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. REINSURANCE The following summarizes reinsurance amounts (in millions) recorded on our Consolidated Statements of Income (Loss), excluding amounts attributable to the indemnity reinsurance transaction with Swiss Re:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2010 2009 2008 ---------- ---------- ---------- Direct insurance premiums and fees $ 6,338 $ 5,936 $ 5,863 Reinsurance assumed 22 10 18 Reinsurance ceded (1,361) (1,227) (1,056) ---------- ---------- ---------- Total insurance premiums and fees, net $ 4,999 $ 4,719 $ 4,825 ========== ========== ========== Direct insurance benefits $ 4,324 $ 3,530 $ 4,254 Reinsurance recoveries netted against benefits (1,754) (1,080) (1,600) ---------- ---------- ---------- Total benefits, net $ 2,570 $ 2,450 $ 2,654 ========== ========== ==========
We cede insurance to other companies. The portion of risks exceeding our retention limit is reinsured with other insurers. We seek reinsurance coverage within the businesses that sell life insurance and annuities in order to limit our exposure to mortality losses and enhance our capital management. As discussed in Note 25, a portion of this reinsurance activity is with affiliated companies. Under our reinsurance program, we reinsure approximately 40% to 45% of the mortality risk on newly issued non-term life insurance contracts and approximately 35% of total mortality risk including term insurance contracts. Our policy for this program is to retain no more than $10 million on a single insured life issued on fixed, VUL and term life insurance contracts. The retention per single insured life for corporate-owned life insurance is $2 million. Portions of our deferred annuity business have been reinsured on a Modco basis with other companies to limit our exposure to interest rate risks. As of December 31, 2010, the reserves associated with these reinsurance arrangements totaled $935 million. To cover products other than life insurance, we acquire other reinsurance coverages with retentions and limits. We obtain reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings of our principal reinsurers. Our reinsurance operations were acquired by Swiss Re in December 2001, through a series of indemnity reinsurance transactions. Swiss Re represents our largest reinsurance exposure. Under the indemnity reinsurance agreements, Swiss Re reinsured certain of our liabilities and obligations. As we are not relieved of our legal liability to the ceding companies, the liabilities and obligations associated with the reinsured contracts remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $3.6 billion as of December 31, 2010. Swiss Re has funded a trust, with a balance of $1.7 billion as of December 31, 2010, to support this business. As a result of Swiss Re's S&P financial strength rating dropping below AA-, Swiss Re funded an additional trust during the fourth quarter of 2009 with a balance of approximately $1.5 billion as of December 31, 2010, to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets are reported within trading securities or mortgage loans on real estate on our Consolidated Balance Sheets. Our liabilities for funds withheld and embedded derivatives as of December 31, 2010, included $1.8 billion and $78 million, respectively, related to the business reinsured by Swiss Re. We recorded the gain related to the indemnity reinsurance transactions on the business sold to Swiss Re as a deferred gain on business sold through reinsurance on our Consolidated Balance Sheets. The deferred gain is being amortized into income at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale. During 2010, 2009 and 2008 we amortized $75 million, $50 million and $50 million, after-tax, respectively, of deferred gain on business sold through reinsurance. 10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2010 ------------------------------------------------------------------------- ACQUISITION CUMULATIVE BALANCE IMPAIRMENT AS OF AS OF CAPITAL DISPOSITIONS BALANCE BEGINNING- BEGINNING- CONTRIBUTION AND AS OF END- OF-YEAR OF-YEAR VALUE IMPAIRMENT OTHER OF-YEAR ----------- ------------- ------------ ---------- ------------ ---------- Retirement Solutions: Annuities $1,040 $(600) $-- $-- $-- $ 440 Defined Contribution 20 -- -- -- -- 20 Insurance Solutions: Life Insurance 2,186 -- -- -- -- 2,186 Group Protection 274 -- -- -- -- 274 Other Operations 170 (79) -- -- 6 97 ----------- ------------- ------------ ---------- ------------ ---------- Total goodwill $3,690 $(679) $-- $-- $ 6 $3,017 =========== ============= ============ ========== ============ ==========
S-44 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2009 ----------- ---------------------------------------------------------------- ACQUISITION CUMULATIVE BALANCE IMPAIRMENT AS OF AS OF CAPITAL DISPOSITIONS BALANCE BEGINNING- BEGINNING- CONTRIBUTION AND AS OF END- OF-YEAR OF-YEAR VALUE IMPAIRMENT OTHER OF-YEAR ----------- ------------- ------------ ---------- ------------ ------------- Retirement Solutions: Annuities $1,040 $-- $ -- $(600) $-- $ 440 Defined Contribution 20 -- -- -- -- 20 Insurance Solutions: Life Insurance 2,186 -- -- -- -- 2,186 Group Protection 274 -- -- -- -- 274 Other Operations -- -- 174 (79) (4) 91 ----------- ---------- ------------ ------------- ------------- ------------ Total goodwill $3,520 $-- $174 $(679) $(4) $3,011 =========== ========== ============ ============= ============= ============
Included in the acquisition accounting adjustments above were adjustments related to income tax deductions recognized when stock options attributable to mergers were exercised or the release of unrecognized tax benefits acquired through mergers. We perform a Step 1 goodwill impairment analysis on all of our reporting units at least annually on October 1. The Step 1 analysis for the reporting units within our Insurance Solutions and Retirement Solutions businesses utilizes primarily a discounted cash flow valuation technique ("income approach"), although limited available market data is also considered. In determining the estimated fair value, we consider discounted cash flow calculations, the level of LNC's share price and assumptions that market participants would make in valuing the reporting unit. This analysis requires us to make judgments about revenues, earnings projections, capital market assumptions and discount rates. For our Media reporting unit, we primarily use discounted cash flow calculations to determine the implied fair value. As of October 1, 2010, all of our reporting units passed the Step 1 analysis, and although Insurance Solutions - Life Insurance carrying value of the net assets was within the estimated fair value range, we deemed it necessary to validate the carrying value of goodwill through a Step 2 analysis. In our Step 2 analysis of Insurance Solutions - Life Insurance, we estimated the implied fair value of the reporting unit's goodwill, including assigning the reporting unit's fair value determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit were acquired in a business combination as of October 1, 2010, and determined there was no impairment due to the implied fair value of goodwill being in excess of the carrying value of goodwill. As of October 1, 2009 all of our reporting units passed the Step 1 analysis, except for our Media reporting unit, which required a Step 2 analysis to be completed. We utilized very detailed forecasts of cash flows and market observable inputs in determining a fair value of the net assets for each of the reporting units similar to what would be estimated in a business combination between market participants. The implied fair value of goodwill for our Media reporting unit was lower than its carrying amount; therefore, goodwill was impaired and written down to its fair value for this reporting unit. The impairment recorded in Other Operations for our Media business was a result of declines in current and forecasted advertising revenue for the entire radio market. Our impairment tests showed the implied fair value of our Media reporting unit was lower than its carrying amount; therefore, we recorded non-cash impairments of goodwill of $79 million and specifically identifiable intangible assets of $50 million. As of March 31, 2009, we performed a Step 1 goodwill impairment analysis on all of our reporting units as a result of our performing an interim test due to volatile capital markets that provided indicators that a potential impairment could be present. All of our reporting units passed the Step 1 analysis, except for our Retirement Solutions - Annuities reporting unit, which required a Step 2 analysis to be completed. Based upon our Step 2 analysis, we recorded goodwill impairment for the Retirement Solutions - Annuities reporting unit in the first quarter of 2009 for $600 million, which was attributable primarily to higher discount rates driven by higher debt costs and equity market volatility, deterioration in sales and declines in equity markets. There were no indicators of impairment as of December 31, 2009, due primarily to the continued improvement in the equity markets and lower discount rates. S-45 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED) The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by reportable segment were as follows:
AS OF DECEMBER 31, --------------------------------------------- 2010 2009 --------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ ---------- ------------ Insurance Solutions -- Life Insurance: Sales force $100 $19 $100 $15 Retirement Solutions -- Defined Contribution: Mutual fund contract rights(1)(2) 2 -- 2 -- Other Operations: FCC licenses(1)(3) 118 -- 118 -- Other 4 3 4 3 -------- ------------ ---------- ------------ Total $224 $22 $224 $18 ======== ==== ======= ========== ============
(1) No amortization recorded as the intangible asset has indefinite life. (2) We recorded mutual fund contract rights impairment of $1 million for the year ended December 31, 2009. (3) We recorded FCC licenses impairment of $49 million for the year ended December 31, 2009. Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2010, was as follows: 2011 $4 2012 4 2013 4 2014 4 2015 4
11. GUARANTEED BENEFIT FEATURES Information on the GDB features outstanding (dollars in millions) was as follows (our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive):
AS OF DECEMBER 31, ----------------------- 2010 2009 ----------- ----------- RETURN OF NET DEPOSITS Total account value $52,211 $44,712 Net amount at risk(1) 816 1,888 Average attained age of contract holders 58 YEARS 57 years MINIMUM RETURN Total account value(2) $ 187 $ 203 Net amount at risk(1) 46 65 Average attained age of contract holders 70 YEARS 69 years Guaranteed minimum return 5% 5%
AS OF DECEMBER 31, ------------------ 2010 2009 -------- --------- ANNIVERSARY CONTRACT VALUE Total account value $23,483 $21,431 Net amount at risk(1) 2,183 4,021 Average attained age of contract holders 66 YEARS 65 years
(1) Represents the amount of death benefit in excess of the account balance. The decrease in net amount at risk when comparing December 31, 2010, to December 31, 2009, was attributable primarily to the rise in equity markets and associated increase in the account values. (2) The decrease in total account value when comparing December 31, 2010, to December 31, 2009, was attributable primarily to an increase in contract surrender rates. The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, S-46 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. GUARANTEED BENEFIT FEATURES (CONTINUED) contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDB (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2010 2009 2008 ------- -------- ------- Balance as of beginning-of-year $ 71 $ 277 $ 38 Changes in reserves 57 (33) 312 Benefits paid (84) (173) (73) ------- -------- ------- Balance as of end-of-year $ 44 $ 71 $277 ======= ======== =======
Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ---------- ---------- ASSET TYPE Domestic equity $35,659 $32,489 International equity 14,172 12,379 Bonds 15,913 9,942 Money market 5,725 6,373 ---------- ---------- Total $71,469 $61,183 ========== ========== Percent of total variable annuity separate account values 98% 97%
Future contract benefits also include reserves for our products with secondary guarantees for our products sold through our Insurance Solutions - Life Insurance segment. These UL and VUL products with secondary guarantees represented approximately 40% of permanent life insurance in force as of December 31, 2010, and approximately 52% of total sales for these products for the year ended December 31, 2010. 12. OTHER CONTRACT HOLDER FUNDS Details of other contract holder funds (in millions) were as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ------- ---------- Fixed account values, including the fixed portion of variable and other contract holder funds $64,582 $61,254 DFEL 1,472 1,273 Contract holder dividends payable 484 494 Premium deposit funds 98 100 Undistributed earnings on participating business 85 56 ------- ---------- Total other contract holder funds $66,721 $63,177 ======= ==========
As of December 31, 2010 and 2009, participating policies comprised approximately 1.20% and 1.30%, respectively, of the face amount of insurance in force, and dividend expenses were $82 million, $89 million and $92 million for the years ended December 31, 2010, 2009 and 2008, respectively. S-47 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SHORT-TERM AND LONG-TERM DEBT Details underlying short-term and long-term debt (in millions) were as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ------ ----------- Short-term debt Short-term debt(1) $ 10 $ 21 ====== =========== Long-term debt 2.75% note, due 2013 $ 4 $ -- LIBOR + 0.03% note, due 2017 250 250 LIBOR + 3.41% note, due 2040 500 -- LIBOR + 1.00% note, due 2037 375 375 Surplus Notes due LNC: 9.76% surplus note, due 2024 50 50 6.56% surplus note, due 2028 500 500 6.03% surplus note, due 2028 750 750 ------ ----------- Total surplus notes 1,300 1,300 ------ ----------- Total long-term debt $2,429 $1,925 ====== ===========
(1) The short-term debt represents short-term notes payable to LNC. Future principal payments due on long-term debt (in millions) as of December 31, 2010, were as follows: 2013 $ 4 Thereafter 2,425 ------ Total $2,429 ======
CREDIT FACILITIES Credit facilities (in millions) were as follows:
AS OF DECEMBER 31, 2010 ----------------------- EXPIRATION MAXIMUM BORROWINGS DATE AVAILABLE OUTSTANDING ---------- ----------------------- CREDIT FACILITIES Credit facility with the FHLBI(1) N/A $630 $350
(1) Our borrowing capacity under this credit facility does not have an expiration date and continues while our investment in the FHLBI common stock remains outstanding. We have pledged securities, included in fixed maturity AFS securities on our Consolidated Balance Sheets, that are associated with this credit facility. On December 31, 2009, LNC made a capital contribution of $171 million to forgive an outstanding balance on a note due to LNC from a consolidated subsidiary of LNL. The caption "Capital contribution from Lincoln National Corporation" in the accompanying Consolidated Statements of Stockholder's Equity includes the $171 million capital contribution. In the third quarter of 2008, LNL made an investment of $19 million in the FHLBI, a AAA-rated entity, and made an additional investment of $2 million in the second quarter of 2009. In 2010, LNL made an additional investment of $11 million in the FHLBI. This relationship provides us with another source of liquidity as an alternative to commercial paper and repurchase agreements as well as provides funding at comparatively low borrowing rates. We are allowed to borrow up to 20 times the amount of our common stock investment in the FHLBI through a credit facility with the FHLBI. Our borrowing capacity under this credit facility does not have an expiration date and continues while our investment in the FHLBI common stock remains outstanding as long as we maintain a satisfactory level of credit-worthiness and we do not incur a material adverse change in our financial, business, regulatory or other areas that would materially affect our operations and viability. All borrowings from the FHLBI are required to be secured by certain investments owned by LNL. On December 4, 2008, the LNC and LNL Boards of Directors approved an additional common stock investment of $56 million, which would increase our total borrowing capacity up to $1.5 billion upon completion of that incremental investment. As of December 31, 2010, based on our actual common stock investment, we had borrowing capacity of up to approximately $630 million from the FHLBI. We had a $250 million floating-rate term loan outstanding under the facility due June 20, 2017, which may be prepaid at any time (classified within long-term debt on our Consolidated Balance Sheets as presented in the above table). During the second quarter of 2010, we also borrowed $100 million at a rate of 0.7% that is due May 25, 2011 (classified within payables for collateral on investments on our Consolidated Balance Sheets). On July 1, 2010, we issued a note of $500 million to LNC. This note calls for us to pay the principal amount of the note on or before June 5, 2040, and interest to be paid annually at an annual rate of LIBOR + 3.41%. On September 10, 2010, we issued a note of $4 million to LFM. This note calls for us to pay the principal amount of the note on or before September 10, 2013, and interest to be paid semiannually at an annual rate of 2.75%. On October 9, 2007, we issued a note of $375 million to LNC. This note calls for us to pay the principal amount of the note on or before October 9, 2037, and interest to be paid quarterly at an annual rate of LIBOR + 1.00%. We issued a surplus note for $500 million to LNC in 1998. This note calls for us to pay the principal amount of the note on or before March 31, 2028, and interest to be paid quarterly at an annual rate of 6.56% . Subject to approval by the Indiana Insurance Commissioner, LNC also has a right to redeem the note for immediate repayment in total or in part once per year on the anniversary date of the note. Any payment of interest or repayment of principal may be paid only out of our statutory earnings, only if our statutory capital surplus exceeds our statutory capital surplus as of the date of note issuance of $2.3 billion, and subject to approval by the Indiana Insurance Commissioner. We issued a surplus note for $750 million to LNC in 1998. This note calls for us to pay the principal amount of the note on or before December 31, 2028, and interest to be paid quarterly at an annual rate of 6.03% . Subject to approval by the Indiana Insurance Commissioner, LNC also has a right to redeem the note for immediate repayment in total or in part once per year on the anniversary date of the note. Any payment of interest or repayment of principal may be paid only out of our statutory earnings, only if our statutory capital surplus exceeds our statutory capital surplus as of the date of note issuance of $2.4 billion, and subject to approval by the Indiana Insurance Commissioner. S-48 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. CONTINGENCIES AND COMMITMENTS CONTINGENCIES REGULATORY AND LITIGATION MATTERS Regulatory bodies, such as state insurance departments, the SEC, Financial Industry Regulatory Authority and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and laws governing the activities of broker-dealers. In the ordinary course of its business, LNL and its subsidiaries are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of LNL. However, given the large and indeterminate amounts sought in certain of these proceedings and the inherent difficulty in predicting the outcome of such legal proceedings, it is possible that an adverse outcome in certain matters could be material to our operating results for any particular reporting period. COMMITMENTS LEASES We lease our home office properties in Fort Wayne, Indiana. In 2006, we exercised the right and option to extend the Fort Wayne lease for two extended terms such that the lease shall expire in 2019. We retain our right and option to exercise the remaining four extended terms of five years each in accordance with the lease agreement. These agreements also provide us with the right of first refusal to purchase the properties at a price defined in the agreements and the option to purchase the leased properties at fair market value on the last day of any renewal period. Total rental expense on operating leases for the years ended December 31, 2010, 2009 and 2008, was $40 million, $47 million and $49 million, respectively. Future minimum rental commitments (in millions) as of December 31, 2010, were as follows: 2011 $30 2012 26 2013 20 2014 13 2015 9
INFORMATION TECHNOLOGY COMMITMENT In February 2004, LNC completed renegotiations and extended the contract with IBM Global Services for information technology services for the Fort Wayne operations through February 2010. Following the original termination date of this agreement, LNC exercised contractual rights to extend this agreement through February 2012. Annual costs are dependent on usage but are expected to be approximately $9 million. MEDIA COMMITMENTS LFM has future commitments of approximately $31 million through 2015 related primarily to employment contracts and rating service contracts. VULNERABILITY FROM CONCENTRATIONS As of December 31, 2010, we did not have a concentration of: business transactions with a particular customer or lender; sources of supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes us vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial position. Although we do not have any significant concentration of customers, our American Legacy Variable Annuity ("ALVA") product offered in our Retirement Solutions - Annuities segment is significant to this segment. The ALVA product accounted for 25%, 28% and 37% of Retirement Solutions - Annuities' variable annuity product deposits in 2010, 2009 and 2008, respectively, and represented approximately 58%, 61% and 62% of our total Retirement Solutions - Annuities' variable annuity product account values as of December 31, 2010, 2009 and 2008, respectively. In addition, fund choices for certain of our other variable annuity products offered in our Retirement Solutions - Annuities segment include American Fund Insurance Series(SM) ("AFIS") funds. For the Retirement Solutions - Annuities segment, AFIS funds accounted for 29%, 33% and 44% of variable annuity product deposits in 2010, 2009 and 2008, respectively, and represented 66%, 69% and 70% of the segment's total variable annuity product account values as of December 31, 2010, 2009 and 2008, respectively. STANDBY REAL ESTATE EQUITY COMMITMENTS Historically, we have entered into standby commitments, which obligated us to purchase real estate at a specified cost if a third-party sale did not occur within approximately one year after construction was completed. These commitments were used by a developer to obtain a construction loan from an outside lender on favorable terms. In return for issuing the commitment, we received an annual fee and a percentage of the profit when the property was sold. Our expectation is that we will be obligated to fund those commitments that remain outstanding. As of December 31, 2010, and December 31, 2009, we had standby real estate equity commitments totaling $53 million and $220 million, respectively. During 2010, we funded commitments of $142 million and recorded a loss of $8 million reported within realized gain (loss) on our Consolidated Statements of Income (Loss). During 2009, we suspended entering into new standby real estate commitments. OTHER CONTINGENCY MATTERS State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments net of estimated future premium tax deductions of $10 million and $12 million as of December 31, 2010 and 2009, respectively. S-49 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SHARES AND STOCKHOLDER'S EQUITY All authorized and issued shares of LNL are owned by LNC. ACCUMULATED OCI The following summarizes the components and changes in accumulated OCI (in millions):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 2010 2009 2008 ---------- ----------------- ------------- UNREALIZED GAIN (LOSS) ON AFS SECURITIES Balance as of beginning-of-year $ 36 $ (2,562) $ 76 Cumulative effect from adoption of new accounting standards 181 (79) -- Unrealized holding gains (losses) arising during the year 2,322 6,021 (7,316) Change in foreign currency exchange rate adjustment (6) 26 (66) Change in DAC, VOBA, DSI and other contract holder funds (1,164) (2,294) 2,522 Income tax benefit (expense) (417) (1,328) 1,703 Less: Reclassification adjustment for gains (losses) included in net income (loss) (136) (555) (1,042) Associated amortization of DAC, VOBA, DSI and DFEL 17 168 244 Income tax benefit (expense) 42 135 279 ---------- ----------------- ------------- Balance as of end-of-year $ 1,029 $ 36 $(2,562) ========== ================= ============= UNREALIZED OTTI ON AFS SECURITIES Balance as of beginning-of-year $ (108) $ -- $ -- (Increases) attributable to: Cumulative effect from adoption of new accounting standards -- (18) -- Gross OTTI recognized in OCI during the year (93) (339) -- Change in DAC, VOBA, DSI and DFEL 10 77 -- Income tax benefit (expense) 29 92 -- Decreases attributable to: Sales, maturities or other settlements of AFS securities 82 151 -- Change in DAC, VOBA, DSI and DFEL (20) (28) -- Income tax benefit (expense) (22) (43) -- ---------- ----------------- ------------- Balance as of end-of-year $ (122) $ (108) $ -- ========== ================= =============
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 ----------- --------- ------- UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS Balance as of beginning-of-year $ (13) $ (15) $ (19) Unrealized holding gains (losses) arising during the year (2) 12 (42) Change in foreign currency exchange rate adjustment 4 (31) (36) Change in DAC, VOBA, DSI and DFEL (11) 11 27 Income tax benefit (expense) 3 5 1 Less: Reclassification adjustment for gains (losses) included in net income (loss) 6 4 (83) Associated amortization of DAC, VOBA, DSI and DFEL (9) (11) -- Income tax benefit (expense) 1 2 29 ----------- --------- ------- Balance as of end-of-year $ (17) $ (13) $ (15) =========== ========= ======= FUNDED STATUS OF EMPLOYEE BENEFIT PLANS Balance as of beginning-of-year $ (17) $ (32) $ (4) Adjustment arising during the year 4 23 (45) Income tax benefit (expense) (1) (8) 17 ----------- --------- ------- Balance as of end-of-year $ (14) $ (17) $ (32) =========== ========= =======
S-50 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. REALIZED (GAIN) LOSS Details underlying realized gain (loss) (in millions) reported on our Consolidated Statements of Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------ ------- ------- Total realized gain (loss) related to certain investments(1) $(132) $(498) $(767) Realized gain (loss) related to certain derivative instruments, including those associated with our consolidated VIEs, and trading securities(2) (41) (77) (78) Indexed annuity net derivative results(3): Gross gain (loss) 34 8 13 Associated amortization of DAC, VOBA, DSI and DFEL (15) (5) (6) Guaranteed living benefits(4): Gross gain (loss) (30) (10) 2 Associated amortization of DAC, VOBA, DSI and DFEL (64) (8) 12 Realized gain (loss) on sale of subsidiaries/businesses -- 1 -- ------ ------- ------- Total realized gain (loss) $(248) $(589) $(824) ====== ======== =======
(1) See "Realized Gain (Loss) Related to Certain Investments" section in Note 5. (2) Represents changes in the fair values of certain derivative investments (including the credit default swaps and contingent forwards associated with our consolidated VIEs), total return swaps (embedded derivatives that are theoretically included in our various modified coinsurance and coinsurance with funds withheld reinsurance arrange- ments that have contractual returns related to various as- sets and liabilities associated with these arrangements) and trading securities. (3) Represents the net difference between the change in the fair value of the S&P 500 call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity products along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products. The year ended December 31, 2008, included a $10 million gain from the initial impact of adopting the Fair Value Measurements and Disclosures Topic of the FASB ASC. (4) Represents the net difference in the change in embedded derivative reserves of our GLB products and the change in the fair value of the derivative instruments we own to hedge, including the cost of purchasing the hedging instruments. (5) Represents the change in the fair value of the derivatives used to hedge our GDB riders. 17. UNDERWRITING, ACQUISITION, INSURANCE, RESTRUCTURING AND OTHER EXPENSES Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2010 2009 2008 --------- --------------- ---------- Commissions $1,859 $1,565 $ 1,710 General and administrative expenses 1,293 1,203 1,215 Expenses associated with reserve financing and unrelated LOCs 16 1 -- DAC and VOBA deferrals and interest, net of amortization (644) (652) (437) Broker-dealer expenses 212 190 215 Other intangibles amortization 4 4 4 Media expenses 59 40 -- Taxes, licenses and fees 192 180 195 Merger-related expenses 9 16 50 Restructuring charges (recoveries) for expense initiatives (1) 32 8 --------- --------------- ---------- Total $2,999 $2,579 $ 2,960 ========= =============== ==========
All merger-related and restructuring charges are included in underwriting, acquisition, insurance and other expenses primarily within Other Operations on our Consolidated Statements of Income (Loss) in the year incurred. 2008 RESTRUCTURING PLAN Starting in December 2008, we implemented a restructuring plan in response to the economic downturn and sustained market volatility, which focused on reducing expenses. Our cumulative pre-tax charges amounted to $39 million for severance, benefits and related costs associated with the plan for workforce reduction and other restructuring actions. S-51 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS LNC and LNL maintain qualified funded defined benefit pension plans in which many of our employees and agents are participants. LNC and LNL also maintain non-qualified, unfunded defined benefit pension plans for certain employees and agents, certain former employees of JP and certain former employees of CIGNA Corporation. In addition, for certain former employees we have supplemental retirement plans that provide defined benefit pension benefits in excess of limits imposed by federal tax law. All of our defined benefit pension plans were frozen as of December 31, 2007, or earlier. For our frozen plans, there are no new participants and no future accruals of benefits from the date of the freeze. The eligibility requirements for each plan are described in each plan document and vary for each plan based on completion of a specified period of continuous service and date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional or cash balance formula. Those formulas are based upon years of credited service and eligible earnings as defined in each plan document. The traditional formula provides benefits stated in terms of a single life annuity payable at age 65. The cash balance formula provides benefits stated as a lump sum hypothetical account balance. That account balance equals the sum of the employee's accumulated annual benefit credits plus interest credits. Benefit credits, which are based on years of service and base salary plus bonus, ceased as of the date the plan was frozen. Interest Credits continue until the participant's benefit is paid. LNC and LNL also sponsor a voluntary employees' beneficiary association ("VEBA") trust that provides postretirement medical, dental and life insurance benefits to retired full-time employees and agents who, depending on the plan, have worked for us for 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide benefits that are subject to preferential tax treatment under the Internal Revenue Code. Medical and dental benefits are available to spouses and other eligible dependents of retired employees and agents. Retirees may be required to contribute toward the cost of these benefits. Eligibility and the amount of required contribution for these benefits varies based upon a variety of factors including years of service and year of retirement. Effective January 1, 2008, the postretirement plan providing benefits to former employees of JP was amended such that only employees who had attained age 55 with a minimum of 10 years of service by December 31, 2007, and who later retire on or after age 60 with 15 years of service will be eligible to receive life insurance benefits when they retire. S-52 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) OBLIGATIONS, FUNDED STATUS AND ASSUMPTIONS Information (in millions) with respect to our benefit plans' assets and obligations was as follows:
AS OF OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2010 2009 2010 2009 ------- ----------- ------------------------ ------- OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------- -------------------------------- CHANGE IN PLAN ASSETS Fair value as of beginning-of-year $119 $101 $ 4 $ 4 Actual return on plan assets 17 25 1 -- Company and participant contributions -- -- 3 3 Benefits paid (8) (7) (3) (3) ------- ----------- ------------------------ ------- Fair value as of end-of-year 128 119 5 4 ------- ----------- ------------------------ ------- CHANGE IN BENEFIT OBLIGATION Balance as of beginning-of-year 112 115 20 20 Interest cost 7 7 2 1 Plan participants' contributions -- -- 1 1 Actuarial (gains) losses 5 (3) 1 1 Benefits paid (8) (7) (3) (3) ------- ----------- ------------------------ ------- Balance as of end-of-year 116 112 21 20 ------- ----------- ------------------------ ------- Funded status of the plans $ 12 $ 7 $(16) $(16) ======= =========== ======================== ======= AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS Other assets $ 15 $ 12 $ -- $ -- Other liabilities (3) (5) (16) (16) ------- ----------- ------------------------ ------- Net amount recognized $ 12 $ 7 $(16) $(16) ======= =========== ======================== ======= AMOUNTS RECOGNIZED IN ACCUMULATED OCI, NET OF TAX Net (gain) loss $ 15 $ 19 $ -- $ (1) Prior service credit -- -- (1) (1) ------- ----------- ------------------------ ------- Net amount recognized $ 15 $ 19 $ (1) $ (2) ======= =========== ======================== ======= RATE OF INCREASE IN COMPENSATION Retiree life insurance plan N/A N/A 4.00% 4.00% All other plans N/A N/A N/A N/A WEIGHTED-AVERAGE ASSUMPTIONS Benefit obligations: Weighted-average discount rate 5.25% 6.00% 5.00% 6.00% Expected return on plan assets 8.00% 8.00% 6.50% 6.50% Net periodic benefit cost: Weighted-average discount rate 6.00% 6.00% 6.00% 6.00% Expected return on plan assets 8.00% 8.00% 6.50% 6.50%
Consistent with our benefit plans' year end, we use December 31 as the measurement date. The discount rate was determined based on a corporate yield curve as of December 31, 2010, and projected benefit obligation cash flows for the pension plans. We reevaluate this assumption each plan year. For 2011, our discount rate for the pension plans will be 6%. The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans' target plan allocation. We reevaluate this assumption each plan year. For 2011, our expected return on plan assets is 8.00% for the plans. The approximate expected return on plan assets by asset class for the pension plans is as follows: Fixed maturity securities 5.73% Common stock: Domestic equity 9.88% International equity 8.48% Cash and invested assets --%
S-53 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) The calculation of the accumulated other postretirement benefit obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) as follows:
AS OF OR FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2010 2009 2008 ------- ----------- ------- Pre-65 health care cost trend rate 9.5% 10% 10% Post-65 health care cost trend rate 9.5% 13% 12% Ultimate trend rate 5% 5% 5% Year that the rate reaches the ultimate trend rate 2020 2020 2019
We expect the health care cost trend rate for 2011 to be 9.00% for both the pre-65 and the post-65 population. A one-percentage point increase in assumed health care cost trend rates would have increased the accumulated postretirement benefit obligation by less than $1 million and total service and interest cost components by less than $1 million. A one-percentage point decrease in assumed health care cost trend rates would have decreased the accumulated postretirement benefit obligation by $1 million and total service and interest cost components by less than $1 million. Information for our pension plans with an accumulated benefit obligation in excess of plan assets (in millions) was as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ---- ------------- Accumulated benefit obligation $94 $90 Projected benefit obligation 94 90 Fair value of plan assets 91 85 COMPONENTS OF NET PERIODIC BENEFIT COST
The components of net periodic benefit cost for our pension plans' and other postretirement plans' expense (recovery) (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS ------- --------------------------- -------------------------------- 2010 2009 2008 2010 2009 2008 ------- ------------------- ------- ---- ------- ------------------- Interest cost $ 7 $ 7 $ 7 $ 1 $ 1 $ 1 Expected return on plan assets (9) (7) (11) -- -- -- Recognized net actuarial loss (gain) 2 5 1 -- (1) (1) ------- ------------------- ------- ---- ------- ------------------- Net periodic benefit expense (recovery) $-- $ 5 $ (3) $ 1 $-- $-- ======= =================== ======= ==== ======= ===================
We expect our 2011 pension plans' income to be approximately $2 million. For 2011, the estimated amount of amortization from accumulated OCI into net periodic benefit expense related to net actuarial loss or gain is expected to be an approximate $1 million loss for our pension plans and less than $1 million gain for our other postretirement plans. PLAN ASSETS As of December 31, 2010 and 2009, our pension plans' asset target allocations by asset category based on estimated fair values were as follows: Fixed maturity securities 50% Common stock: Domestic equity 35% International equity 15% Cash and invested assets --%
The investment objectives for the assets related to our pension plans are to: Maintain sufficient liquidity to pay obligations of the plans as they come due; Minimize the effect of a single investment loss and large losses to the plans through prudent risk/reward diversification consistent with sound fiduciary standards; Maintain an appropriate asset allocation policy; Earn a return commensurate with the level of risk assumed through the asset allocation policy; and Control costs of administering and managing the plans' investment operations. S-54 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) Investments can be made in various asset classes and styles, including, but not limited to: domestic and international equity, fixed income securities, derivatives, and other asset classes the investment managers deem prudent. Our plans follow a strategic asset allocation policy that strives to systemically increase the percentage of assets in liability-matching fixed income investments as funding levels increase. We currently target asset weightings as follows: domestic equity allocations (35%) are split into large cap (25%), small cap (5%) and hedge funds (5%). Fixed maturity securities represents core fixed income investments. The performance of the pension trust assets are monitored on a quarterly basis relative to the plan's objectives. Our qualified pension plans' assets have been combined into a master retirement trust where a variety of qualified managers, including manager of managers, are expected to have returns that exceed the median of similar funds over 3-year periods, above an appropriate index over 5-year periods and meet real return standards over 10-year periods. Managers are monitored for adherence to approved investment policy guidelines and managers not meeting these criteria are subject to additional due diligence review, corrective action or possible termination. FAIR VALUE OF PLAN ASSETS See "Fair Value Measurement" in Note 1 for discussion of how we categorize our pension plans' assets, into a three-level fair value hierarchy. The following summarizes our fair value measurements of pension plans' assets (in millions) on a recurring basis by the three-level fair value hierarchy:
AS OF DECEMBER 31, 2010 ------------------------------------------ QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE ----------- ----------- ------------ ----- ASSET CLASS Fixed maturity securities: Corporate bonds $-- $ 37 $-- $ 37 U.S. Government bonds -- 14 -- 14 Foreign government bonds -- 2 3 5 MBS: CMOs -- 1 -- 1 CMBS -- 1 -- 1 Common stock 16 43 3 62 Cash and invested assets -- 8 -- 8 ----------- ----------- ------------ ----- Total $16 $106 $ 6 $128 =========== =========== ============ =====
AS OF DECEMBER 31, 2009 ------------------------------------------ QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE ----------- ----------- ------------ ----- ASSET CLASS Fixed maturity securities: Corporate bonds $-- $ 47 $-- $ 47 U.S. Government bonds -- 4 -- 4 Foreign government bonds -- 2 -- 2 MBS: CMOs -- 1 -- 1 CMBS -- 2 -- 2 State and municipal bonds -- 1 -- 1 Common stock 18 42 -- 60 Cash and invested assets -- 2 -- 2 ----------- ----------- ------------ ----- Total $18 $101 $-- $119 =========== =========== ============ =====
S-55 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) The following summarizes changes to our pension plan assets (in millions) classified within Level 3 of the fair value hierarchy as reported above:
FOR THE YEAR ENDED DECEMBER 31, 2010 ------------------------------------------------------------ RETURN ON ASSETS TRANSFERS ----------------- PURCHASES, IN OR BEGINNING SOLD SALES AND OUT OF ENDING FAIR HELD AT DURING SETTLEMENTS, LEVEL 3, FAIR VALUE YEAR END THE YEAR NET NET VALUE --------- -------- -------- ------------ ------------ ------ Fixed maturity securities: Foreign government bonds $-- $-- $-- $3 $-- $3 Common stock -- -- -- 3 -- 3 --------- -------- -------- ------------ ------------ ------ Total $-- $-- $-- $6 $-- $6 ========= ======== ======== ============ ============ ======
FOR THE YEAR ENDED DECEMBER 31, 2009 ------------------------------------------------------------ RETURN ON ASSETS TRANSFERS ----------------- PURCHASES, IN OR BEGINNING SOLD SALES AND OUT OF ENDING FAIR HELD AT DURING SETTLEMENTS, LEVEL 3, FAIR VALUE YEAR END THE YEAR NET NET VALUE --------- -------- -------- ------------ ------------ ------ Fixed maturity securities: Corporate bonds $ 1 $-- $-- $-- $(1) $-- ========= ======== ======== ============ ============ ======
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR PENSION PLANS' ASSETS The fair value measurements of our pension plans' assets are based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the security, and the valuation methodology is consistently applied to measure the security's fair value. The fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations or pricing matrices. Both observable and unobservable inputs are used in the valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker-dealer quotes, procedures are employed, where possible, that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with brokers and observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, unobservable inputs are used in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity. Prices received from third parties are not adjusted; however, the third-party pricing services' valuation methodologies and related inputs are evaluated and additional evaluation is performed to determine the appropriate level within the fair value hierarchy. The observable and unobservable inputs to the valuation methodologies are based on general standard inputs. The standard inputs used in order of priority are benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all securities on any given day. Cash and invested cash is carried at cost, which approximates fair value. This category includes highly liquid debt instruments purchased with a maturity of three months or less. Due to the nature of these assets, we believe these assets should be classified as Level 2. PLAN CASH FLOWS It is our practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended and with guidance issued there under. In accordance with such practice, no contributions were required for the years ended December 31, 2010 or 2009. Based on our calculations, we do not expect to be required to make any contributions to our qualified pension plans in 2011 under applicable pension law. S-56 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) For our nonqualified pension plans, we fund the benefits as they become due to retirees. The amount expected to be contributed to the nonqualified pension plans during 2011 is less than $1 million. We expect the following benefit payments (in millions):
PENSION PLANS OTHER POSTRETIREMENT PLANS ------- --------------------------------- NOT DEFINED REFLECTING REFLECTING BENEFIT MEDICARE MEDICARE MEDICARE PENSION PART D PART D PART D PLANS SUBSIDY SUBSIDY SUBSIDY ------- ---------- ----------- ---------- 2011 $8 $2 $-- $2 2012 9 2 -- 2 2013 9 2 -- 2 2014 9 2 -- 2 2015 9 2 -- 2 Following five years thereafter 43 10 (1) 11
19. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS DEFINED CONTRIBUTION PLANS LNC and we sponsor contributory defined contribution plans for eligible employees and agents, respectively, which includes money purchase plans. LNC and we make contributions and matching contributions to each of the active plans, respectively, in accordance with the plan document and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. For the years ended December 31, 2010, 2009 and 2008, expenses for these plans were $60 million, $61 million and $58 million respectively. DEFERRED COMPENSATION PLANS LNC and we sponsor six separate non-qualified, unfunded, deferred compensation plans for various groups: employees, agents and non-employee directors. The investment earnings expenses for certain investment options within the respective plans are hedged by total return swaps. Participant's account values increase or decrease due to investment earnings driven by market fluctuation. Our expenses increase or decrease in direct proportion to the market's change for the participants' investment options. The total return swaps allow us to minimize the investment earnings expenses. Presented below for the respective plans we have netted the investment earnings due to market fluctuation with the results of the total return swaps. For further discussion on our total return swaps related to our deferred compensation plans, see Note 6. Information (in millions) with respect to these plans was as follows:
AS OF DECEMBER 31, ------------------ 2010 2009 ---- ------------- Total liabilities(1) $315 $314 Investment held to fund liabilities(2) 130 118
(1) Reported in other liabilities on our Consolidated Balance Sheets. (2) Reported in other assets on our Consolidated Balance Sheets. THE DEFERRED COMPENSATION PLAN FOR EMPLOYEES Eligible participants in this plan may elect to defer payment of a portion of their compensation as defined by the plan. Plan participants may select from a menu of "phantom" investment options (identical to those offered under our qualified defined contribution plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of the plan, we agree to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. We make matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of our contribution is calculated in accordance with the plan document, which is similar to our qualified S-57 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS (CONTINUED) defined contribution plans. Expenses (in millions) for this plan were as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 ---- ---- ------------------- Employer matching contributions $6 $ 4 $5 Increase (decrease) in measurement of liabilites, net of total return swap 1 6 1 ---- ---- ------------------- Total plan expenses $7 $10 $6 ==== ==== ===================
DEFERRED COMPENSATION PLAN FOR AGENTS LNL sponsors three deferred compensation plans for certain eligible agents. Eligible participants in these plans may elect to defer payment of a portion of their compensation as defined by the various plans. The plans' participants may select from a menu of "phantom" investment options (identical to those offered under our qualified defined contribution plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of this plan, we agree to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. We make matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of our contribution is calculated in accordance with the plan document, which is similar to our qualified defined contribution plans. Expenses (in millions) for these plans were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2010 2009 2008 ---- ---- --------- Employer matching contributions $3 $2 $2 Increase (decrease) in measurement of liabilites, net of total return swap 3 4 -- ---- ---- --------- Total plan expenses $6 $6 $2 ==== ==== =========
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS The plan allows for non-employee directors to defer a portion of their annual retainers and, in addition, we credit deferred stock units annually. The menu of "phantom" investment options is identical to those offered in the employees' plan. For the years ended December 31, 2010, 2009 and 2008, expenses for this plan were $2 million, $1 million and less than $1 million, respectively. The terms of the plan for non-employee directors provide that plan participants who select LNC's stock as the measure for their investment return will receive shares of LNC's stock in settlement of this portion of their accounts at the time of distribution. In addition, participants are precluded from diversifying any portion of their deferred compensation plan account that has been credited to the stock unit fund. Consequently, changes in value of LNC's stock do not affect the expenses associated with this portion of the deferred compensation plan. DEFERRED COMPENSATION PLAN FOR FORMER JEFFERSON-PILOT AGENTS Eligible former agents of JP may participate in this deferred compensation plan. Eligible agents are allowed to defer commissions and bonuses and specify where these deferral commissions will be invested in selected notional mutual funds. Agents participate in the plan with the understanding that the return on these funds cannot be received until a specified age or in the event of a significant lifestyle change. The funded amount is rebalanced to match the funds that have been elected under the agent deferred compensation plan. The plan obligation increases with contributions, deferrals and investment income, and decreases with withdrawals and investment losses. The plan's assets increase with investment gains, decrease with investment losses and payouts of death benefits. For the years ended December 31, 2010, 2009 and 2008, expenses (income) for this plan were $2 million, $1 million and ($2) million, respectively. 20. STOCK-BASED INCENTIVE COMPENSATION PLANS Our employees and agents are included in LNC's various incentive plans that provide for the issuance of stock options, performance shares (performance-vested shares as opposed to time-vested shares), SARS, restricted stock units, and restricted stock awards ("nonvested stock"). LNC has a policy of issuing new shares to satisfy option exercises. Total compensation expense (in millions) for all of our stock-based incentive compensation plans was as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2010 2009 2008 ------- ------- ------- Stock options $ 5 $ 6 $ 8 Performance shares (1) (1) 2 SARs -- 1 4 Restricted stock units and nonvested stock 11 6 5 ------- ------- ------- Total $15 $12 $19 ======= ======= ======= Recognized tax benefit $ 5 $ 4 $ 7
S-58 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. STATUTORY INFORMATION AND RESTRICTIONS We prepare financial statements in accordance with SAP prescribed or permitted by the insurance departments of our states of domicile, which may vary materially from GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. We are subject to the applicable laws and regulations of our states of domicile. Changes in these laws and regulations could change capital levels or capital requirements for the Company. Specified statutory information (in millions) was as follows:
AS OF DECEMBER 31, ---------------------- 2010 2009 --------- ------------ Capital and surplus $6,750 $6,300
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2010 2009 2008 ---- ---- ------------ Net gain (loss) from operations, after-tax $553 $867 $ 510 Net income (loss) 430 (35) (261) Dividends to LNC 684 405 400
The increase in statutory net income (loss) for the year ended December 31, 2010, from that of 2009 was primarily due to a significant decrease in realized losses on investments due to improving market conditions throughout 2010. The increase in statutory net income (loss) for the year ended December 31, 2009, from that of 2008 was primarily due to the improved market conditions in 2009. The new statutory reserving standard (commonly called "VACARVM") that was developed by the NAIC replaced current statutory reserve practices for variable annuities with guaranteed benefits, such as GWBs, and was effective December 31, 2009. The actual effect of adoption was relatively neutral to RBC ratios and future dividend capacity of our insurance subsidiaries with a slight decrease in statutory reserves offset by a higher capital requirement. We utilize captive reinsurance structures, as well as third-party reinsurance arrangements, to lessen the negative effect on statutory capital and dividend capacity in our life insurance subsidiaries. Our states of domicile, Indiana for LNL and New York for LLANY, have adopted certain prescribed accounting practices that differ from those found in NAIC SAP. These prescribed practices are the use of continuous Commissioners Annuity Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed by the state of New York and the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of In-diana. We also have several accounting practices permitted by the states of domicile that differ from those found in NAIC SAP. Specifically, these are accounting for the lesser of the face amount of all amounts outstanding under an LOC and the value of the Valuation of Life Insurance Policies Model Regulation ("XXX") additional statutory reserves as an admitted asset and a form of surplus as of December 31, 2009; and the use of a more conservative valuation interest rate on certain annuities as of December 31, 2010 and 2009. The effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 ------- ------------- Calculation of reserves using the Indiana universal life method $314 $328 Calculation of reserves using continuous CARVM (5) (6) Conservative valuation rate on certain variable annuities (15) (11) Lesser of LOC and XXX additional reserve as surplus 457 412
We are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, LNL may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the "Commissioner"), only from unassigned surplus and must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding twelve consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer's contract holders' surplus, or statutory net gain from operations for the previous calendar twelve-month period (both shown on the last annual statement on file with the Commissioner), but in no event to exceed statutory unassigned surplus. As discussed above, we may not consider the benefit from the statutory accounting principles relating to our deferred tax assets in calculating available dividends. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. New York, the state of domicile of LLANY, has similar restrictions, except that in New York it is the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year-end or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We expect we could pay dividends of approximately $611 million in 2011 without prior approval from the respective state commissioners. All payments of principal and interest on the surplus notes must be approved by the respective Commissioner of Insurance. S-59 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
AS OF DECEMBER 31, ----------------------------------------------- 2010 2009 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- ASSETS AFS securities: Fixed maturity securities $ 66,289 $ 66,289 $ 58,889 $ 58,889 VIEs' fixed maturity securities 584 584 -- -- Equity securities 140 140 155 155 Trading securities 2,459 2,459 2,366 2,366 Mortgage loans on real estate 6,431 6,847 6,835 6,967 Derivative investments 1,021 1,021 841 841 Other investments 978 978 975 975 Cash and invested cash 1,904 1,904 2,553 2,553 Reinsurance related embedded derivatives 112 112 277 277 Separate account assets 84,630 84,630 73,500 73,500 LIABILITIES Future contract benefits: Indexed annuity contracts embedded derivatives (497) (497) (419) (419) GLB reserves embedded derivatives (408) (408) (676) (676) Other contract holder funds: Remaining guaranteed interest and similar contracts (1,119) (1,119) (940) (940) Account values of certain investment contracts (26,061) (27,067) (24,039) (24,244) Short-term debt (10) (10) (21) (21) Long-term debt (2,429) (2,335) (1,925) (1,714) VIEs' liabilities - derivative instruments (209) (209) -- -- Other liabilities: Deferred compensation plans embedded derivatives (315) (315) (314) (314) Credit default swaps (16) (16) (65) (65)
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments. MORTGAGE LOANS ON REAL ESTATE The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price or the fair value of the collateral if the loan is collateral dependent. OTHER INVESTMENTS The carrying value of our assets classified as other investments approximates their fair value. Other investments include LPs and other privately held investments that are accounted for using the equity method of accounting. OTHER CONTRACT HOLDER FUNDS Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of December 31, 2010 and 2009, the remaining guaranteed interest and similar contracts carrying value approximates fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. S-60 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) SHORT-TERM AND LONG-TERM DEBT The fair value of long-term debt is based on quoted market prices or estimated using discounted cash flow analysis determined in conjunction with our incremental borrowing rate as of the balance sheet date for similar types of borrowing arrangements where quoted prices are not available. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value. FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2010, or December 31, 2009, and we noted no changes in our valuation methodologies between these periods. The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels described above:
AS OF DECEMBER 31, 2010 ----------------------------------------------------- QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE --------- ---------------- -------------- ----------- ASSETS Investments: Fixed maturity AFS securities: Corporate bonds $ 58 $ 48,304 $ 2,353 $ 50,715 U.S. Government bonds 117 3 2 122 Foreign government bonds -- 381 113 494 MBS: CMOs -- 5,461 24 5,485 MPTS -- 2,801 95 2,896 CMBS -- 1,863 102 1,965 ABS CDOs -- 2 171 173 State and municipal bonds -- 3,085 -- 3,085 Hybrid and redeemable preferred securities 18 1,222 114 1,354 VIEs' fixed maturity securities -- 584 -- 584 Equity AFS securities: Banking securities -- 2 -- 2 Insurance securities 3 -- 33 36 Other financial services securities -- 8 24 32 Other securities 34 2 34 70 Trading securities 2 2,383 74 2,459 Derivative investments -- (473) 1,494 1,021 Cash and invested cash -- 1,904 -- 1,904 Reinsurance related embedded derivatives -- 112 -- 112 Separate account assets -- 84,630 -- 84,630 --------- ---------------- -------------- ----------- Total assets $232 $152,274 $ 4,633 $157,139 ========= ================ ============== =========== LIABILITIES Future contract benefits: Indexed annuity contracts embedded derivatives $ -- $ -- $ (497) $ (497) GLB reserves embedded derivatives -- -- (408) (408) VIEs' liabilities -- derivative instruments -- -- (209) (209) Other liabilities: Deferred compensation plans embedded derivatives -- -- (315) (315) Credit default swaps -- -- (16) (16) --------- ---------------- -------------- ----------- Total liabilities $ -- $ -- $(1,445) $ (1,445) ========= ================ ============== ===========
S-61 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
AS OF DECEMBER 31, 2009 ----------------------------------------------------- QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE --------- ---------------- -------------- ----------- ASSETS Investments: Fixed maturity AFS securities: Corporate bonds $ 55 $ 41,904 $ 2,117 $ 44,076 U.S. Government bonds 112 33 3 148 Foreign government bonds -- 397 92 489 MBS: CMOs -- 5,593 34 5,627 MPTS -- 2,808 101 2,909 CMBS -- 1,796 252 2,048 ABS: CDOs -- 4 153 157 CLNs -- -- 322 322 State and municipal bonds -- 1,943 -- 1,943 Hybrid and redeemable preferred securities 15 1,005 150 1,170 Equity AFS securities: Banking securities 23 1 -- 24 Insurance securities 3 -- 43 46 Other financial services securities -- 6 22 28 Other securities 34 -- 23 57 Trading securities 2 2,274 90 2,366 Derivative investments -- (397) 1,238 841 Cash and invested cash -- 2,553 -- 2,553 Reinsurance related embedded derivatives -- 277 -- 277 Separate account assets -- 73,500 -- 73,500 --------- ---------------- -------------- ----------- Total assets $244 $133,697 $ 4,640 $138,581 ========= ================ ============== =========== LIABILITIES Future contract benefits: Indexed annuity contracts embedded derivatives $ -- $ -- $ (419) $ (419) GLB reserves embedded derivatives -- -- (676) (676) Other liabilities: Deferred compensation plans embedded derivatives -- -- (314) (314) Credit default swaps -- -- (65) (65) --------- ---------------- -------------- ----------- Total liabilities $ -- $ -- $(1,474) $ (1,474) ========= ================ ============== ===========
S-62 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any impact of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
FOR THE YEAR ENDED DECEMBER 31, 2010 ---------------------------------------------------------------------------- GAINS SALES, TRANSFERS ITEMS (LOSSES) ISSUANCES, IN OR INCLUDED IN MATURITIES, OUT BEGINNING IN OCI SETTLEMENTS, OF ENDING FAIR NET AND CALLS, LEVEL 3, FAIR VALUE INCOME OTHER(1) NET NET(2) VALUE ------------ ----------- ------------- --------------- ------------ -------- Investments:(3) Fixed maturity AFS securities: Corporate bonds $2,117 $ (42) $ 53 $279 $ (54) $2,353 U.S. Government bonds 3 -- -- (4) 3 2 Foreign government bonds 92 -- 8 (4) 17 113 MBS: CMOs 34 (5) 7 (8) (4) 24 MPTS 101 -- 3 (9) -- 95 CMBS 252 (47) 84 (72) (115) 102 ABS: CDOs 153 1 30 (13) -- 171 CLNs 322 -- 278 -- (600) -- Hybrid and redeemable preferred securities 150 2 (23) (15) -- 114 Equity AFS securities: Insurance securities 43 -- 2 (12) -- 33 Other financial services securities 22 -- 7 (5) -- 24 Other securities 23 -- (1) 12 -- 34 Trading securities 90 2 (10) (7) (1) 74 Derivative investments 1,238 (166) 7 415 -- 1,494 Future contract benefits:(4) Indexed annuity contracts embedded derivatives (419) (81) -- 3 -- (497) GLB reserves embedded derivatives (676) 268 -- -- -- (408) VIEs' liabilities -- derivative instruments(5) -- 16 -- -- (225) (209) Other liabilities: Deferred compensation plans embedded derivatives(6) (314) (33) -- 32 -- (315) Credit default swaps(7) (65) 7 -- 42 -- (16) ------------ ----------- ------------- --------------- ------------ -------- Total, net $3,166 $ (78) $445 $634 $(979) $3,188 ============ =========== ============= =============== ============ ========
S-63 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2009 ---------------------------------------------------------------------------- GAINS SALES, TRANSFERS ITEMS (LOSSES) ISSUANCES, IN OR INCLUDED IN MATURITIES, OUT BEGINNING IN OCI SETTLEMENTS, OF ENDING FAIR NET AND CALLS, LEVEL 3, FAIR VALUE INCOME OTHER(1) NET NET(2) VALUE ------------ ----------- ------------- --------------- ------------ -------- Investments:(3) Fixed maturity AFS securities: Corporate bonds $ 2,383 $ (46) $317 $ (161) $(376) $2,117 U.S. Government bonds 3 -- -- -- -- 3 Foreign government bonds 60 1 2 10 19 92 MBS: CMOs 160 (7) 34 (13) (140) 34 MPTS 18 -- 1 97 (15) 101 CMBS 238 1 57 (44) -- 252 ABS: CDOs 150 (35) 61 (21) (2) 153 CLNs 50 -- 272 -- -- 322 State and municipal bonds 117 -- (1) (17) (99) -- Hybrid and redeemable preferred securities 113 (21) 47 3 8 150 Equity AFS securities: Insurance securities 50 (7) 20 (20) -- 43 Other financial services securities 20 (2) 7 (3) -- 22 Other securities 23 2 (1) (1) -- 23 Trading securities 77 35 -- (7) (15) 90 Derivative investments 78 (87) (7) 1,254 -- 1,238 Future contract benefits:(4) Indexed annuity contracts embedded derivatives (252) (75) -- (92) -- (419) GLB reserves embedded derivatives (2,904) 2,228 -- -- -- (676) Other liabilities: Deferred compensation plans embedded derivatives(6) (223) (50) -- (41) -- (314) Credit default swaps(7) (51) (37) -- 23 -- (65) ------------ ----------- ------------- --------------- ------------ -------- Total, net $ 110 $1,900 $809 $ 967 $(620) $3,166 ============ =========== ============= =============== ============ ========
S-64 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2008 -------------------------------------------------------------------------- GAINS SALES, TRANSFERS ITEMS (LOSSES) ISSUANCES, IN OR INCLUDED IN MATURITIES, OUT BEGINNING IN OCI SETTLEMENTS, OF ENDING FAIR NET AND CALLS, LEVEL 3, FAIR VALUE INCOME OTHER(1) NET NET(2) VALUE ---------- ----------- ------------- --------------- ------------ -------- Investments:(3) Fixed maturity AFS securities: Corporate bonds $2,461 $ (150) $ (442) $ (10) $ 524 $ 2,383 U.S. Government bonds 3 -- -- -- -- 3 Foreign government bonds 79 -- (12) (7) -- 60 MBS: CMOs 275 (21) (53) (12) (29) 160 MPTS 52 -- (11) 1 (24) 18 CMBS 362 -- (193) 27 42 238 ABS: CDOs 184 1 (85) 50 -- 150 CLNs 660 -- (360) -- (250) 50 State and municipal bonds 138 -- (2) (32) 13 117 Hybrid and redeemable preferred securities 111 -- (41) 35 8 113 Equity AFS securities: Banking securities -- (1) -- 1 -- -- Insurance securities 2 (1) (18) 67 -- 50 Other financial services securities 35 (23) (2) 10 -- 20 Other securities 17 (5) 3 8 -- 23 Trading securities 107 (28) -- (13) 11 77 Derivative investments 195 (237) 29 91 -- 78 Future contract benefits:(4) Indexed annuity contracts embedded derivatives (389) 196 -- (59) -- (252) GLB reserves embedded derivatives (279) (2,625) -- -- -- (2,904) Other liabilities: Deferred compensation plans embedded derivatives(6) (271) 43 -- 5 -- (223) Credit default swaps(7) -- (51) -- -- -- (51) ---------- ----------- ------------- --------------- ------------ ---------- Total, net $3,742 $(2,902) $(1,187) $162 $ 295 $ 110 ========== =========== ============= =============== ============ ==========
(1) The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments. See "Derivatives Instruments Designated and Qualifying as Fair Value Hedges" section in Note 6. (2) Transfers in or out of Level 3 for AFS and trading securities are displayed at amortized cost as of the beginning-of-period. For AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in prior years. (3) Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Income (Loss). (4) Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Income (Loss). (5) The changes in fair value of the credit default swaps and contingency forwards are included in realized gain (loss) on our Consolidated Statements of Income (Loss). (6) Deferrals and subsequent changes in fair value for the participants' investment options are reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). (7) Gains (losses) from sales, maturities, settlements and calls are included in net investment income on our Consolidated Statements of Income (Loss). S-65 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following summarizes changes in unrealized gains (losses) included in net income, excluding any impact of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 -------- --------------- ---------- Investments:(1) Trading securities $ -- $ 33 $ (23) Derivative investments (163) (86) (129) Future contract benefits:(1) Indexed annuity contracts embedded derivatives 44 (17) 23 GLB reserves embedded derivatives 419 2,366 (1,061) VIEs' liabilities -- derivative instruments(1) 16 -- -- Other liabilities: Deferred compensation plans embedded derivatives(2) (33) (50) 43 Credit default swaps(3) (12) (14) (51) -------- --------------- ---------- Total, net $ 271 $2,232 $(1,198) ======== =============== ==========
(1) Included in realized gain (loss) on our Consolidated Statements of Income (Loss). (2) Included in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). (3) Included in net investment income on our Consolidated Statements of Income (Loss). The following provides the components of the transfers in and out of Level 3 (in millions) as reported above:
FOR THE YEAR ENDED DECEMBER 31, 2010 ------------------------------- TRANSFERS TRANSFERS IN TO OUT OF LEVEL 3 LEVEL 3 TOTAL ---------- ----------- -------- Investments: Fixed maturity AFS securities: Corporate bonds $ 144 $(198) $ (54) U.S. Government bonds 3 -- 3 Foreign government bonds 17 -- 17 MBS: CMOs -- (4) (4) CMBS 3 (118) (115) ABS CLNs -- (600) (600) Trading securities -- (1) (1) Future contract benefits: VIEs' liabilities -- derivative instruments (225) -- (225) ---------- ----------- -------- Total, net $ (58) $(921) $(979) ========== =========== ========
Transfers in and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the year ended December 31, 2010, our corporate bonds and CMBS transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available, respectively, and the ABS CLNs transfer out of Level 3 and VIEs' liabilities - derivative instruments transfer into Level 3 are related to new accounting guidance that is discussed in Note 4. For the year ended December 31, 2010, there were no significant transfers between Level 1 and 2 of the fair value hierarchy. 23. SEGMENT INFORMATION We provide products and services in two operating businesses and report results through four business segments as follows:
BUSINESS CORRESPONDING SEGMENTS -------------------- ---------------------- Retirement Solutions Annuities Defined Contribution Insurance Solutions Life Insurance Group Protection
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations. RETIREMENT SOLUTIONS The Retirement Solutions business provides its products through two segments: Annuities and Defined Contribution. The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering individual fixed annuities, including indexed annuities and variable annuities. The Defined Contribution segment provides employer-sponsored variable and fixed annuities, defined benefit, individual retirement accounts and mutual-fund based programs in the retirement plan marketplaces. INSURANCE SOLUTIONS The Insurance Solutions business provides its products through two segments: Life Insurance and Group Protection. S-66 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. SEGMENT INFORMATION (CONTINUED) The Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs) and both single and survivorship versions of UL and VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL insurance products. The Group Protection segment offers group life, disability and dental insurance to employers, and its products are marketed primarily through a national distribution system of regional group offices. These offices develop business through employee benefit brokers, third-party administrators and other employee benefit firms. OTHER OPERATIONS Other Operations includes investments related to excess capital, investments in media properties and other corporate investments; benefit plan net liability; the unamortized deferred gain on indemnity reinsurance related to the sale of reinsurance to Swiss Re in 2001; the results of certain disability income business due to the rescission of a reinsurance agreement with Swiss Re; the Institutional Pension business, which is a closed-block of pension business, the majority of which was sold on a group annuity basis, and is currently in run-off; and debt costs. We are actively managing our remaining radio station clusters to maximize performance and future value. Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: Realized gains and losses associated with the following ("excluded realized gain (loss)"): - Sale or disposal of securities; - Impairments of securities; - Change in the fair value of derivative instruments, embedded derivatives within certain reinsurance arrangements and our trading securities; - Change in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; - Change in the GLB embedded derivative reserves, net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves; and - Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. Change in reserves accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC resulting from benefit ratio unlocking on our GDB and GLB riders ("benefit ratio unlocking"); Income (loss) from the initial adoption of new accounting standards; Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance; Gain (loss) on early extinguishment of debt; Losses from the impairment of intangible assets; and Income (loss) from discontinued operations. Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: Excluded realized gain (loss); Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and Revenue adjustments from the initial adoption of new accounting standards. We use our prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations. S-67 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. SEGMENT INFORMATION (CONTINUED) Segment information (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2010 2009 2008 --------- --------------- --------- REVENUES Operating revenues: Retirement Solutions: Annuities $2,412 $2,085 $2,191 Defined Contribution 970 911 913 --------- --------------- --------- Total Retirement Solutions 3,382 2,996 3,104 --------- --------------- --------- Insurance Solutions: Life Insurance 4,156 3,990 4,005 Group Protection 1,831 1,713 1,640 --------- --------------- --------- Total Insurance Solutions 5,987 5,703 5,645 --------- --------------- --------- Other Operations 470 449 433 Excluded realized gain (loss), pre-tax (317) (643) (863) Amortization of deferred gains from reserve changes on business sold through reinsurance, pre-tax 3 3 3 Amortization of DFEL associated with benefit ratio unlocking, pre-tax -- -- 1 --------- --------------- --------- Total revenues $9,525 $8,508 $8,323 ========= =============== =========
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2010 2009 2008 --------- --------------- -------- NET INCOME (LOSS) Income (loss) from operations: Retirement Solutions: Annuities $ 463 $ 355 $ 154 Defined Contribution 146 124 117 --------- --------------- -------- Total Retirement Solutions 609 479 271 --------- --------------- -------- Insurance Solutions: Life Insurance 595 617 489 Group Protection 72 124 104 --------- --------------- -------- Total Insurance Solutions 667 741 593 --------- --------------- -------- Other Operations 3 (7) (47) Excluded realized gain (loss), after-tax (206) (418) (561) Income (expense) from reserve changes (net of related amortization) on business sold through reinsurance, after-tax 2 2 2 Impairment of intangibles, after-tax -- (709) -- Benefit ratio unlocking, after-tax -- -- (4) --------- --------------- -------- Net income (loss) $1,075 $ 88 $ 254 ========= =============== ========
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2010 2009 2008 ------ ------------ ------ NET INVESTMENT INCOME Retirement Solutions: Annuities $1,107 $1,020 $ 958 Defined Contribution 769 732 695 ------ ------------ ------ Total Retirement Solutions 1,876 1,752 1,653 ------ ------------ ------ Insurance Solutions: Life Insurance 2,040 1,827 1,867 Group Protection 141 127 117 ------ ------------ ------ Total Insurance Solutions 2,181 1,954 1,984 ------ ------------ ------ Other Operations 305 300 338 ------ ------------ ------ Total net investment income $4,362 $4,006 $3,975 ====== ============ ======
S-68 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. SEGMENT INFORMATION (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2010 2009 2008 ------ ------------ ------ AMORTIZATION OF DAC AND VOBA, NET OF INTEREST Retirement Solutions: Annuities $ 402 $356 $ 729 Defined Contribution 78 71 130 ------ ------------ ------ Total Retirement Solutions 480 427 859 ------ ------------ ------ Insurance Solutions: Life Insurance 492 519 519 Group Protection 46 46 36 ------ ------------ ------ Total Insurance Solutions 538 565 555 ------ ------------ ------ Total amortization of DAC and VOBA, net of interest $1,018 $992 $1,414 ====== ============ ======
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2010 2009 2008 -------- --------------- -------- FEDERAL INCOME TAX EXPENSE (BENEFIT) Retirement Solutions: Annuities $ 91 $ 42 $ (76) Defined Contribution 55 45 26 -------- --------------- -------- Total Retirement Solutions 146 87 (50) -------- --------------- -------- Insurance Solutions: Life Insurance 279 271 240 Group Protection 38 67 56 -------- --------------- -------- Total Insurance Solutions 317 338 296 -------- --------------- -------- Other Operations (6) (21) (11) Excluded realized gain (loss) (111) (225) (302) Reserve changes (net of related amortization) on business sold through reinsurance 1 1 1 Impairment of intangibles -- (16) -- Benefit ratio unlocking -- (1) (2) -------- --------------- -------- Total federal income tax expense (benefit) $ 347 $ 163 $ (68) ======== =============== ========
AS OF DECEMBER 31, ------------------ 2010 2009 -------- --------- ASSETS Retirement Solutions: Annuities $ 91,789 $ 80,700 Defined Contribution 28,563 26,689 -------- --------- Total Retirement Solutions 120,352 107,389 -------- --------- Insurance Solutions: Life Insurance 55,083 50,825 Group Protection 3,254 2,845 -------- --------- Total Insurance Solutions 58,337 53,670 -------- --------- Other Operations 13,323 13,148 -------- --------- Total assets $192,012 $174,207 ======== =========
S-69 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24. SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA The following summarizes our supplemental cash flow data (in millions):
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 2010 2009 2008 ---- --------------- ------- Interest paid $ 94 $ 96 $ 81 Income taxes paid (received) 345 (15) (23) Significant non-cash investing and financing transactions: Funds withheld agreement with LNBAR: Carrying value of assets $ -- $ 790 $ -- Carrying value of liabilities -- (790) -- ---- --------------- ------- Total acquired from LNBAR $ -- $ -- $ -- ==== =============== ======= Capital contribution of LFM: Carrying value of assets (includes cash and invested cash) $ -- $ 364 $ -- Carrying value of liabilities -- (84) -- ---- --------------- ------- Total capital contribution of LFM $ -- $ 280 $ -- ==== =============== =======
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2010 2009 2008 ---- --------------- ----------- Reinsurance assumed from FPP: Carrying value of assets $ -- $ 63 $ -- Carrying value of liabilities -- (63) -- ---- --------------- --- ------- Total reinsurance assumed from FPP $ -- $ -- $ -- ==== =============== =========== Sale of subsidiaries/business Proceeds from sale of subsidiaries/business $ -- $ 6 $ -- Assets disposed (includes cash and invested cash) -- (5) -- ---- --------------- --- ------- Gain on sale of subsidiary/ business $ -- $ 1 $ -- ==== =============== =========== Reinsurance ceded to LNBAR: Carrying value of assets $188 $ -- $ 360 Carrying value of liabilities (188) -- (360) ---- --------------- ----------- Total reinsuranced ceded to LNBAR $ -- $ -- $ -- ==== =============== ===========
25. TRANSACTIONS WITH AFFILIATES Transactions with affiliates (in millions) recorded on our consolidated financial statements were as follows:
AS OF DECEMBER 31, --------------------- 2010 2009 -------- ------------ Assets with affiliates: Corporate bonds(1) $ 100 $ 100 Reinsurance on ceded reinsurance contracts(2) 2,322 2,414 Reinsurance on assumed reinsurance contracts(3) 417 417 Cash management agreement investment(4) 173 142 Service agreement receivable(4) (12) (51) Liabilities with affiliates: Inter-company short-term debt(5) 10 21 Inter-company long-term debt(6) 2,179 1,675
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2010 2009 2008 -------- --------------- -------- Revenues with affiliates: Premiums paid on ceded reinsurance contracts(7) $(308) $(235) $(222) Net investment income on cash management agreement(8) -- 1 11 Fees for management of general account(8) -- (68) (65) Benefits and expenses with affiliates: Reinsurance (recoveries) benefits on ceded reinsurance contracts(9) (765) (158) (655) Service agreement payments(10) (58) 21 (2) Transfer pricing arrangement(10) -- (32) (32) Interest expense on inter-company debt(11) 98 90 83
(1) Reported in fixed maturity AFS securities on our Consolidated Balance Sheets. (2) Reported in reinsurance recoverables on our Consolidated Balance Sheets. (3) Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets. (4) Reported in other assets on our Consolidated Balance Sheets. S-70 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 25. TRANSACTIONS WITH AFFILIATES (CONTINUED) (5) Reported in short-term debt on our Consolidated Balance Sheets. (6) Reported in long-term debt on our Consolidated Balance Sheets. (7) Reported in insurance premiums on our Consolidated Statements of Income (Loss). (8) Reported in net investment income on our Consolidated Statement of Income (Loss). (9) Reported in benefits on our Consolidated Statements of Income (Loss). 10) Reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss). (11) Reported in interest and debt expense on our Consolidated Statements of Income (Loss). CORPORATE BONDS LNC issues corporate bonds to us for a predetermined face value to be repaid by LNC at a predetermined maturity with a specified interest rate. We purchase these investments for our segmented portfolios that have yield, duration and other characteristics. CASH MANAGEMENT AGREEMENT In order to manage our capital more efficiently, we participate in an inter-company cash management program where LNC can lend to or borrow from us to meet short-term borrowing needs. The cash management program is essentially a series of demand loans, which are permitted under applicable insurance laws, among LNC and its affiliates that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs. The borrowing and lending limit is currently the lesser of 3% of our admitted assets and 25% of its surplus, in both cases, as of its most recent year end. SERVICE AGREEMENT In accordance with service agreements with LNC and other subsidiaries of LNC for personnel and facilities usage, general management services and investment management services, we receive services from and provide services to affiliated companies and also receive an allocation of corporate overhead from LNC. Corporate overhead expenses are assigned based on specific methodologies for each function. The majority of the expenses are assigned based on the following methodologies: assets by product, assets under management, weighted number of policy applications, weighted policies in force and sales. FEES FOR MANAGEMENT OF GENERAL ACCOUNT AND TRANSFER PRICING ARRANGEMENT On January 4, 2010, LNC closed on a purchase and sale agreement pursuant to which all of the outstanding capital stock of Delaware Management Holdings, Inc. ("Delaware") was sold. In addition, we entered into investment advisory agreements with Delaware, pursuant to which Delaware will continue to manage the majority of our general account insurance assets. A transfer pricing arrangement is in place between LFD and Delaware related to the wholesaling of Delaware's investment products. CEDED REINSURANCE CONTRACTS As discussed in Note 9, we cede and accept reinsurance from affiliated companies. We cede certain guaranteed benefit risks (including certain GDB and GWB benefits) to LNBAR. We also cede reserves related to certain risks for certain UL policies, which resulted from recent actuarial reserving guidelines. As discussed in Note 3, we cede to LNBAR the risk under certain UL contracts for no-lapse benefit guarantees. Substantially all reinsurance ceded to affiliated companies is with unauthorized companies. To take a reserve credit for such reinsurance, we hold assets from the reinsurer, including funds held under reinsurance treaties, and are the beneficiary on letters of credit aggregating $1.8 billion and $2.4 billion as of December 31, 2010 and 2009, respectively. The letters of credit are issued by banks and represent guarantees of performance under the reinsurance agreement, and are guaranteed by LNC. S-71 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N N-1 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2010
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO THE LINCOLN THE LINCOLN THE LINCOLN NATIONAL NATIONAL NATIONAL LIFE LIFE LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ ABVPSF Global Thematic Growth Class B $ 29,452,922 $ 61,380 $ 29,514,302 $ -- $ 1,339 $ 29,512,963 ABVPSF Growth and Income Class B 153,900,475 -- 153,900,475 14,849 6,679 153,878,947 ABVPSF International Value Class B 177,268,453 111,814 177,380,267 -- 6,116 177,374,151 ABVPSF Large Cap Growth Class B 12,964,047 -- 12,964,047 102 572 12,963,373 ABVPSF Small/Mid Cap Value Class B 150,130,429 500,028 150,630,457 -- 6,535 150,623,922 American Century VP Inflation Protection Class II 494,166,212 83,732 494,249,944 -- 22,643 494,227,301 American Funds Global Growth Class 2 331,538,292 -- 331,538,292 213,926 14,405 331,309,961 American Funds Global Small Capitalization Class 2 406,401,930 -- 406,401,930 450,545 16,005 405,935,380 American Funds Growth Class 2 1,945,104,462 58,833 1,945,163,295 -- 87,568 1,945,075,727 American Funds Growth-Income Class 2 1,966,070,007 -- 1,966,070,007 243,501 83,428 1,965,743,078 American Funds International Class 2 764,307,994 -- 764,307,994 338,274 33,867 763,935,853 BlackRock Global Allocation V.I. Class III 616,389,023 1,266,403 617,655,426 -- 29,822 617,625,604 Delaware VIP Diversified Income Service Class 997,255,020 1,211,467 998,466,487 -- 44,240 998,422,247 Delaware VIP Emerging Markets Service Class 312,590,699 339,406 312,930,105 -- 14,154 312,915,951 Delaware VIP High Yield Standard Class 11,623,217 -- 11,623,217 152 449 11,622,616 Delaware VIP High Yield Service Class 319,920,469 -- 319,920,469 369,921 14,713 319,535,835 Delaware VIP International Value Equity Standard Class 334,619 -- 334,619 -- 13 334,606 Delaware VIP Limited-Term Diversified Income Service Class 657,313,026 1,097,961 658,410,987 -- 24,469 658,386,518 Delaware VIP REIT Standard Class 5,330,507 -- 5,330,507 736 211 5,329,560 Delaware VIP REIT Service Class 110,526,327 25,238 110,551,565 -- 5,002 110,546,563 Delaware VIP Small Cap Value Standard Class 9,525,890 6,273 9,532,163 -- 373 9,531,790 Delaware VIP Small Cap Value Service Class 309,637,070 -- 309,637,070 193,078 14,303 309,429,689 Delaware VIP Smid Cap Growth Standard Class 9,439,536 3,184 9,442,720 -- 369 9,442,351 Delaware VIP Smid Cap Growth Service Class 84,780,627 187,144 84,967,771 -- 3,844 84,963,927 Delaware VIP U.S. Growth Service Class 124,502,378 215,923 124,718,301 -- 3,860 124,714,441 Delaware VIP Value Standard Class 6,183,266 98,207 6,281,473 -- 243 6,281,230 Delaware VIP Value Service Class 125,106,621 306,000 125,412,621 -- 5,655 125,406,966 DWS VIP Alternative Asset Allocation Plus Class B 18,600,811 87,798 18,688,609 -- 869 18,687,740 DWS VIP Equity 500 Index Class A 24,776,584 -- 24,776,584 1,775 1,049 24,773,760 DWS VIP Equity 500 Index Class B 35,025,009 -- 35,025,009 16,171 1,611 35,007,227 DWS VIP Small Cap Index Class A 7,149,686 -- 7,149,686 204 313 7,149,169 DWS VIP Small Cap Index Class B 16,478,059 -- 16,478,059 55,417 736 16,421,906 Fidelity VIP Contrafund Service Class 2 938,200,679 628,379 938,829,058 -- 42,246 938,786,812 Fidelity VIP Equity-Income Initial Class 6,993,151 -- 6,993,151 2 269 6,992,880 Fidelity VIP Equity-Income Service Class 2 45,495,370 -- 45,495,370 5,055 2,007 45,488,308 Fidelity VIP Growth Initial Class 5,653,197 -- 5,653,197 9 219 5,652,969 Fidelity VIP Growth Service Class 2 72,729,806 4,356 72,734,162 -- 3,407 72,730,755 Fidelity VIP Mid Cap Service Class 2 403,740,103 -- 403,740,103 94,011 18,360 403,627,732 Fidelity VIP Overseas Initial Class 2,285,321 -- 2,285,321 8 88 2,285,225 Fidelity VIP Overseas Service Class 2 87,025,083 -- 87,025,083 16,071 3,901 87,005,111 FTVIPT Franklin Income Securities Class 2 498,860,342 -- 498,860,342 24,356 21,837 498,814,149 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 115,463,343 12,733 115,476,076 -- 5,183 115,470,893 FTVIPT Mutual Shares Securities Class 2 508,637,307 492,572 509,129,879 -- 17,419 509,112,460 FTVIPT Templeton Global Bond Securities Class 2 663,996,655 -- 663,996,655 232,150 29,151 663,735,354 FTVIPT Templeton Growth Securities Class 2 63,355,539 -- 63,355,539 12,069 2,875 63,340,595
See accompanying notes. N-2
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO THE LINCOLN THE LINCOLN THE LINCOLN NATIONAL NATIONAL NATIONAL LIFE LIFE LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ Goldman Sachs VIT Large Cap Value Service Class $ 94,188,587 $ 111,807 $ 94,300,394 $ -- $ 2,315 $ 94,298,079 Invesco V.I. Capital Appreciation Series I 3,167,707 -- 3,167,707 5 125 3,167,577 Invesco V.I. Capital Appreciation Series II 1,684,479 8 1,684,487 -- 75 1,684,412 Invesco V.I. Core Equity Series I 10,647,234 -- 10,647,234 24 431 10,646,779 Invesco V.I. Core Equity Series II 3,809,256 -- 3,809,256 28 161 3,809,067 Invesco V.I. International Growth Series I 3,841,028 -- 3,841,028 -- 155 3,840,873 Invesco V.I. International Growth Series II 3,412,517 -- 3,412,517 21 149 3,412,347 Janus Aspen Series Balanced Service Class 23,954,408 -- 23,954,408 47,356 1,033 23,906,019 Janus Aspen Series Enterprise Service Class 8,186,405 -- 8,186,405 82 357 8,185,966 Janus Aspen Series Worldwide Service Class 1,893,160 -- 1,893,160 -- 80 1,893,080 LVIP American Global Growth Service Class II 2,549,397 119,818 2,669,215 -- 110 2,669,105 LVIP American Global Small Capitalization Service Class II 3,284,591 191,170 3,475,761 -- 160 3,475,601 LVIP American Growth Service Class II 12,222,342 279,938 12,502,280 -- 587 12,501,693 LVIP American Growth-Income Service Class II 8,475,943 231,543 8,707,486 -- 412 8,707,074 LVIP American International Service Class II 5,896,216 125,976 6,022,192 -- 280 6,021,912 LVIP Baron Growth Opportunities Service Class 88,046,566 -- 88,046,566 125,370 4,046 87,917,150 LVIP BlackRock Inflation Protected Bond Service Class 14,013,741 122,736 14,136,477 -- 680 14,135,797 LVIP Capital Growth Service Class 145,143,291 -- 145,143,291 504,412 3,858 144,635,021 LVIP Cohen & Steers Global Real Estate Service Class 72,674,014 -- 72,674,014 24,638 3,313 72,646,063 LVIP Columbia Value Opportunities Service Class 15,075,418 153,514 15,228,932 -- 688 15,228,244 LVIP Delaware Bond Standard Class 203,063,801 -- 203,063,801 115,781 9,051 202,938,969 LVIP Delaware Bond Service Class 1,496,363,181 1,052,915 1,497,416,096 -- 57,447 1,497,358,649 LVIP Delaware Diversified Floating Rate Service Class 11,877,043 442,369 12,319,412 -- 579 12,318,833 LVIP Delaware Foundation Aggressive Allocation Standard Class 13,018,509 -- 13,018,509 435 601 13,017,473 LVIP Delaware Foundation Aggressive Allocation Service Class 29,718,286 -- 29,718,286 48,925 1,409 29,667,952 LVIP Delaware Growth and Income Service Class 35,502,391 20,529 35,522,920 -- 1,581 35,521,339 LVIP Delaware Social Awareness Standard Class 12,406,734 -- 12,406,734 47 555 12,406,132 LVIP Delaware Social Awareness Service Class 49,240,242 -- 49,240,242 4,593 2,161 49,233,488 LVIP Delaware Special Opportunities Service Class 26,929,988 291,560 27,221,548 -- 1,201 27,220,347 LVIP Global Income Service Class 235,182,745 732,694 235,915,439 -- 10,424 235,905,015 LVIP Janus Capital Appreciation Standard Class 2,825,619 -- 2,825,619 3 131 2,825,485 LVIP Janus Capital Appreciation Service Class 63,634,037 27,797 63,661,834 -- 2,978 63,658,856 LVIP JPMorgan High Yield Service Class 3,171,835 75,281 3,247,116 -- 154 3,246,962 LVIP MFS International Growth Service Class 96,858,831 41,121 96,899,952 -- 3,525 96,896,427 LVIP MFS Value Service Class 409,366,474 418,373 409,784,847 -- 13,670 409,771,177 LVIP Mid-Cap Value Service Class 40,810,224 -- 40,810,224 7,100 1,839 40,801,285 LVIP Mondrian International Value Standard Class 22,439,723 -- 22,439,723 14,893 1,026 22,423,804
See accompanying notes. N-3
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO THE LINCOLN THE LINCOLN THE LINCOLN NATIONAL NATIONAL NATIONAL LIFE LIFE LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ LVIP Mondrian International Value Service Class $ 111,490,217 $ -- $ 111,490,217 $ 25,652 $ 4,954 $ 111,459,611 LVIP Money Market Standard Class 66,690,777 -- 66,690,777 2,220 2,882 66,685,675 LVIP Money Market Service Class 343,552,049 -- 343,552,049 569,291 15,957 342,966,801 LVIP SSgA Bond Index Service Class 948,478,634 340,893 948,819,527 -- 44,479 948,775,048 LVIP SSgA Conservative Index Allocation Service Class 2,703,359 241,095 2,944,454 -- 144 2,944,310 LVIP SSgA Conservative Structured Allocation Service Class 9,998,682 596,661 10,595,343 -- 493 10,594,850 LVIP SSgA Developed International 150 Service Class 138,244,165 55,422 138,299,587 -- 6,476 138,293,111 LVIP SSgA Emerging Markets 100 Service Class 168,340,941 120,635 168,461,576 -- 7,864 168,453,712 LVIP SSgA Global Tactical Allocation Service Class 64,343,813 -- 64,343,813 343,847 2,914 63,997,052 LVIP SSgA International Index Service Class 198,529,872 103,165 198,633,037 -- 9,243 198,623,794 LVIP SSgA Large Cap 100 Service Class 289,275,649 -- 289,275,649 7,223 13,671 289,254,755 LVIP SSgA Moderate Index Allocation Service Class 3,975,865 144,714 4,120,579 -- 174 4,120,405 LVIP SSgA Moderate Structured Allocation Service Class 27,343,157 1,215,280 28,558,437 -- 1,361 28,557,076 LVIP SSgA Moderately Aggressive Index Allocation Service Class 4,673,551 1,174,574 5,848,125 -- 223 5,847,902 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 15,919,430 158,520 16,077,950 -- 799 16,077,151 LVIP SSgA S&P 500 Index Standard Class 2,012,856 -- 2,012,856 11 90 2,012,755 LVIP SSgA S&P 500 Index Service Class 419,441,313 -- 419,441,313 511,046 19,699 418,910,568 LVIP SSgA Small-Cap Index Service Class 122,970,660 -- 122,970,660 276,522 5,756 122,688,382 LVIP SSgA Small-Mid Cap 200 Service Class 94,907,064 -- 94,907,064 26,692 4,497 94,875,875 LVIP T. Rowe Price Growth Stock Service Class 71,067,939 276,877 71,344,816 -- 3,290 71,341,526 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 2,881,488 -- 2,881,488 6,510 134 2,874,844 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 47,475,160 87,955 47,563,115 -- 2,109 47,561,006 LVIP Templeton Growth Service Class 102,380,570 79,763 102,460,333 -- 4,475 102,455,858 LVIP Turner Mid-Cap Growth Service Class 29,470,899 -- 29,470,899 27,116 1,333 29,442,450 LVIP Wells Fargo Intrinsic Value Service Class 27,483,144 50,735 27,533,879 -- 1,230 27,532,649 LVIP Wilshire 2010 Profile Service Class 8,599,695 -- 8,599,695 -- 397 8,599,298 LVIP Wilshire 2020 Profile Service Class 18,174,391 -- 18,174,391 99 810 18,173,482 LVIP Wilshire 2030 Profile Service Class 10,684,055 -- 10,684,055 49,787 505 10,633,763 LVIP Wilshire 2040 Profile Service Class 6,193,731 99,667 6,293,398 -- 286 6,293,112 LVIP Wilshire Conservative Profile Service Class 378,847,970 -- 378,847,970 155,928 17,714 378,674,328 LVIP Wilshire Moderate Profile Service Class 1,077,817,488 519,884 1,078,337,372 -- 51,458 1,078,285,914 LVIP Wilshire Moderately Aggressive Profile Service Class 650,249,634 -- 650,249,634 455,925 30,319 649,763,390 Lord Abbett Fundamental Equity Class VC 9,976,924 6,295 9,983,219 -- 251 9,982,968 MFS VIT Core Equity Service Class 2,729,770 -- 2,729,770 -- 123 2,729,647 MFS VIT Growth Initial Class 3,148,374 -- 3,148,374 11 122 3,148,241 MFS VIT Growth Service Class 14,508,145 7,536 14,515,681 -- 643 14,515,038 MFS VIT Total Return Initial Class 14,139,835 1,976 14,141,811 -- 551 14,141,260 MFS VIT Total Return Service Class 321,308,840 -- 321,308,840 403,411 14,353 320,891,076 MFS VIT Utilities Initial Class 12,355,335 4,412 12,359,747 -- 479 12,359,268
See accompanying notes. N-4
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO THE LINCOLN THE LINCOLN THE LINCOLN NATIONAL NATIONAL NATIONAL LIFE LIFE LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ MFS VIT Utilities Service Class $176,394,007 $32,194 $176,426,201 $ -- $7,833 $176,418,368 Morgan Stanley UIF Capital Growth Class II 1,257,742 -- 1,257,742 -- 31 1,257,711 NB AMT Mid-Cap Growth I Class 53,230,537 -- 53,230,537 7,503 2,412 53,220,622 NB AMT Regency I Class 55,149,491 -- 55,149,491 3,319 2,463 55,143,709 Oppenheimer Global Securities Service Class 3,814,702 -- 3,814,702 22 93 3,814,587 PIMCO VIT Commodity Real Return Advisor Class 11,845,225 -- 11,845,225 2,387 497 11,842,341 Putnam VT Global Health Care Class IB 2,884,064 -- 2,884,064 17 125 2,883,922 Putnam VT Growth & Income Class IB 2,005,482 4 2,005,486 -- 90 2,005,396
See accompanying notes. N-5 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2010
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ----------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 521,120 $ (433,053) $ 88,067 ABVPSF Growth and Income Class B -- (2,261,139) (2,261,139) ABVPSF International Value Class B 4,344,892 (1,857,533) 2,487,359 ABVPSF Large Cap Growth Class B 36,079 (210,108) (174,029) ABVPSF Small/Mid Cap Value Class B 336,059 (1,993,533) (1,657,474) American Century VP Inflation Protection Class II 7,364,058 (7,528,176) (164,118) American Funds Global Growth Class 2 4,521,647 (4,683,535) (161,888) American Funds Global Small Capitalization Class 2 5,835,266 (4,872,981) 962,285 American Funds Growth Class 2 12,734,793 (28,870,924) (16,136,131) American Funds Growth-Income Class 2 27,124,526 (28,102,492) (977,966) American Funds International Class 2 14,539,142 (11,304,461) 3,234,681 BlackRock Global Allocation V.I. Class III 6,477,123 (6,704,870) (227,747) Delaware VIP Diversified Income Service Class 36,374,642 (14,138,929) 22,235,713 Delaware VIP Emerging Markets Service Class 1,402,666 (4,065,134) (2,662,468) Delaware VIP High Yield Standard Class 611,460 (128,158) 483,302 Delaware VIP High Yield Service Class 20,748,545 (4,760,009) 15,988,536 Delaware VIP International Value Equity Standard Class 13,559 (4,885) 8,674 Delaware VIP Limited-Term Diversified Income Service Class 10,434,402 (7,232,039) 3,202,363 Delaware VIP REIT Standard Class 144,040 (73,907) 70,133 Delaware VIP REIT Service Class 2,514,400 (1,623,659) 890,741 Delaware VIP Small Cap Value Standard Class 57,962 (125,788) (67,826) Delaware VIP Small Cap Value Service Class 1,226,260 (4,445,349) (3,219,089) Delaware VIP Smid Cap Growth Standard Class -- (29,860) (29,860) Delaware VIP Smid Cap Growth Service Class -- (304,616) (304,616) Delaware VIP Trend Standard Class -- (90,844) (90,844) Delaware VIP Trend Service Class -- (860,311) (860,311) Delaware VIP U.S. Growth Service Class -- (1,020,237) (1,020,237) Delaware VIP Value Standard Class 141,813 (83,446) 58,367 Delaware VIP Value Service Class 2,519,876 (1,897,090) 622,786 DWS VIP Alternative Asset Allocation Plus Class B 69,878 (160,187) (90,309) DWS VIP Equity 500 Index Class A 463,329 (367,949) 95,380 DWS VIP Equity 500 Index Class B 559,332 (563,534) (4,202) DWS VIP Small Cap Index Class A 63,182 (107,190) (44,008) DWS VIP Small Cap Index Class B 113,140 (260,513) (147,373) Fidelity VIP Contrafund Service Class 2 8,664,977 (13,521,068) (4,856,091) Fidelity VIP Equity-Income Initial Class 119,743 (97,526) 22,217 Fidelity VIP Equity-Income Service Class 2 688,031 (726,268) (38,237) Fidelity VIP Growth Initial Class 13,890 (73,960) (60,070) Fidelity VIP Growth Service Class 2 19,010 (970,008) (950,998) Fidelity VIP Mid Cap Service Class 2 435,423 (5,196,845) (4,761,422) Fidelity VIP Overseas Initial Class 29,551 (31,744) (2,193) Fidelity VIP Overseas Service Class 2 933,389 (1,220,402) (287,013) FTVIPT Franklin Income Securities Class 2 29,217,284 (7,173,670) 22,043,614 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 -- (1,456,014) (1,456,014) FTVIPT Mutual Shares Securities Class 2 6,901,682 (5,214,313) 1,687,369 FTVIPT Templeton Global Bond Securities Class 2 9,369,032 (10,458,999) (1,089,967) FTVIPT Templeton Growth Securities Class 2 892,854 (1,071,066) (178,212) Goldman Sachs VIT Large Cap Value Service Class 547,845 (445,717) 102,128 Invesco V.I. Capital Appreciation Series I 22,245 (43,786) (21,541) Invesco V.I. Capital Appreciation Series II 8,861 (27,583) (18,722) Invesco V.I. Core Equity Series I 102,726 (160,716) (57,990) Invesco V.I. Core Equity Series II 29,436 (57,767) (28,331) Invesco V.I. International Growth Series I 83,975 (56,367) 27,608 Invesco V.I. International Growth Series II 61,771 (54,360) 7,411 Janus Aspen Series Balanced Service Class 610,901 (386,177) 224,724 Janus Aspen Series Enterprise Service Class -- (124,664) (124,664) Janus Aspen Series Worldwide Service Class 8,601 (27,691) (19,090)
N-6
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN (DECREASE) NET NET NET UNREALIZED IN REALIZED REALIZED REALIZED APPRECIATION OR NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ----------------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 326,911 $ -- $ 326,911 $ 3,542,881 $ 3,957,859 ABVPSF Growth and Income Class B (9,443,179) -- (9,443,179) 27,110,122 15,405,804 ABVPSF International Value Class B (7,537,796) -- (7,537,796) 13,178,540 8,128,103 ABVPSF Large Cap Growth Class B 27,103 -- 27,103 1,083,009 936,083 ABVPSF Small/Mid Cap Value Class B 79,006 -- 79,006 29,173,097 27,594,629 American Century VP Inflation Protection Class II 4,437,401 -- 4,437,401 9,419,766 13,693,049 American Funds Global Growth Class 2 (1,624,228) -- (1,624,228) 32,033,296 30,247,180 American Funds Global Small Capitalization Class 2 (627,381) -- (627,381) 66,309,880 66,644,784 American Funds Growth Class 2 (14,223,638) -- (14,223,638) 312,374,236 282,014,467 American Funds Growth-Income Class 2 (19,884,171) -- (19,884,171) 196,483,474 175,621,337 American Funds International Class 2 (5,429,423) -- (5,429,423) 43,502,953 41,308,211 BlackRock Global Allocation V.I. Class III 1,487,290 3,518,145 5,005,435 36,508,309 41,285,997 Delaware VIP Diversified Income Service Class 12,734,874 1,907,020 14,641,894 10,745,185 47,622,792 Delaware VIP Emerging Markets Service Class 1,648,785 -- 1,648,785 41,760,278 40,746,595 Delaware VIP High Yield Standard Class 662,817 -- 662,817 24,107 1,170,226 Delaware VIP High Yield Service Class 9,019,747 -- 9,019,747 9,563,102 34,571,385 Delaware VIP International Value Equity Standard Class (35,226) -- (35,226) 54,456 27,904 Delaware VIP Limited-Term Diversified Income Service Class 2,892,189 2,748,087 5,640,276 3,335,434 12,178,073 Delaware VIP REIT Standard Class (556,874) -- (556,874) 1,633,527 1,146,786 Delaware VIP REIT Service Class (13,626,248) -- (13,626,248) 34,183,419 21,447,912 Delaware VIP Small Cap Value Standard Class 418,073 -- 418,073 2,070,926 2,421,173 Delaware VIP Small Cap Value Service Class (254,240) -- (254,240) 74,841,961 71,368,632 Delaware VIP Smid Cap Growth Standard Class 37,671 -- 37,671 1,141,154 1,148,965 Delaware VIP Smid Cap Growth Service Class 519,934 -- 519,934 9,733,756 9,949,074 Delaware VIP Trend Standard Class 81,463 321,310 402,773 1,168,329 1,480,258 Delaware VIP Trend Service Class 4,853,669 2,916,236 7,769,905 5,121,804 12,031,398 Delaware VIP U.S. Growth Service Class 1,834,757 -- 1,834,757 12,598,227 13,412,747 Delaware VIP Value Standard Class (123,028) -- (123,028) 831,881 767,220 Delaware VIP Value Service Class (4,531,928) -- (4,531,928) 18,824,468 14,915,326 DWS VIP Alternative Asset Allocation Plus Class B 130,094 77,665 207,759 1,069,637 1,187,087 DWS VIP Equity 500 Index Class A (37,193) -- (37,193) 2,805,656 2,863,843 DWS VIP Equity 500 Index Class B (212,906) -- (212,906) 4,199,868 3,982,760 DWS VIP Small Cap Index Class A (246,496) -- (246,496) 1,756,784 1,466,280 DWS VIP Small Cap Index Class B (1,557,454) -- (1,557,454) 5,030,287 3,325,460 Fidelity VIP Contrafund Service Class 2 (21,286,599) 395,612 (20,890,987) 147,489,977 121,742,899 Fidelity VIP Equity-Income Initial Class (500,214) -- (500,214) 1,340,169 862,172 Fidelity VIP Equity-Income Service Class 2 (3,158,380) -- (3,158,380) 8,654,080 5,457,463 Fidelity VIP Growth Initial Class (436,652) 17,322 (419,330) 1,537,613 1,058,213 Fidelity VIP Growth Service Class 2 (1,217,468) 207,940 (1,009,528) 13,693,008 11,732,482 Fidelity VIP Mid Cap Service Class 2 (630,887) 1,043,171 412,284 81,108,071 76,758,933 Fidelity VIP Overseas Initial Class (111,176) 4,030 (107,146) 334,873 225,534 Fidelity VIP Overseas Service Class 2 (2,923,282) 154,705 (2,768,577) 11,473,228 8,417,638 FTVIPT Franklin Income Securities Class 2 (5,423,198) -- (5,423,198) 30,172,761 46,793,177 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 (179,118) -- (179,118) 23,129,502 21,494,370 FTVIPT Mutual Shares Securities Class 2 (4,661,807) -- (4,661,807) 45,096,788 42,122,350 FTVIPT Templeton Global Bond Securities Class 2 14,041,680 1,694,883 15,736,563 61,693,500 76,340,096 FTVIPT Templeton Growth Securities Class 2 (5,191,986) -- (5,191,986) 8,497,461 3,127,263 Goldman Sachs VIT Large Cap Value Service Class 85,804 -- 85,804 7,714,199 7,902,131 Invesco V.I. Capital Appreciation Series I (160,867) -- (160,867) 567,814 385,406 Invesco V.I. Capital Appreciation Series II (78,129) -- (78,129) 311,975 215,124 Invesco V.I. Core Equity Series I 13,297 -- 13,297 830,740 786,047 Invesco V.I. Core Equity Series II 5,377 -- 5,377 288,324 265,370 Invesco V.I. International Growth Series I 286,147 -- 286,147 53,062 366,817 Invesco V.I. International Growth Series II 168,046 -- 168,046 160,538 335,995 Janus Aspen Series Balanced Service Class 739,257 -- 739,257 536,025 1,500,006 Janus Aspen Series Enterprise Service Class 298,107 -- 298,107 1,455,720 1,629,163 Janus Aspen Series Worldwide Service Class (2,907) -- (2,907) 247,572 225,575
See accompanying notes. N-7
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ----------------------------------------------------------------------------------------------------- LVIP American Global Growth Service Class II $ -- $ (2,060) $ (2,060) LVIP American Global Small Capitalization Service Class II -- (2,740) (2,740) LVIP American Growth Service Class II -- (9,932) (9,932) LVIP American Growth-Income Service Class II -- (6,947) (6,947) LVIP American International Service Class II -- (4,513) (4,513) LVIP Baron Growth Opportunities Service Class -- (1,160,993) (1,160,993) LVIP BlackRock Inflation Protected Bond Service Class 28,714 (11,676) 17,038 LVIP Capital Growth Service Class -- (918,338) (918,338) LVIP Cohen & Steers Global Real Estate Service Class -- (998,805) (998,805) LVIP Columbia Value Opportunities Service Class -- (167,847) (167,847) LVIP Delaware Bond Standard Class 7,172,464 (3,553,378) 3,619,086 LVIP Delaware Bond Service Class 43,876,268 (18,058,251) 25,818,017 LVIP Delaware Diversified Floating Rate Service Class 8,744 (9,842) (1,098) LVIP Delaware Foundation Aggressive Allocation Standard Class 340,743 (227,216) 113,527 LVIP Delaware Foundation Aggressive Allocation Service Class 705,928 (523,092) 182,836 LVIP Delaware Growth and Income Service Class 205,802 (504,509) (298,707) LVIP Delaware Social Awareness Standard Class 71,234 (198,852) (127,618) LVIP Delaware Social Awareness Service Class 124,998 (759,879) (634,881) LVIP Delaware Special Opportunities Service Class 88,156 (276,415) (188,259) LVIP Global Income Service Class 4,636,259 (2,230,960) 2,405,299 LVIP Janus Capital Appreciation Standard Class 19,629 (46,495) (26,866) LVIP Janus Capital Appreciation Service Class 301,189 (976,486) (675,297) LVIP JPMorgan High Yield Service Class 12,408 (2,566) 9,842 LVIP MFS International Growth Service Class 381,256 (920,080) (538,824) LVIP MFS Value Service Class 3,747,578 (3,791,167) (43,589) LVIP Mid-Cap Value Service Class 2,786 (508,742) (505,956) LVIP Mondrian International Value Standard Class 739,659 (388,511) 351,148 LVIP Mondrian International Value Service Class 3,341,905 (1,724,145) 1,617,760 LVIP Money Market Standard Class 39,264 (1,344,125) (1,304,861) LVIP Money Market Service Class 170,701 (6,985,235) (6,814,534) LVIP SSgA Bond Index Service Class 15,002,931 (12,313,194) 2,689,737 LVIP SSgA Conservative Index Allocation Service Class -- (1,716) (1,716) LVIP SSgA Conservative Structured Allocation Service Class -- (7,299) (7,299) LVIP SSgA Developed International 150 Service Class 1,235,057 (1,725,868) (490,811) LVIP SSgA Emerging Markets 100 Service Class 1,266,930 (1,982,241) (715,311) LVIP SSgA Global Tactical Allocation Service Class 475,179 (925,565) (450,386) LVIP SSgA International Index Service Class 2,120,394 (2,425,151) (304,757) LVIP SSgA Large Cap 100 Service Class 2,476,939 (3,553,510) (1,076,571) LVIP SSgA Moderate Index Allocation Service Class -- (3,272) (3,272) LVIP SSgA Moderate Structured Allocation Service Class -- (22,507) (22,507) LVIP SSgA Moderately Aggressive Index Allocation Service Class -- (2,740) (2,740) LVIP SSgA Moderately Aggressive Structured Allocation Service Class -- (13,715) (13,715) LVIP SSgA S&P 500 Index Standard Class 20,807 (26,822) (6,015) LVIP SSgA S&P 500 Index Service Class 3,448,122 (5,198,405) (1,750,283) LVIP SSgA Small-Cap Index Service Class 316,892 (1,481,184) (1,164,292) LVIP SSgA Small-Mid Cap 200 Service Class 1,250,128 (1,189,964) 60,164 LVIP T. Rowe Price Growth Stock Service Class -- (865,591) (865,591) LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class -- (40,107) (40,107) LVIP T. Rowe Price Structured Mid-Cap Growth Service Class -- (559,636) (559,636) LVIP Templeton Growth Service Class 1,514,731 (1,374,365) 140,366 LVIP Turner Mid-Cap Growth Service Class -- (302,281) (302,281) LVIP Wells Fargo Intrinsic Value Service Class 189,873 (402,351) (212,478) LVIP Wilshire 2010 Profile Service Class 70,543 (145,723) (75,180) LVIP Wilshire 2020 Profile Service Class 113,298 (272,497) (159,199) LVIP Wilshire 2030 Profile Service Class 57,274 (180,352) (123,078) LVIP Wilshire 2040 Profile Service Class 29,773 (91,625) (61,852) LVIP Wilshire Conservative Profile Service Class 12,271,263 (5,880,630) 6,390,633
N-8
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN (DECREASE) NET NET NET UNREALIZED IN REALIZED REALIZED REALIZED APPRECIATION OR NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ----------------------------------------------------------------------------------------------------------------------------------- LVIP American Global Growth Service Class II $ 16 $ -- $ 16 $ 51,812 $ 49,768 LVIP American Global Small Capitalization Service Class II 103 -- 103 53,319 50,682 LVIP American Growth Service Class II 1,492 -- 1,492 203,231 194,791 LVIP American Growth-Income Service Class II 336 -- 336 134,428 127,817 LVIP American International Service Class II 349 -- 349 79,318 75,154 LVIP Baron Growth Opportunities Service Class 684,055 -- 684,055 16,994,287 16,517,349 LVIP BlackRock Inflation Protected Bond Service Class (12,754) -- (12,754) (39,395) (35,111) LVIP Capital Growth Service Class 1,250,799 -- 1,250,799 20,834,744 21,167,205 LVIP Cohen & Steers Global Real Estate Service Class 209,305 -- 209,305 10,117,278 9,327,778 LVIP Columbia Value Opportunities Service Class 354,019 -- 354,019 2,091,958 2,278,130 LVIP Delaware Bond Standard Class 4,582,765 4,340,679 8,923,444 2,042,619 14,585,149 LVIP Delaware Bond Service Class 9,242,355 26,641,819 35,884,174 9,774,838 71,477,029 LVIP Delaware Diversified Floating Rate Service Class (476) -- (476) (1,255) (2,829) LVIP Delaware Foundation Aggressive Allocation Standard Class (381,885) -- (381,885) 1,524,027 1,255,669 LVIP Delaware Foundation Aggressive Allocation Service Class (2,313,836) -- (2,313,836) 4,748,629 2,617,629 LVIP Delaware Growth and Income Service Class (606,165) -- (606,165) 4,279,139 3,374,267 LVIP Delaware Social Awareness Standard Class 110,310 -- 110,310 1,142,632 1,125,324 LVIP Delaware Social Awareness Service Class (176,838) -- (176,838) 5,092,461 4,280,742 LVIP Delaware Special Opportunities Service Class 469,441 -- 469,441 4,291,530 4,572,712 LVIP Global Income Service Class 418,311 -- 418,311 7,243,392 10,067,002 LVIP Janus Capital Appreciation Standard Class 55,238 -- 55,238 225,613 253,985 LVIP Janus Capital Appreciation Service Class 1,042,747 -- 1,042,747 4,789,714 5,157,164 LVIP JPMorgan High Yield Service Class (307) -- (307) 11,475 21,010 LVIP MFS International Growth Service Class (1,943,122) -- (1,943,122) 11,063,933 8,581,987 LVIP MFS Value Service Class 1,639,969 -- 1,639,969 34,241,562 35,837,942 LVIP Mid-Cap Value Service Class 770,285 -- 770,285 6,645,132 6,909,461 LVIP Mondrian International Value Standard Class (555,767) -- (555,767) 146,322 (58,297) LVIP Mondrian International Value Service Class (2,631,287) -- (2,631,287) 1,755,432 741,905 LVIP Money Market Standard Class 8 325 333 (8) (1,304,536) LVIP Money Market Service Class 21 1,726 1,747 (21) (6,812,808) LVIP SSgA Bond Index Service Class 3,713,732 -- 3,713,732 14,201,350 20,604,819 LVIP SSgA Conservative Index Allocation Service Class 198 -- 198 16,984 15,466 LVIP SSgA Conservative Structured Allocation Service Class 124 -- 124 74,302 67,127 LVIP SSgA Developed International 150 Service Class 1,526,279 -- 1,526,279 8,038,660 9,074,128 LVIP SSgA Emerging Markets 100 Service Class 6,136,390 -- 6,136,390 24,622,099 30,043,178 LVIP SSgA Global Tactical Allocation Service Class (2,071,293) -- (2,071,293) 6,291,080 3,769,401 LVIP SSgA International Index Service Class 1,545,817 -- 1,545,817 11,906,422 13,147,482 LVIP SSgA Large Cap 100 Service Class 5,865,615 -- 5,865,615 30,666,851 35,455,895 LVIP SSgA Moderate Index Allocation Service Class 19 -- 19 48,766 45,513 LVIP SSgA Moderate Structured Allocation Service Class 1,465 -- 1,465 277,191 256,149 LVIP SSgA Moderately Aggressive Index Allocation Service Class 28 -- 28 36,745 34,033 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 12,539 -- 12,539 218,707 217,531 LVIP SSgA S&P 500 Index Standard Class 104,960 -- 104,960 135,215 234,160 LVIP SSgA S&P 500 Index Service Class 3,113,596 -- 3,113,596 43,759,940 45,123,253 LVIP SSgA Small-Cap Index Service Class 2,240,480 -- 2,240,480 20,360,581 21,436,769 LVIP SSgA Small-Mid Cap 200 Service Class 4,730,856 -- 4,730,856 11,733,512 16,524,532 LVIP T. Rowe Price Growth Stock Service Class 1,883,124 -- 1,883,124 6,823,954 7,841,487 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 110,538 -- 110,538 490,498 560,929 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 1,375,428 -- 1,375,428 8,120,728 8,936,520 LVIP Templeton Growth Service Class (1,663,025) -- (1,663,025) 6,401,308 4,878,649 LVIP Turner Mid-Cap Growth Service Class (110,955) -- (110,955) 4,868,079 4,454,843 LVIP Wells Fargo Intrinsic Value Service Class (736,424) -- (736,424) 4,601,006 3,652,104 LVIP Wilshire 2010 Profile Service Class 276,093 -- 276,093 584,723 785,636 LVIP Wilshire 2020 Profile Service Class 262,621 -- 262,621 1,537,479 1,640,901 LVIP Wilshire 2030 Profile Service Class 389,107 -- 389,107 690,289 956,318 LVIP Wilshire 2040 Profile Service Class 96,023 -- 96,023 573,553 607,724 LVIP Wilshire Conservative Profile Service Class 6,577,060 -- 6,577,060 15,747,029 28,714,722
See accompanying notes. N-9
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ----------------------------------------------------------------------------------------------------- LVIP Wilshire Moderate Profile Service Class $26,696,030 $(16,697,293) $ 9,998,737 LVIP Wilshire Moderately Aggressive Profile Service Class 15,167,592 (9,742,013) 5,425,579 Lord Abbett Fundamental Equity Class VC 28,240 (64,380) (36,140) MFS VIT Core Equity Service Class 25,294 (44,927) (19,633) MFS VIT Growth Initial Class 3,547 (42,488) (38,941) MFS VIT Growth Service Class -- (187,299) (187,299) MFS VIT Total Return Initial Class 403,117 (206,301) 196,816 MFS VIT Total Return Service Class 7,658,755 (4,979,105) 2,679,650 MFS VIT Utilities Initial Class 404,766 (181,249) 223,517 MFS VIT Utilities Service Class 4,962,730 (2,657,526) 2,305,204 Morgan Stanley UIF Capital Growth Class II -- (9,595) (9,595) NB AMT Mid-Cap Growth I Class -- (809,249) (809,249) NB AMT Regency I Class 371,712 (885,323) (513,611) Oppenheimer Global Securities Service Class 19,826 (21,181) (1,355) PIMCO VIT Commodity Real Return Advisor Class 976,901 (97,832) 879,069 Putnam VT Global Health Care Class IB 59,132 (47,465) 11,667 Putnam VT Growth & Income Class IB 32,097 (32,534) (437)
N-10
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN (DECREASE) NET NET NET UNREALIZED IN REALIZED REALIZED REALIZED APPRECIATION OR NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ----------------------------------------------------------------------------------------------------------------------------------- LVIP Wilshire Moderate Profile Service Class $ (191,090) $ -- $ (191,090) $ 82,172,467 $91,980,114 LVIP Wilshire Moderately Aggressive Profile Service Class (6,046,983) -- (6,046,983) 60,367,344 59,745,940 Lord Abbett Fundamental Equity Class VC 129,017 -- 129,017 1,284,818 1,377,695 MFS VIT Core Equity Service Class 70,733 -- 70,733 316,151 367,251 MFS VIT Growth Initial Class (136,016) -- (136,016) 555,155 380,198 MFS VIT Growth Service Class 594,943 -- 594,943 1,275,862 1,683,506 MFS VIT Total Return Initial Class (150,372) -- (150,372) 1,092,050 1,138,494 MFS VIT Total Return Service Class (3,853,276) -- (3,853,276) 24,515,078 23,341,452 MFS VIT Utilities Initial Class 100,936 -- 100,936 758,946 1,083,399 MFS VIT Utilities Service Class (3,323,740) -- (3,323,740) 19,325,819 18,307,283 Morgan Stanley UIF Capital Growth Class II 46,491 -- 46,491 192,742 229,638 NB AMT Mid-Cap Growth I Class 2,014,076 -- 2,014,076 10,661,078 11,865,905 NB AMT Regency I Class (692,719) -- (692,719) 12,736,697 11,530,367 Oppenheimer Global Securities Service Class 35,798 -- 35,798 399,422 433,865 PIMCO VIT Commodity Real Return Advisor Class (226,115) 172,321 (53,794) 848,474 1,673,749 Putnam VT Global Health Care Class IB 27,074 -- 27,074 (15,577) 23,164 Putnam VT Growth & Income Class IB (206,694) -- (206,694) 432,181 225,050
See accompanying notes. N-11 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2009 AND 2010
ABVPSF GLOBAL ABVPSF ABVPSF THEMATIC GROWTH ABVPSF LARGE CAP GROWTH AND INCOME INTERNATIONAL GROWTH CLASS B CLASS B VALUE CLASS B CLASS B SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $16,985,544 $128,497,995 $ 87,885,870 $13,536,124 Changes From Operations: - Net investment income (loss) (363,556) 2,506,589 (376,967) (214,742) - Net realized gain (loss) on investments (2,340,719) (18,749,569) (29,652,593) (814,949) - Net change in unrealized appreciation or depreciation on investments 11,677,408 38,358,578 59,818,107 5,106,294 ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 8,973,133 22,115,598 29,788,547 4,076,603 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,387,266 5,288,854 14,516,844 56,908 - Contract withdrawals and transfers to annuity reserves (1,928,716) (14,525,038) (5,096,588) (1,826,206) - Contract transfers 2,065,760 3,883,718 (10,232,130) (1,092,728) ----------- ------------ ------------ ----------- 1,524,310 (5,352,466) (811,874) (2,862,026) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,635) (16,172) (3,528) (3,561) - Receipt (reimbursement) of mortality guarantee adjustments -- 905 (2) -- ----------- ------------ ------------ ----------- (1,635) (15,267) (3,530) (3,561) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,522,675 (5,367,733) (815,404) (2,865,587) ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 10,495,808 16,747,865 28,973,143 1,211,016 ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 27,481,352 145,245,860 116,859,013 14,747,140 Changes From Operations: - Net investment income (loss) 88,067 (2,261,139) 2,487,359 (174,029) - Net realized gain (loss) on investments 326,911 (9,443,179) (7,537,796) 27,103 - Net change in unrealized appreciation or depreciation on investments 3,542,881 27,110,122 13,178,540 1,083,009 ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,957,859 15,405,804 8,128,103 936,083 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,962,059 7,591,190 18,978,532 56,676 - Contract withdrawals and transfers to annuity reserves (3,042,746) (15,532,866) (7,299,880) (2,161,019) - Contract transfers (843,768) 1,181,376 40,713,736 (615,507) ----------- ------------ ------------ ----------- (1,924,455) (6,760,300) 52,392,388 (2,719,850) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,793) (13,622) (5,355) -- - Receipt (reimbursement) of mortality guarantee adjustments -- 1,205 2 -- ----------- ------------ ------------ ----------- (1,793) (12,417) (5,353) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,926,248) (6,772,717) 52,387,035 (2,719,850) ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,031,611 8,633,087 60,515,138 (1,783,767) ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $29,512,963 $153,878,947 $177,374,151 $12,963,373 =========== ============ ============ ===========
N-12
ABVPSF AMERICAN AMERICAN AMERICAN SMALL/MID CENTURY FUNDS FUNDS CAP VP INFLATION GLOBAL GLOBAL SMALL VALUE PROTECTION GROWTH CAPITALIZATION CLASS B CLASS II CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 84,894,668 $237,085,710 $216,967,583 $174,409,032 Changes From Operations: - Net investment income (loss) (666,807) 575,017 (522,397) (2,916,394) - Net realized gain (loss) on investments (10,957,685) (418,404) (19,908,816) (28,020,563) - Net change in unrealized appreciation or depreciation on investments 43,790,839 23,919,453 104,412,906 138,033,579 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 32,166,347 24,076,066 83,981,693 107,096,622 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,751,449 52,964,585 24,619,295 31,392,739 - Contract withdrawals and transfers to annuity reserves (5,841,308) (23,698,718) (14,847,803) (14,943,508) - Contract transfers (14,806,627) 96,955,961 (31,086,107) (9,792,101) ------------ ------------ ------------ ------------ (12,896,486) 126,221,828 (21,314,615) 6,657,130 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 9,401 (2,411) -- - Annuity Payments (3,690) (33,097) (9,231) (9,469) - Receipt (reimbursement) of mortality guarantee adjustments -- 416 9 1,509 ------------ ------------ ------------ ------------ (3,690) (23,280) (11,633) (7,960) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (12,900,176) 126,198,548 (21,326,248) 6,649,170 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 19,266,171 150,274,614 62,655,445 113,745,792 ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 104,160,839 387,360,324 279,623,028 288,154,824 Changes From Operations: - Net investment income (loss) (1,657,474) (164,118) (161,888) 962,285 - Net realized gain (loss) on investments 79,006 4,437,401 (1,624,228) (627,381) - Net change in unrealized appreciation or depreciation on investments 29,173,097 9,419,766 32,033,296 66,309,880 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 27,594,629 13,693,049 30,247,180 66,644,784 Changes From Unit Transactions: Accumulation Units: - Contract purchases 16,361,177 66,270,959 28,971,020 41,546,882 - Contract withdrawals and transfers to annuity reserves (9,375,915) (37,696,225) (21,103,150) (23,765,638) - Contract transfers 11,824,705 64,542,266 13,537,303 33,356,956 ------------ ------------ ------------ ------------ 18,809,967 93,117,000 21,405,173 51,138,200 Annuity Reserves: - Transfer from accumulation units and between subaccounts 60,063 60,063 46,679 7,669 - Annuity Payments (1,543) (3,652) (11,589) (11,032) - Receipt (reimbursement) of mortality guarantee adjustments (33) 517 (510) 935 ------------ ------------ ------------ ------------ 58,487 56,928 34,580 (2,428) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 18,868,454 93,173,928 21,439,753 51,135,772 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 46,463,083 106,866,977 51,686,933 117,780,556 ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $150,623,922 $494,227,301 $331,309,961 $405,935,380 ============ ============ ============ ============ AMERICAN AMERICAN FUNDS AMERICAN FUNDS GROWTH FUNDS GROWTH -INCOME INTERNATIONAL CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $1,096,444,796 $1,213,955,684 $ 567,950,440 Changes From Operations: - Net investment income (loss) (13,150,516) 1,165,213 (951,263) - Net realized gain (loss) on investments (60,845,946) (60,790,318) (40,711,795) - Net change in unrealized appreciation or depreciation on investments 509,708,432 439,961,592 255,132,005 -------------- -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 435,711,970 380,336,487 213,468,947 Changes From Unit Transactions: Accumulation Units: - Contract purchases 113,426,584 110,922,199 49,525,302 - Contract withdrawals and transfers to annuity reserves (96,862,332) (106,353,810) (44,987,404) - Contract transfers 164,731,278 167,826,007 (95,476,206) -------------- -------------- ------------- 181,295,530 172,394,396 (90,938,308) Annuity Reserves: - Transfer from accumulation units and between subaccounts (2,654) (15,719) -- - Annuity Payments (62,186) (194,267) (37,361) - Receipt (reimbursement) of mortality guarantee adjustments (881) 4,384 2,640 -------------- -------------- ------------- (65,721) (205,602) (34,721) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 181,229,809 172,188,794 (90,973,029) -------------- -------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 616,941,779 552,525,281 122,495,918 -------------- -------------- ------------- NET ASSETS AT DECEMBER 31, 2009 1,713,386,575 1,766,480,965 690,446,358 Changes From Operations: - Net investment income (loss) (16,136,131) (977,966) 3,234,681 - Net realized gain (loss) on investments (14,223,638) (19,884,171) (5,429,423) - Net change in unrealized appreciation or depreciation on investments 312,374,236 196,483,474 43,502,953 -------------- -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 282,014,467 175,621,337 41,308,211 Changes From Unit Transactions: Accumulation Units: - Contract purchases 121,754,532 115,629,269 62,959,658 - Contract withdrawals and transfers to annuity reserves (142,936,764) (150,851,178) (56,764,412) - Contract transfers (29,252,347) 59,039,134 25,892,480 -------------- -------------- ------------- (50,434,579) 23,817,225 32,087,726 Annuity Reserves: - Transfer from accumulation units and between subaccounts 190,448 42,910 126,634 - Annuity Payments (74,593) (214,604) (33,434) - Receipt (reimbursement) of mortality guarantee adjustments (6,591) (4,755) 358 -------------- -------------- ------------- 109,264 (176,449) 93,558 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (50,325,315) 23,640,776 32,181,284 -------------- -------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 231,689,152 199,262,113 73,489,495 -------------- -------------- ------------- NET ASSETS AT DECEMBER 31, 2010 $1,945,075,727 $1,965,743,078 $ 763,935,853 ============== ============== ============= DELAWARE BLACKROCK VIP GLOBAL DIVERSIFIED ALLOCATION V.I. INCOME CLASS III SERVICE CLASS SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $383,243,656 Changes From Operations: - Net investment income (loss) 1,393,171 17,797,295 - Net realized gain (loss) on investments 428,921 1,569,629 - Net change in unrealized appreciation or depreciation on investments 6,219,997 92,958,293 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 8,042,089 112,325,217 Changes From Unit Transactions: Accumulation Units: - Contract purchases 76,518,727 90,253,864 - Contract withdrawals and transfers to annuity reserves (3,242,976) (38,468,101) - Contract transfers 122,377,738 167,889,167 ------------ ------------ 195,653,489 219,674,930 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 7,422 - Annuity Payments -- (29,458) - Receipt (reimbursement) of mortality guarantee adjustments -- 472 ------------ ------------ -- (21,564) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 195,653,489 219,653,366 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 203,695,578 331,978,583 ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 203,695,578 715,222,239 Changes From Operations: - Net investment income (loss) (227,747) 22,235,713 - Net realized gain (loss) on investments 5,005,435 14,641,894 - Net change in unrealized appreciation or depreciation on investments 36,508,309 10,745,185 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 41,285,997 47,622,792 Changes From Unit Transactions: Accumulation Units: - Contract purchases 192,117,891 146,750,882 - Contract withdrawals and transfers to annuity reserves (17,458,143) (68,397,817) - Contract transfers 197,859,645 157,227,296 ------------ ------------ 372,519,393 235,580,361 Annuity Reserves: - Transfer from accumulation units and between subaccounts 129,776 24,963 - Annuity Payments (5,098) (27,972) - Receipt (reimbursement) of mortality guarantee adjustments (42) (136) ------------ ------------ 124,636 (3,145) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 372,644,029 235,577,216 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 413,930,026 283,200,008 ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $617,625,604 $998,422,247 ============ ============
See accompanying notes. N-13
DELAWARE VIP DELAWARE VIP DELAWARE VIP INTERNATIONAL EMERGING HIGH YIELD DELAWARE VIP VALUE EQUITY MARKETS STANDARD HIGH YIELD STANDARD SERVICE CLASS CLASS SERVICE CLASS CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $141,037,891 $ 8,034,157 $166,499,584 $ 423,335 Changes From Operations: - Net investment income (loss) (1,314,684) 740,545 12,476,775 8,219 - Net realized gain (loss) on investments (18,525,970) 61,432 (8,121,159) (113,617) - Net change in unrealized appreciation or depreciation on investments 119,959,749 3,045,045 81,123,245 219,237 ------------ ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 100,119,095 3,847,022 85,478,861 113,839 Changes From Unit Transactions: Accumulation Units: - Contract purchases 13,639,060 37,906 20,173,812 111 - Contract withdrawals and transfers to annuity reserves (10,982,758) (1,249,707) (19,181,407) (87,549) - Contract transfers (20,680,585) (2,809,227) 12,941,276 (75,895) ------------ ----------- ------------ --------- (18,024,283) (4,021,028) 13,933,681 (163,333) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,210) (229) (27,562) -- - Receipt (reimbursement) of mortality guarantee adjustments 596 24 472 -- ------------ ----------- ------------ --------- (614) (205) (27,090) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (18,024,897) (4,021,233) 13,906,591 (163,333) ------------ ----------- ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 82,094,198 (174,211) 99,385,452 (49,494) ------------ ----------- ------------ --------- NET ASSETS AT DECEMBER 31, 2009 223,132,089 7,859,946 265,885,036 373,841 Changes From Operations: - Net investment income (loss) (2,662,468) 483,302 15,988,536 8,674 - Net realized gain (loss) on investments 1,648,785 662,817 9,019,747 (35,226) - Net change in unrealized appreciation or depreciation on investments 41,760,278 24,107 9,563,102 54,456 ------------ ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 40,746,595 1,170,226 34,571,385 27,904 Changes From Unit Transactions: Accumulation Units: - Contract purchases 40,467,163 26,204 22,709,137 111 - Contract withdrawals and transfers to annuity reserves (18,140,980) (1,166,721) (28,170,921) (12,684) - Contract transfers 26,665,367 3,733,195 24,431,694 (54,566) ------------ ----------- ------------ --------- 48,991,550 2,592,678 18,969,910 (67,139) Annuity Reserves: - Transfer from accumulation units and between subaccounts 67,304 -- 135,493 -- - Annuity Payments (961) (272) (26,669) -- - Receipt (reimbursement) of mortality guarantee adjustments (20,626) 38 680 -- ------------ ----------- ------------ --------- 45,717 (234) 109,504 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 49,037,267 2,592,444 19,079,414 (67,139) ------------ ----------- ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 89,783,862 3,762,670 53,650,799 (39,235) ------------ ----------- ------------ --------- NET ASSETS AT DECEMBER 31, 2010 $312,915,951 $11,622,616 $319,535,835 $ 334,606 ============ =========== ============ =========
N-14
DELAWARE VIP DELAWARE VIP LIMITED-TERM DELAWARE SMALL CAP DIVERSIFIED VIP REIT DELAWARE VALUE INCOME STANDARD VIP REIT STANDARD SERVICE CLASS CLASS SERVICE CLASS CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 81,388,856 $ 5,881,815 $ 97,607,134 $ 9,651,885 Changes From Operations: - Net investment income (loss) 3,806,577 161,265 2,398,009 (31,109) - Net realized gain (loss) on investments 1,860,631 (2,234,071) (42,530,953) (754,492) - Net change in unrealized appreciation or depreciation on investments 12,775,031 2,828,918 55,056,090 2,830,454 ------------ ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 18,442,239 756,112 14,923,146 2,044,853 Changes From Unit Transactions: Accumulation Units: - Contract purchases 57,658,293 42,467 1,646,253 83,175 - Contract withdrawals and transfers to annuity reserves (18,453,533) (1,117,806) (8,064,327) (1,844,944) - Contract transfers 223,183,214 (558,162) (16,400,874) (1,049,085) ------------ ----------- ------------ ----------- 262,387,974 (1,633,501) (22,818,948) (2,810,854) Annuity Reserves: - Transfer from accumulation units and between subaccounts 43,923 (5,150) -- -- - Annuity Payments (162,724) (5,806) (25,844) (731) - Receipt (reimbursement) of mortality guarantee adjustments (131) 155 1,275 35 ------------ ----------- ------------ ----------- (118,932) (10,801) (24,569) (696) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 262,269,042 (1,644,302) (22,843,517) (2,811,550) ------------ ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 280,711,281 (888,190) (7,920,371) (766,697) ------------ ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 362,100,137 4,993,625 89,686,763 8,885,188 Changes From Operations: - Net investment income (loss) 3,202,363 70,133 890,741 (67,826) - Net realized gain (loss) on investments 5,640,276 (556,874) (13,626,248) 418,073 - Net change in unrealized appreciation or depreciation on investments 3,335,434 1,633,527 34,183,419 2,070,926 ------------ ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 12,178,073 1,146,786 21,447,912 2,421,173 Changes From Unit Transactions: Accumulation Units: - Contract purchases 118,665,809 22,296 6,217,771 13,239 - Contract withdrawals and transfers to annuity reserves (39,702,580) (798,368) (12,039,714) (1,378,119) - Contract transfers 205,289,661 (19,599) 5,262,827 (408,796) ------------ ----------- ------------ ----------- 284,252,890 (795,671) (559,116) (1,773,676) Annuity Reserves: - Transfer from accumulation units and between subaccounts 35,635 (165) -- -- - Annuity Payments (180,302) (15,094) (27,937) (954) - Receipt (reimbursement) of mortality guarantee adjustments 85 79 (1,059) 59 ------------ ----------- ------------ ----------- (144,582) (15,180) (28,996) (895) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 284,108,308 (810,851) (588,112) (1,774,571) ------------ ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 296,286,381 335,935 20,859,800 646,602 ------------ ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $658,386,518 $ 5,329,560 $110,546,563 $ 9,531,790 ============ =========== ============ =========== DELAWARE VIP DELAWARE VIP SMID CAP DELAWARE VIP SMALL CAP GROWTH SMID CAP VALUE STANDARD GROWTH SERVICE CLASS CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $230,267,773 $ -- $ -- Changes From Operations: - Net investment income (loss) (2,197,008) -- -- - Net realized gain (loss) on investments (29,150,675) -- -- - Net change in unrealized appreciation or depreciation on investments 90,706,523 -- -- ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 59,358,840 -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 15,053,198 -- -- - Contract withdrawals and transfers to annuity reserves (16,065,928) -- -- - Contract transfers (41,513,418) -- -- ------------ ---------- ----------- (42,526,148) -- -- Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments (11,856) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 59 -- -- ------------ ---------- ----------- (11,797) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (42,537,945) -- -- ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 16,820,895 -- -- ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 247,088,668 -- -- Changes From Operations: - Net investment income (loss) (3,219,089) (29,860) (304,616) - Net realized gain (loss) on investments (254,240) 37,671 519,934 - Net change in unrealized appreciation or depreciation on investments 74,841,961 1,141,154 9,733,756 ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 71,368,632 1,148,965 9,949,074 Changes From Unit Transactions: Accumulation Units: - Contract purchases 22,988,917 7,085 766,517 - Contract withdrawals and transfers to annuity reserves (23,776,911) (332,279) (3,459,005) - Contract transfers (8,227,292) 8,553,412 77,646,323 ------------ ---------- ----------- (9,015,286) 8,228,218 74,953,835 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments (12,433) 62,991 61,002 - Receipt (reimbursement) of mortality guarantee adjustments 108 2,177 16 ------------ ---------- ----------- (12,325) 65,168 61,018 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (9,027,611) 8,293,386 75,014,853 ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 62,341,021 9,442,351 84,963,927 ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $309,429,689 $9,442,351 $84,963,927 ============ ========== =========== DELAWARE VIP TREND DELAWARE STANDARD VIP TREND CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 7,010,663 $ 52,003,840 Changes From Operations: - Net investment income (loss) (104,245) (928,602) - Net realized gain (loss) on investments (995,807) (7,340,381) - Net change in unrealized appreciation or depreciation on investments 4,243,750 32,589,215 ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,143,698 24,320,232 Changes From Unit Transactions: Accumulation Units: - Contract purchases 28,825 1,704,940 - Contract withdrawals and transfers to annuity reserves (1,134,769) (5,167,357) - Contract transfers (639,866) (6,395,750) ----------- ------------ (1,745,810) (9,858,167) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (4,578) (2,464) - Receipt (reimbursement) of mortality guarantee adjustments 1,177 (3) ----------- ------------ (3,401) (2,467) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,749,211) (9,860,634) ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 1,394,487 14,459,598 ----------- ------------ NET ASSETS AT DECEMBER 31, 2009 8,405,150 66,463,438 Changes From Operations: - Net investment income (loss) (90,844) (860,311) - Net realized gain (loss) on investments 402,773 7,769,905 - Net change in unrealized appreciation or depreciation on investments 1,168,329 5,121,804 ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,480,258 12,031,398 Changes From Unit Transactions: Accumulation Units: - Contract purchases 48,041 2,039,913 - Contract withdrawals and transfers to annuity reserves (1,199,707) (6,167,430) - Contract transfers (8,664,465) (74,302,949) ----------- ------------ (9,816,131) (78,430,466) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (69,277) (64,370) - Receipt (reimbursement) of mortality guarantee adjustments -- -- ----------- ------------ (69,277) (64,370) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (9,885,408) (78,494,836) ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (8,405,150) (66,463,438) ----------- ------------ NET ASSETS AT DECEMBER 31, 2010 $ -- $ -- =========== ============
See accompanying notes. N-15
DWS VIP DELAWARE ALTERNATIVE DELAWARE VIP VIP VALUE DELAWARE ASSET U.S. GROWTH STANDARD VIP VALUE ALLOCATION SERVICE CLASS CLASS SERVICE CLASS PLUS CLASS B SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 21,229,340 $ 6,352,152 $ 92,632,743 $ -- Changes From Operations: - Net investment income (loss) (507,952) 105,224 1,088,904 (27,293) - Net realized gain (loss) on investments (819,808) (503,414) (9,904,400) 176,371 - Net change in unrealized appreciation or depreciation on investments 14,427,801 1,243,917 24,497,054 136,879 ------------ ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 13,100,041 845,727 15,681,558 285,957 Changes From Unit Transactions: Accumulation Units: - Contract purchases 9,272,208 33,626 5,794,340 1,116,477 - Contract withdrawals and transfers to annuity reserves (2,807,657) (871,437) (6,612,626) (106,750) - Contract transfers 21,536,358 (291,800) 9,556,703 1,983,110 ------------ ----------- ------------ ----------- 28,000,909 (1,129,611) 8,738,417 2,992,837 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (4,395) (4,091) (1,639) -- - Receipt (reimbursement) of mortality guarantee adjustments 699 1,417 285 -- ------------ ----------- ------------ ----------- (3,696) (2,674) (1,354) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 27,997,213 (1,132,285) 8,737,063 2,992,837 ------------ ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 41,097,254 (286,558) 24,418,621 3,278,794 ------------ ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 62,326,594 6,065,594 117,051,364 3,278,794 Changes From Operations: - Net investment income (loss) (1,020,237) 58,367 622,786 (90,309) - Net realized gain (loss) on investments 1,834,757 (123,028) (4,531,928) 207,759 - Net change in unrealized appreciation or depreciation on investments 12,598,227 831,881 18,824,468 1,069,637 ------------ ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 13,412,747 767,220 14,915,326 1,187,087 Changes From Unit Transactions: Accumulation Units: - Contract purchases 17,341,706 17,805 6,229,336 6,121,179 - Contract withdrawals and transfers to annuity reserves (5,459,668) (616,857) (8,816,848) (710,133) - Contract transfers 37,097,284 50,109 (3,964,742) 8,810,813 ------------ ----------- ------------ ----------- 48,979,322 (548,943) (6,552,254) 14,221,859 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (5,204) (4,635) (1,825) -- - Receipt (reimbursement) of mortality guarantee adjustments 982 1,994 (5,645) -- ------------ ----------- ------------ ----------- (4,222) (2,641) (7,470) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 48,975,100 (551,584) (6,559,724) 14,221,859 ------------ ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 62,387,847 215,636 8,355,602 15,408,946 ------------ ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $124,714,441 $ 6,281,230 $125,406,966 $18,687,740 ============ =========== ============ ===========
N-16
DWS VIP DWS VIP DWS VIP DWS VIP EQUITY 500 EQUITY 500 SMALL CAP SMALL CAP INDEX CLASS A INDEX CLASS B INDEX CLASS A INDEX CLASS B SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $24,170,085 $29,391,732 $ 6,804,093 $18,430,158 Changes From Operations: - Net investment income (loss) 316,657 256,178 16,031 11,485 - Net realized gain (loss) on investments (1,210,139) (2,125,167) (206,436) (3,140,946) - Net change in unrealized appreciation or depreciation on investments 6,098,509 8,320,923 1,687,542 6,613,841 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,205,027 6,451,934 1,497,137 3,484,380 Changes From Unit Transactions: Accumulation Units: - Contract purchases 179,710 312,102 34,298 326,567 - Contract withdrawals and transfers to annuity reserves (3,269,453) (2,447,593) (756,803) (1,136,876) - Contract transfers (782,202) 242,478 (359,324) (4,343,558) ----------- ----------- ----------- ----------- (3,871,945) (1,893,013) (1,081,829) (5,153,867) Annuity Reserves: - Transfer from accumulation units and between subaccounts (6,586) 8,775 (6,128) -- - Annuity Payments (18,417) (2,213) (1,113) (5,552) - Receipt (reimbursement) of mortality guarantee adjustments 4,328 (1,395) -- (3) ----------- ----------- ----------- ----------- (20,675) 5,167 (7,241) (5,555) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,892,620) (1,887,846) (1,089,070) (5,159,422) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,312,407 4,564,088 408,067 (1,675,042) ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 25,482,492 33,955,820 7,212,160 16,755,116 Changes From Operations: - Net investment income (loss) 95,380 (4,202) (44,008) (147,373) - Net realized gain (loss) on investments (37,193) (212,906) (246,496) (1,557,454) - Net change in unrealized appreciation or depreciation on investments 2,805,656 4,199,868 1,756,784 5,030,287 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,863,843 3,982,760 1,466,280 3,325,460 Changes From Unit Transactions: Accumulation Units: - Contract purchases 97,400 146,177 21,249 82,595 - Contract withdrawals and transfers to annuity reserves (2,944,068) (2,536,920) (932,447) (1,375,612) - Contract transfers (711,617) (537,939) (616,962) (2,357,147) ----------- ----------- ----------- ----------- (3,558,285) (2,928,682) (1,528,160) (3,650,164) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (20,936) (2,765) (1,111) (8,509) - Receipt (reimbursement) of mortality guarantee adjustments 6,646 94 -- 3 ----------- ----------- ----------- ----------- (14,290) (2,671) (1,111) (8,506) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,572,575) (2,931,353) (1,529,271) (3,658,670) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (708,732) 1,051,407 (62,991) (333,210) ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $24,773,760 $35,007,227 $ 7,149,169 $16,421,906 =========== =========== =========== =========== FIDELITY VIP FIDELITY VIP FIDELITY VIP CONTRAFUND EQUITY-INCOME EQUITY-INCOME SERVICE CLASS 2 INITIAL CLASS SERVICE CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 500,282,061 $ 7,625,372 $ 47,467,613 Changes From Operations: - Net investment income (loss) (2,227,513) 53,780 169,740 - Net realized gain (loss) on investments (49,990,562) (1,373,212) (7,911,280) - Net change in unrealized appreciation or depreciation on investments 234,108,624 3,013,896 19,054,040 ------------- ----------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 181,890,549 1,694,464 11,312,500 Changes From Unit Transactions: Accumulation Units: - Contract purchases 44,751,510 85,346 293,640 - Contract withdrawals and transfers to annuity reserves (38,728,083) (1,166,079) (5,943,404) - Contract transfers 105,915,772 (659,416) (3,783,617) ------------- ----------- ------------- 111,939,199 (1,740,149) (9,433,381) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments (2,006) (2,345) (17,883) - Receipt (reimbursement) of mortality guarantee adjustments 176 1,198 48 ------------- ----------- ------------- (1,830) (1,147) (17,835) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 111,937,369 (1,741,296) (9,451,216) ------------- ----------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 293,827,918 (46,832) 1,861,284 ------------- ----------- ------------- NET ASSETS AT DECEMBER 31, 2009 794,109,979 7,578,540 49,328,897 Changes From Operations: - Net investment income (loss) (4,856,091) 22,217 (38,237) - Net realized gain (loss) on investments (20,890,987) (500,214) (3,158,380) - Net change in unrealized appreciation or depreciation on investments 147,489,977 1,340,169 8,654,080 ------------- ----------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 121,742,899 862,172 5,457,463 Changes From Unit Transactions: Accumulation Units: - Contract purchases 66,842,014 11,064 152,588 - Contract withdrawals and transfers to annuity reserves (57,410,744) (1,125,084) (5,679,359) - Contract transfers 13,409,529 (332,604) (3,756,052) ------------- ----------- ------------- 22,840,799 (1,446,624) (9,282,823) Annuity Reserves: - Transfer from accumulation units and between subaccounts 99,865 -- -- - Annuity Payments (5,142) (2,805) (15,323) - Receipt (reimbursement) of mortality guarantee adjustments (1,588) 1,597 94 ------------- ----------- ------------- 93,135 (1,208) (15,229) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 22,933,934 (1,447,832) (9,298,052) ------------- ----------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 144,676,833 (585,660) (3,840,589) ------------- ----------- ------------- NET ASSETS AT DECEMBER 31, 2010 $ 938,786,812 $ 6,992,880 $ 45,488,308 ============= =========== ============= FIDELITY VIP FIDELITY VIP GROWTH GROWTH INITIAL CLASS SERVICE CLASS 2 SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $5,288,086 $46,897,614 Changes From Operations: - Net investment income (loss) (49,733) (732,610) - Net realized gain (loss) on investments (877,759) (7,886,178) - Net change in unrealized appreciation or depreciation on investments 2,132,665 20,104,642 ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,205,173 11,485,854 Changes From Unit Transactions: Accumulation Units: - Contract purchases 32,784 3,333,350 - Contract withdrawals and transfers to annuity reserves (677,271) (4,385,751) - Contract transfers (294,378) (58,481) ---------- ----------- (938,865) (1,110,882) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (8,057) (988) - Receipt (reimbursement) of mortality guarantee adjustments 2,984 223 ---------- ----------- (5,073) (765) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (943,938) (1,111,647) ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 261,235 10,374,207 ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 5,549,321 57,271,821 Changes From Operations: - Net investment income (loss) (60,070) (950,998) - Net realized gain (loss) on investments (419,330) (1,009,528) - Net change in unrealized appreciation or depreciation on investments 1,537,613 13,693,008 ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,058,213 11,732,482 Changes From Unit Transactions: Accumulation Units: - Contract purchases 93,567 4,446,118 - Contract withdrawals and transfers to annuity reserves (671,328) (5,482,323) - Contract transfers (371,940) 4,768,718 ---------- ----------- (949,701) 3,732,513 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (9,656) (1,153) - Receipt (reimbursement) of mortality guarantee adjustments 4,792 (4,908) ---------- ----------- (4,864) (6,061) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (954,565) 3,726,452 ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 103,648 15,458,934 ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $5,652,969 $72,730,755 ========== ===========
See accompanying notes. N-17
FTVIPT FRANKLIN FIDELITY VIP FIDELITY VIP FIDELITY VIP INCOME MID CAP OVERSEAS OVERSEAS SECURITIES SERVICE CLASS 2 INITIAL CLASS SERVICE CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $212,067,044 $2,693,356 $ 72,016,219 $358,972,880 Changes From Operations: - Net investment income (loss) (2,881,732) 13,925 148,229 28,803,264 - Net realized gain (loss) on investments (32,440,291) (292,170) (10,163,498) (43,744,290) - Net change in unrealized appreciation or depreciation on investments 110,069,931 830,708 25,510,269 130,249,598 ------------ ---------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 74,747,908 552,463 15,495,000 115,308,572 Changes From Unit Transactions: Accumulation Units: - Contract purchases 32,541,150 748 5,242,964 38,248,645 - Contract withdrawals and transfers to annuity reserves (12,865,280) (594,382) (6,518,343) (24,664,382) - Contract transfers (46,571,348) (83,153) (10,092,379) (68,095,409) ------------ ---------- ------------ ------------ (26,895,478) (676,787) (11,367,758) (54,511,146) Annuity Reserves: - Transfer from accumulation units and between subaccounts (7,850) -- -- -- - Annuity Payments (6,485) (10,965) (7,354) (2,027) - Receipt (reimbursement) of mortality guarantee adjustments 8 3,919 454 (2) ------------ ---------- ------------ ------------ (14,327) (7,046) (6,900) (2,029) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (26,909,805) (683,833) (11,374,658) (54,513,175) ------------ ---------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 47,838,103 (131,370) 4,120,342 60,795,397 ------------ ---------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 259,905,147 2,561,986 76,136,561 419,768,277 Changes From Operations: - Net investment income (loss) (4,761,422) (2,193) (287,013) 22,043,614 - Net realized gain (loss) on investments 412,284 (107,146) (2,768,577) (5,423,198) - Net change in unrealized appreciation or depreciation on investments 81,108,071 334,873 11,473,228 30,172,761 ------------ ---------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 76,758,933 225,534 8,417,638 46,793,177 Changes From Unit Transactions: Accumulation Units: - Contract purchases 55,425,852 12,190 8,127,342 45,416,339 - Contract withdrawals and transfers to annuity reserves (19,187,041) (488,724) (6,872,274) (29,263,135) - Contract transfers 30,653,359 (19,234) 1,169,942 16,101,891 ------------ ---------- ------------ ------------ 66,892,170 (495,768) 2,425,010 32,255,095 Annuity Reserves: - Transfer from accumulation units and between subaccounts 83,302 -- 33,873 -- - Annuity Payments (11,821) (12,368) (8,571) (2,401) - Receipt (reimbursement) of mortality guarantee adjustments 1 5,841 600 1 ------------ ---------- ------------ ------------ 71,482 (6,527) 25,902 (2,400) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 66,963,652 (502,295) 2,450,912 32,252,695 ------------ ---------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 143,722,585 (276,761) 10,868,550 79,045,872 ------------ ---------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $403,627,732 $2,285,225 $ 87,005,111 $498,814,149 ============ ========== ============ ============
N-18
FTVIPT FRANKLIN SMALL FTVIPT FTVIPT -MID CAP FTVIPT TEMPLETON TEMPLETON GROWTH MUTUAL SHARES GLOBAL BOND GROWTH SECURITIES SECURITIES SECURITIES SECURITIES CLASS 2 CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 61,007,232 $229,277,740 $398,547,664 $ 83,661,526 Changes From Operations: - Net investment income (loss) (1,149,634) 1,304,867 62,025,755 1,307,539 - Net realized gain (loss) on investments (8,357,794) (32,354,089) 2,655,286 (19,285,247) - Net change in unrealized appreciation or depreciation on investments 34,216,312 95,123,899 15,444,754 36,251,208 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 24,708,884 64,074,677 80,125,795 18,273,500 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,268,277 47,059,049 51,993,018 417,994 - Contract withdrawals and transfers to annuity reserves (4,953,779) (13,614,826) (33,396,122) (6,994,975) - Contract transfers (4,983,237) 5,260,817 137,515,990 (23,674,449) ------------ ------------ ------------ ------------ (1,668,739) 38,705,040 156,112,886 (30,251,430) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,859) (847) (934) (7,069) - Receipt (reimbursement) of mortality guarantee adjustments 142 (1) 384 232 ------------ ------------ ------------ ------------ (1,717) (848) (550) (6,837) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,670,456) 38,704,192 156,112,336 (30,258,267) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 23,038,428 102,778,869 236,238,131 (11,984,767) ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 84,045,660 332,056,609 634,785,795 71,676,759 Changes From Operations: - Net investment income (loss) (1,456,014) 1,687,369 (1,089,967) (178,212) - Net realized gain (loss) on investments (179,118) (4,661,807) 15,736,563 (5,191,986) - Net change in unrealized appreciation or depreciation on investments 23,129,502 45,096,788 61,693,500 8,497,461 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,494,370 42,122,350 76,340,096 3,127,263 Changes From Unit Transactions: Accumulation Units: - Contract purchases 10,559,956 56,598,345 6,281,746 456,670 - Contract withdrawals and transfers to annuity reserves (8,310,631) (21,477,349) (45,596,246) (7,867,934) - Contract transfers 7,683,604 99,763,159 (8,062,723) (4,044,328) ------------ ------------ ------------ ------------ 9,932,929 134,884,155 (47,377,223) (11,455,592) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 53,094 -- (151) - Annuity Payments (2,360) (3,854) (85) (7,843) - Receipt (reimbursement) of mortality guarantee adjustments 294 106 (13,229) 159 ------------ ------------ ------------ ------------ (2,066) 49,346 (13,314) (7,835) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 9,930,863 134,933,501 (47,390,537) (11,463,427) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 31,425,233 177,055,851 28,949,559 (8,336,164) ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $115,470,893 $509,112,460 $663,735,354 $ 63,340,595 ============ ============ ============ ============ GOLDMAN SACHS VIT INVESCO V.I. INVESCO V.I. LARGE CAP CAPITAL CAPITAL VALUE APPRECIATION APPRECIATION SERVICE CLASS SERIES I SERIES II SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 39,029 $3,358,095 $1,996,280 Changes From Operations: - Net investment income (loss) 261,336 (26,245) (23,745) - Net realized gain (loss) on investments 4,778 (347,466) (398,916) - Net change in unrealized appreciation or depreciation on investments 1,151,487 911,570 730,232 ----------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,417,601 537,859 307,571 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,792,642 29,243 15,468 - Contract withdrawals and transfers to annuity reserves (130,976) (459,876) (320,877) - Contract transfers 12,315,612 (173,528) (250,190) ----------- ---------- ---------- 19,977,278 (604,161) (555,599) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments -- (1,009) -- - Receipt (reimbursement) of mortality guarantee adjustments -- 222 -- ----------- ---------- ---------- -- (787) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 19,977,278 (604,948) (555,599) ----------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 21,394,879 (67,089) (248,028) ----------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2009 21,433,908 3,291,006 1,748,252 Changes From Operations: - Net investment income (loss) 102,128 (21,541) (18,722) - Net realized gain (loss) on investments 85,804 (160,867) (78,129) - Net change in unrealized appreciation or depreciation on investments 7,714,199 567,814 311,975 ----------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,902,131 385,406 215,124 Changes From Unit Transactions: Accumulation Units: - Contract purchases 19,406,757 21,793 2,340 - Contract withdrawals and transfers to annuity reserves (1,674,219) (445,818) (282,120) - Contract transfers 47,229,502 (79,070) 816 ----------- ---------- ---------- 64,962,040 (503,095) (278,964) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments -- (1,109) -- - Receipt (reimbursement) of mortality guarantee adjustments -- (4,631) -- ----------- ---------- ---------- -- (5,740) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 64,962,040 (508,835) (278,964) ----------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 72,864,171 (123,429) (63,840) ----------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2010 $94,298,079 $3,167,577 $1,684,412 =========== ========== ========== INVESCO V.I. INVESCO V.I. CORE EQUITY CORE EQUITY SERIES I SERIES II SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $11,156,757 $3,828,214 Changes From Operations: - Net investment income (loss) 35,658 (1,181) - Net realized gain (loss) on investments (428,327) (230,279) - Net change in unrealized appreciation or depreciation on investments 2,948,617 1,049,713 ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,555,948 818,253 Changes From Unit Transactions: Accumulation Units: - Contract purchases 28,670 12,896 - Contract withdrawals and transfers to annuity reserves (1,453,594) (468,320) - Contract transfers (346,340) (322,667) ----------- ---------- (1,771,264) (778,091) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (894) -- - Receipt (reimbursement) of mortality guarantee adjustments 145 -- ----------- ---------- (749) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,772,013) (778,091) ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 783,935 40,162 ----------- ---------- NET ASSETS AT DECEMBER 31, 2009 11,940,692 3,868,376 Changes From Operations: - Net investment income (loss) (57,990) (28,331) - Net realized gain (loss) on investments 13,297 5,377 - Net change in unrealized appreciation or depreciation on investments 830,740 288,324 ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 786,047 265,370 Changes From Unit Transactions: Accumulation Units: - Contract purchases 53,297 37,556 - Contract withdrawals and transfers to annuity reserves (1,697,877) (393,448) - Contract transfers (434,606) 31,213 ----------- ---------- (2,079,186) (324,679) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (1,033) -- - Receipt (reimbursement) of mortality guarantee adjustments 259 -- ----------- ---------- (774) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,079,960) (324,679) ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,293,913) (59,309) ----------- ---------- NET ASSETS AT DECEMBER 31, 2010 $10,646,779 $3,809,067 =========== ==========
See accompanying notes. N-19
INVESCO V.I. INVESCO V.I. JANUS JANUS INTERNATIONAL INTERNATIONAL ASPEN SERIES ASPEN SERIES GROWTH GROWTH BALANCED ENTERPRISE SERIES I SERIES II SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $4,158,730 $3,639,727 $24,907,981 $ 7,127,862 Changes From Operations: - Net investment income (loss) (1,304) (7,392) 282,900 (116,912) - Net realized gain (loss) on investments 130,076 (19,743) 939,783 (441,852) - Net change in unrealized appreciation or depreciation on investments 1,044,893 982,201 4,072,437 3,126,108 ---------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,173,665 955,066 5,295,120 2,567,344 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,496 7,927 100,705 19,810 - Contract withdrawals and transfers to annuity reserves (584,477) (331,347) (3,354,768) (755,646) - Contract transfers (328,055) (486,847) (319,925) (723,635) ---------- ---------- ----------- ----------- (904,036) (810,267) (3,573,988) (1,459,471) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- (34,520) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- 42 -- ---------- ---------- ----------- ----------- -- -- (34,478) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (904,036) (810,267) (3,608,466) (1,459,471) ---------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 269,629 144,799 1,686,654 1,107,873 ---------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 4,428,359 3,784,526 26,594,635 8,235,735 Changes From Operations: - Net investment income (loss) 27,608 7,411 224,724 (124,664) - Net realized gain (loss) on investments 286,147 168,046 739,257 298,107 - Net change in unrealized appreciation or depreciation on investments 53,062 160,538 536,025 1,455,720 ---------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 366,817 335,995 1,500,006 1,629,163 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,082 74,822 77,417 14,796 - Contract withdrawals and transfers to annuity reserves (717,195) (447,022) (4,366,319) (822,442) - Contract transfers (238,190) (335,974) 128,165 (871,286) ---------- ---------- ----------- ----------- (954,303) (708,174) (4,160,737) (1,678,932) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- (183) -- - Annuity Payments -- -- (27,581) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- (121) -- ---------- ---------- ----------- ----------- -- -- (27,885) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (954,303) (708,174) (4,188,622) (1,678,932) ---------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (587,486) (372,179) (2,688,616) (49,769) ---------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $3,840,873 $3,412,347 $23,906,019 $ 8,185,966 ========== ========== =========== ===========
N-20
JANUS ASPEN SERIES LVIP AMERICAN LVIP AMERICAN WORLDWIDE GLOBAL GLOBAL SMALL LVIP AMERICAN SERVICE GROWTH CAPITALIZATION GROWTH CLASS SERVICE CLASS II SERVICE CLASS II SERVICE CLASS II SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $1,809,532 $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) (5,493) -- -- -- - Net realized gain (loss) on investments (166,330) -- -- -- - Net change in unrealized appreciation or depreciation on investments 706,181 -- -- -- ---------- ---------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 534,358 -- -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 9,681 -- -- -- - Contract withdrawals and transfers to annuity reserves (277,335) -- -- -- - Contract transfers (190,011) -- -- -- ---------- ---------- ---------- ----------- (457,665) -- -- -- Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,210) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- ---------- ----------- (1,210) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (458,875) -- -- -- ---------- ---------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 75,483 -- -- -- ---------- ---------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 1,885,015 -- -- -- Changes From Operations: - Net investment income (loss) (19,090) (2,060) (2,740) (9,932) - Net realized gain (loss) on investments (2,907) 16 103 1,492 - Net change in unrealized appreciation or depreciation on investments 247,572 51,812 53,319 203,231 ---------- ---------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 225,575 49,768 50,682 194,791 Changes From Unit Transactions: Accumulation Units: - Contract purchases 60,359 2,357,456 2,950,078 12,178,719 - Contract withdrawals and transfers to annuity reserves (167,891) (652) (2,269) (32,237) - Contract transfers (108,655) 262,533 477,110 160,420 ---------- ---------- ---------- ----------- (216,187) 2,619,337 3,424,919 12,306,902 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,323) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ---------- ---------- ----------- (1,323) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (217,510) 2,619,337 3,424,919 12,306,902 ---------- ---------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 8,065 2,669,105 3,475,601 12,501,693 ---------- ---------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $1,893,080 $2,669,105 $3,475,601 $12,501,693 ========== ========== ========== =========== LVIP BARON LVIP AMERICAN LVIP AMERICAN GROWTH GROWTH-INCOME INTERNATIONAL OPPORTUNITIES SERVICE CLASS II SERVICE CLASS II SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $ -- $41,420,290 Changes From Operations: - Net investment income (loss) -- -- (850,920) - Net realized gain (loss) on investments -- -- (4,790,056) - Net change in unrealized appreciation or depreciation on investments -- -- 21,850,957 ---------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- 16,209,981 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- 8,766,242 - Contract withdrawals and transfers to annuity reserves -- -- (2,915,444) - Contract transfers -- -- (1,210,162) ---------- ---------- ----------- -- -- 4,640,636 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments -- -- (560) - Receipt (reimbursement) of mortality guarantee adjustments -- -- 18 ---------- ---------- ----------- -- -- (542) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- -- 4,640,094 ---------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- 20,850,075 ---------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 -- -- 62,270,365 Changes From Operations: - Net investment income (loss) (6,947) (4,513) (1,160,993) - Net realized gain (loss) on investments 336 349 684,055 - Net change in unrealized appreciation or depreciation on investments 134,428 79,318 16,994,287 ---------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 127,817 75,154 16,517,349 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,480,581 5,769,976 11,616,624 - Contract withdrawals and transfers to annuity reserves (30,543) (2,705) (3,910,939) - Contract transfers 129,219 179,487 1,424,419 ---------- ---------- ----------- 8,579,257 5,946,758 9,130,104 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments -- -- (698) - Receipt (reimbursement) of mortality guarantee adjustments -- -- 30 ---------- ---------- ----------- -- -- (668) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 8,579,257 5,946,758 9,129,436 ---------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 8,707,074 6,021,912 25,646,785 ---------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $8,707,074 $6,021,912 $87,917,150 ========== ========== =========== LVIP BLACKROCK INFLATION LVIP CAPITAL PROTECTED BOND GROWTH SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2009 $ -- $ 7,720,820 Changes From Operations: - Net investment income (loss) -- (248,257) - Net realized gain (loss) on investments -- (65,470) - Net change in unrealized appreciation or depreciation on investments -- 8,794,956 ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 8,481,229 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 13,853,568 - Contract withdrawals and transfers to annuity reserves -- (947,294) - Contract transfers -- 28,656,574 ----------- ------------ -- 41,562,848 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- ----------- ------------ -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- 41,562,848 ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS -- 50,044,077 ----------- ------------ NET ASSETS AT DECEMBER 31, 2009 -- 57,764,897 Changes From Operations: - Net investment income (loss) 17,038 (918,338) - Net realized gain (loss) on investments (12,754) 1,250,799 - Net change in unrealized appreciation or depreciation on investments (39,395) 20,834,744 ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (35,111) 21,167,205 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,298,951 20,474,073 - Contract withdrawals and transfers to annuity reserves (25,504) (3,859,899) - Contract transfers 6,897,461 49,088,745 ----------- ------------ 14,170,908 65,702,919 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- ----------- ------------ -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 14,170,908 65,702,919 ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 14,135,797 86,870,124 ----------- ------------ NET ASSETS AT DECEMBER 31, 2010 $14,135,797 $144,635,021 =========== ============
See accompanying notes. N-21
LVIP COHEN & LVIP COLUMBIA STEERS GLOBAL VALUE LVIP DELAWARE LVIP DELAWARE REAL ESTATE OPPORTUNITIES BOND BOND SERVICE CLASS SERVICE CLASS STANDARD CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $38,920,478 $ 3,857,022 $224,703,303 $ 590,700,221 Changes From Operations: - Net investment income (loss) (745,634) (64,789) 5,669,654 23,693,886 - Net realized gain (loss) on investments (7,106,245) (718,859) (832,714) (1,289,412) - Net change in unrealized appreciation or depreciation on investments 23,391,391 2,099,606 30,349,094 92,370,477 ----------- ----------- ------------ -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 15,539,512 1,315,958 35,186,034 114,774,951 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,336,471 2,306,414 1,232,184 141,434,586 - Contract withdrawals and transfers to annuity reserves (2,223,985) (408,587) (36,701,690) (56,918,758) - Contract transfers (4,530,373) 382,852 (436,281) 197,968,020 ----------- ----------- ------------ -------------- 582,113 2,280,679 (35,905,787) 282,483,848 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- (14,057) - Annuity Payments -- -- (108,816) (24,695) - Receipt (reimbursement) of mortality guarantee adjustments -- -- 2,190 5,001 ----------- ----------- ------------ -------------- -- -- (106,626) (33,751) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 582,113 2,280,679 (36,012,413) 282,450,097 ----------- ----------- ------------ -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 16,121,625 3,596,637 (826,379) 397,225,048 ----------- ----------- ------------ -------------- NET ASSETS AT DECEMBER 31, 2009 55,042,103 7,453,659 223,876,924 987,925,269 Changes From Operations: - Net investment income (loss) (998,805) (167,847) 3,619,086 25,818,017 - Net realized gain (loss) on investments 209,305 354,019 8,923,444 35,884,174 - Net change in unrealized appreciation or depreciation on investments 10,117,278 2,091,958 2,042,619 9,774,838 ----------- ----------- ------------ -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 9,327,778 2,278,130 14,585,149 71,477,029 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,838,094 3,528,178 1,210,510 230,573,002 - Contract withdrawals and transfers to annuity reserves (3,794,157) (535,794) (34,210,000) (87,706,707) - Contract transfers 3,207,061 2,504,071 (2,447,666) 294,574,132 ----------- ----------- ------------ -------------- 8,250,998 5,496,455 (35,447,156) 437,440,427 Annuity Reserves: - Transfer from accumulation units and between subaccounts 25,405 -- 4,765 545,109 - Annuity Payments (221) -- (73,242) (35,648) - Receipt (reimbursement) of mortality guarantee adjustments -- -- (7,471) 6,463 ----------- ----------- ------------ -------------- 25,184 -- (75,948) 515,924 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 8,276,182 5,496,455 (35,523,104) 437,956,351 ----------- ----------- ------------ -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 17,603,960 7,774,585 (20,937,955) 509,433,380 ----------- ----------- ------------ -------------- NET ASSETS AT DECEMBER 31, 2010 $72,646,063 $15,228,244 $202,938,969 $1,497,358,649 =========== =========== ============ ==============
N-22
LVIP DELAWARE LVIP DELAWARE LVIP DELAWARE FOUNDATION FOUNDATION LVIP DELAWARE DIVERSIFIED AGGRESSIVE AGGRESSIVE GROWTH FLOATING RATE ALLOCATION ALLOCATION AND INCOME SERVICE CLASS STANDARD CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $15,329,718 $ 41,922,453 $17,695,340 Changes From Operations: - Net investment income (loss) -- (23,537) (212,178) (160,787) - Net realized gain (loss) on investments -- (2,570,482) (9,512,061) (1,960,101) - Net change in unrealized appreciation or depreciation on investments -- 6,534,530 19,941,915 7,034,174 ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- 3,940,511 10,217,676 4,913,286 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 18,577 1,197,184 3,118,244 - Contract withdrawals and transfers to annuity reserves -- (1,674,745) (2,574,014) (1,161,562) - Contract transfers -- (2,717,337) (15,225,754) 4,582,020 ----------- ----------- ------------ ----------- -- (4,373,505) (16,602,584) 6,538,702 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (3,641) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- (2) -- -- ----------- ----------- ------------ ----------- -- (3,643) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- (4,377,148) (16,602,584) 6,538,702 ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- (436,637) (6,384,908) 11,451,988 ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 -- 14,893,081 35,537,545 29,147,328 Changes From Operations: - Net investment income (loss) (1,098) 113,527 182,836 (298,707) - Net realized gain (loss) on investments (476) (381,885) (2,313,836) (606,165) - Net change in unrealized appreciation or depreciation on investments (1,255) 1,524,027 4,748,629 4,279,139 ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,829) 1,255,669 2,617,629 3,374,267 Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,273,216 13,911 245,926 3,034,231 - Contract withdrawals and transfers to annuity reserves (53,170) (1,905,421) (5,839,573) (1,856,497) - Contract transfers 7,101,616 (1,236,639) (2,893,575) 1,822,010 ----------- ----------- ------------ ----------- 12,321,662 (3,128,149) (8,487,222) 2,999,744 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (3,142) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 14 -- -- ----------- ----------- ------------ ----------- -- (3,128) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 12,321,662 (3,131,277) (8,487,222) 2,999,744 ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 12,318,833 (1,875,608) (5,869,593) 6,374,011 ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $12,318,833 $13,017,473 $ 29,667,952 $35,521,339 =========== =========== ============ =========== LVIP DELAWARE LVIP DELAWARE LVIP DELAWARE SOCIAL SOCIAL SPECIAL AWARENESS AWARENESS OPPORTUNITIES STANDARD CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $12,930,385 $42,910,993 $ 8,306,542 Changes From Operations: - Net investment income (loss) (115,270) (544,291) (89,134) - Net realized gain (loss) on investments 74,785 (342,007) (1,125,223) - Net change in unrealized appreciation or depreciation on investments 3,043,487 11,710,205 3,548,707 ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,003,002 10,823,907 2,334,350 Changes From Unit Transactions: Accumulation Units: - Contract purchases 42,157 2,097,004 2,677,384 - Contract withdrawals and transfers to annuity reserves (1,668,727) (4,664,587) (695,155) - Contract transfers (966,441) (1,528,079) (1,143,295) ----------- ----------- ----------- (2,593,011) (4,095,662) 838,934 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments (4,662) (2,752) -- - Receipt (reimbursement) of mortality guarantee adjustments (1) 1,204 -- ----------- ----------- ----------- (4,663) (1,548) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,597,674) (4,097,210) 838,934 ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 405,328 6,726,697 3,173,284 ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 13,335,713 49,637,690 11,479,826 Changes From Operations: - Net investment income (loss) (127,618) (634,881) (188,259) - Net realized gain (loss) on investments 110,310 (176,838) 469,441 - Net change in unrealized appreciation or depreciation on investments 1,142,632 5,092,461 4,291,530 ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,125,324 4,280,742 4,572,712 Changes From Unit Transactions: Accumulation Units: - Contract purchases 110,482 2,744,436 4,383,280 - Contract withdrawals and transfers to annuity reserves (1,614,907) (5,268,521) (1,087,787) - Contract transfers (545,071) (2,159,218) 7,872,316 ----------- ----------- ----------- (2,049,496) (4,683,303) 11,167,809 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- - Annuity Payments (5,410) (3,195) -- - Receipt (reimbursement) of mortality guarantee adjustments 1 1,554 -- ----------- ----------- ----------- (5,409) (1,641) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,054,905) (4,684,944) 11,167,809 ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (929,581) (404,202) 15,740,521 ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $12,406,132 $49,233,488 $27,220,347 =========== =========== =========== LVIP JANUS CAPITAL LVIP GLOBAL APPRECIATION INCOME STANDARD SERVICE CLASS CLASS SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $2,443,401 Changes From Operations: - Net investment income (loss) 461,184 (21,645) - Net realized gain (loss) on investments 39,014 (104,803) - Net change in unrealized appreciation or depreciation on investments (411,450) 918,938 ------------ ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 88,748 792,490 Changes From Unit Transactions: Accumulation Units: - Contract purchases 32,548,105 28,585 - Contract withdrawals and transfers to annuity reserves (296,255) (333,266) - Contract transfers 24,872,657 (98,033) ------------ ---------- 57,124,507 (402,714) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- ------------ ---------- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 57,124,507 (402,714) ------------ ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 57,213,255 389,776 ------------ ---------- NET ASSETS AT DECEMBER 31, 2009 57,213,255 2,833,177 Changes From Operations: - Net investment income (loss) 2,405,299 (26,866) - Net realized gain (loss) on investments 418,311 55,238 - Net change in unrealized appreciation or depreciation on investments 7,243,392 225,613 ------------ ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 10,067,002 253,985 Changes From Unit Transactions: Accumulation Units: - Contract purchases 82,617,349 2,871 - Contract withdrawals and transfers to annuity reserves (6,219,837) (280,718) - Contract transfers 92,148,528 16,170 ------------ ---------- 168,546,040 (261,677) Annuity Reserves: - Transfer from accumulation units and between subaccounts 85,639 -- - Annuity Payments (6,895) -- - Receipt (reimbursement) of mortality guarantee adjustments (26) -- ------------ ---------- 78,718 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 168,624,758 (261,677) ------------ ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 178,691,760 (7,692) ------------ ---------- NET ASSETS AT DECEMBER 31, 2010 $235,905,015 $2,825,485 ============ ==========
See accompanying notes. N-23
LVIP JANUS LVIP LVIP MFS CAPITAL JPMORGAN INTERNATIONAL LVIP MFS APPRECIATION HIGH YIELD GROWTH VALUE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $24,856,506 $ -- $23,019,042 $ 81,499,360 Changes From Operations: - Net investment income (loss) (279,544) -- (288,063) 423,423 - Net realized gain (loss) on investments (1,863,893) -- (4,575,846) (2,119,820) - Net change in unrealized appreciation or depreciation on investments 14,640,182 -- 14,869,287 34,663,662 ----------- ---------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 12,496,745 -- 10,005,378 32,967,265 Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,062,914 -- 10,314,449 34,774,575 - Contract withdrawals and transfers to annuity reserves (2,204,399) -- (1,551,676) (6,234,528) - Contract transfers 14,569,910 -- 11,856,653 87,998,587 ----------- ---------- ----------- ------------ 17,428,425 -- 20,619,426 116,538,634 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ----------- ---------- ----------- ------------ -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 17,428,425 -- 20,619,426 116,538,634 ----------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 29,925,170 -- 30,624,804 149,505,899 ----------- ---------- ----------- ------------ NET ASSETS AT DECEMBER 31, 2009 54,781,676 -- 53,643,846 231,005,259 Changes From Operations: - Net investment income (loss) (675,297) 9,842 (538,824) (43,589) - Net realized gain (loss) on investments 1,042,747 (307) (1,943,122) 1,639,969 - Net change in unrealized appreciation or depreciation on investments 4,789,714 11,475 11,063,933 34,241,562 ----------- ---------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,157,164 21,010 8,581,987 35,837,942 Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,530,451 1,885,848 17,310,888 54,296,153 - Contract withdrawals and transfers to annuity reserves (4,026,861) (3,248) (3,190,046) (14,420,539) - Contract transfers 2,216,426 1,343,352 20,537,816 102,617,244 ----------- ---------- ----------- ------------ 3,720,016 3,225,952 34,658,658 142,492,858 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 12,447 445,059 - Annuity Payments -- -- (639) (9,751) - Receipt (reimbursement) of mortality guarantee adjustments -- -- 128 (190) ----------- ---------- ----------- ------------ -- -- 11,936 435,118 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 3,720,016 3,225,952 34,670,594 142,927,976 ----------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 8,877,180 3,246,962 43,252,581 178,765,918 ----------- ---------- ----------- ------------ NET ASSETS AT DECEMBER 31, 2010 $63,658,856 $3,246,962 $96,896,427 $409,771,177 =========== ========== =========== ============
N-24
LVIP MONDRIAN LVIP MONDRIAN LVIP MONEY LVIP MID-CAP INTERNATIONAL INTERNATIONAL MARKET VALUE VALUE VALUE STANDARD SERVICE CLASS STANDARD CLASS SERVICE CLASS CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $13,021,942 $28,349,359 $105,135,796 $178,597,067 Changes From Operations: - Net investment income (loss) (235,734) 383,891 1,372,429 (1,851,016) - Net realized gain (loss) on investments (2,186,551) (1,782,937) (8,458,871) 1,391 - Net change in unrealized appreciation or depreciation on investments 8,796,044 5,679,896 25,714,404 (19) ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,373,759 4,280,850 18,627,962 (1,849,644) Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,114,828 80,576 8,401,433 1,332,830 - Contract withdrawals and transfers to annuity reserves (794,330) (3,427,553) (7,985,345) (87,778,450) - Contract transfers 429,670 (2,528,657) (13,149,778) 13,985,680 ----------- ----------- ------------ ------------ 3,750,168 (5,875,634) (12,733,690) (72,459,940) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- 641 - Annuity Payments -- (7,783) (5,654) (84,684) - Receipt (reimbursement) of mortality guarantee adjustments -- 404 1,340 38 ----------- ----------- ------------ ------------ -- (7,379) (4,314) (84,005) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 3,750,168 (5,883,013) (12,738,004) (72,543,945) ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 10,123,927 (1,602,163) 5,889,958 (74,393,589) ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 23,145,869 26,747,196 111,025,754 104,203,478 Changes From Operations: - Net investment income (loss) (505,956) 351,148 1,617,760 (1,304,861) - Net realized gain (loss) on investments 770,285 (555,767) (2,631,287) 333 - Net change in unrealized appreciation or depreciation on investments 6,645,132 146,322 1,755,432 (8) ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,909,461 (58,297) 741,905 (1,304,536) Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,815,254 87,152 8,154,730 995,369 - Contract withdrawals and transfers to annuity reserves (1,387,767) (3,607,892) (9,350,671) (51,703,222) - Contract transfers 5,257,375 (725,515) 890,980 14,574,373 ----------- ----------- ------------ ------------ 10,684,862 (4,246,255) (304,961) (36,133,480) Annuity Reserves: - Transfer from accumulation units and between subaccounts 60,063 -- -- 13,116 - Annuity Payments 1,063 (6,427) (4,725) (93,016) - Receipt (reimbursement) of mortality guarantee adjustments (33) (12,413) 1,638 113 ----------- ----------- ------------ ------------ 61,093 (18,840) (3,087) (79,787) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 10,745,955 (4,265,095) (308,048) (36,213,267) ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 17,655,416 (4,323,392) 433,857 (37,517,803) ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $40,801,285 $22,423,804 $111,459,611 $ 66,685,675 =========== =========== ============ ============ LVIP SSGA LVIP SSGA CONSERVATIVE CONSERVATIVE LVIP MONEY LVIP SSGA INDEX STRUCTURED MARKET BOND INDEX ALLOCATION ALLOCATION SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 619,101,956 $126,524,359 $ -- $ -- Changes From Operations: - Net investment income (loss) (8,843,124) 1,360,811 -- -- - Net realized gain (loss) on investments 5,849 1,234,213 -- -- - Net change in unrealized appreciation or depreciation on investments (56) 5,335,798 -- -- ------------- ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (8,837,331) 7,930,822 -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 73,856,393 164,034,808 -- -- - Contract withdrawals and transfers to annuity reserves (105,434,028) (14,304,174) -- -- - Contract transfers (152,749,796) 207,497,132 -- -- ------------- ------------ ---------- ----------- (184,327,431) 357,227,766 -- -- Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (161,326) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 2,567 -- -- -- ------------- ------------ ---------- ----------- (158,759) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (184,486,190) 357,227,766 -- -- ------------- ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (193,323,521) 365,158,588 -- -- ------------- ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 425,778,435 491,682,947 -- -- Changes From Operations: - Net investment income (loss) (6,814,534) 2,689,737 (1,716) (7,299) - Net realized gain (loss) on investments 1,747 3,713,732 198 124 - Net change in unrealized appreciation or depreciation on investments (21) 14,201,350 16,984 74,302 ------------- ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (6,812,808) 20,604,819 15,466 67,127 Changes From Unit Transactions: Accumulation Units: - Contract purchases 72,865,055 237,593,691 1,993,980 8,918,672 - Contract withdrawals and transfers to annuity reserves (106,324,179) (38,670,764) (874) (23,451) - Contract transfers (42,536,366) 237,564,355 935,738 1,632,502 ------------- ------------ ---------- ----------- (75,995,490) 436,487,282 2,928,844 10,527,723 Annuity Reserves: - Transfer from accumulation units and between subaccounts 33,873 -- -- -- - Annuity Payments (40,367) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 3,158 -- -- -- ------------- ------------ ---------- ----------- (3,336) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (75,998,826) 436,487,282 2,928,844 10,527,723 ------------- ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (82,811,634) 457,092,101 2,944,310 10,594,850 ------------- ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $ 342,966,801 $948,775,048 $2,944,310 $10,594,850 ============= ============ ========== =========== LVIP SSGA DEVELOPED INTERNATIONAL 150 SERVICE CLASS SUBACCOUNT ----------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 17,122,014 Changes From Operations: - Net investment income (loss) (6,451) - Net realized gain (loss) on investments 1,559,055 - Net change in unrealized appreciation or depreciation on investments 14,222,782 ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 15,775,386 Changes From Unit Transactions: Accumulation Units: - Contract purchases 21,793,077 - Contract withdrawals and transfers to annuity reserves (1,691,574) - Contract transfers 15,095,363 ------------ 35,196,866 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ------------ -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 35,196,866 ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 50,972,252 ------------ NET ASSETS AT DECEMBER 31, 2009 68,094,266 Changes From Operations: - Net investment income (loss) (490,811) - Net realized gain (loss) on investments 1,526,279 - Net change in unrealized appreciation or depreciation on investments 8,038,660 ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 9,074,128 Changes From Unit Transactions: Accumulation Units: - Contract purchases 34,957,496 - Contract withdrawals and transfers to annuity reserves (4,971,227) - Contract transfers 31,138,448 ------------ 61,124,717 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ------------ -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 61,124,717 ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 70,198,845 ------------ NET ASSETS AT DECEMBER 31, 2010 $138,293,111 ============
See accompanying notes. N-25
LVIP SSGA LVIP SSGA LVIP SSGA EMERGING GLOBAL TACTICAL INTERNATIONAL LVIP SSGA MARKETS 100 ALLOCATION INDEX LARGE CAP 100 SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 14,179,848 $70,291,413 $ 22,232,589 $ 33,002,221 Changes From Operations: - Net investment income (loss) (108,419) 2,245,637 102,724 (188,214) - Net realized gain (loss) on investments 3,010,736 (12,833,936) 700,235 1,605,588 - Net change in unrealized appreciation or depreciation on investments 22,997,819 26,058,571 15,665,756 30,252,682 ------------ ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 25,900,136 15,470,272 16,468,715 31,670,056 Changes From Unit Transactions: Accumulation Units: - Contract purchases 19,556,436 8,220,162 33,916,389 43,945,587 - Contract withdrawals and transfers to annuity reserves (1,798,098) (3,625,337) (2,164,178) (3,362,386) - Contract transfers 24,814,473 (35,742,516) 24,263,643 36,542,944 ------------ ----------- ------------ ------------ 42,572,811 (31,147,691) 56,015,854 77,126,145 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ------------ ----------- ------------ ------------ -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 42,572,811 (31,147,691) 56,015,854 77,126,145 ------------ ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 68,472,947 (15,677,419) 72,484,569 108,796,201 ------------ ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2009 82,652,795 54,613,994 94,717,158 141,798,422 Changes From Operations: - Net investment income (loss) (715,311) (450,386) (304,757) (1,076,571) - Net realized gain (loss) on investments 6,136,390 (2,071,293) 1,545,817 5,865,615 - Net change in unrealized appreciation or depreciation on investments 24,622,099 6,291,080 11,906,422 30,666,851 ------------ ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,043,178 3,769,401 13,147,482 35,455,895 Changes From Unit Transactions: Accumulation Units: - Contract purchases 34,875,760 8,842,163 53,322,384 68,846,694 - Contract withdrawals and transfers to annuity reserves (7,018,054) (3,845,612) (7,268,652) (12,248,440) - Contract transfers 27,876,630 617,106 44,705,422 55,402,184 ------------ ----------- ------------ ------------ 55,734,336 5,613,657 90,759,154 112,000,438 Annuity Reserves: - Transfer from accumulation units and between subaccounts 24,025 -- -- -- - Annuity Payments (610) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments (12) -- -- -- ------------ ----------- ------------ ------------ 23,403 -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 55,757,739 5,613,657 90,759,154 112,000,438 ------------ ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 85,800,917 9,383,058 103,906,636 147,456,333 ------------ ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2010 $168,453,712 $63,997,052 $198,623,794 $289,254,755 ============ =========== ============ ============
N-26
LVIP SSGA LVIP SSGA LVIP SSGA MODERATELY MODERATELY LVIP SSGA MODERATE AGGRESSIVE AGGRESSIVE MODERATE INDEX STRUCTURED INDEX STRUCTURED ALLOCATION ALLOCATION ALLOCATION ALLOCATION SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ -- $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) -- -- -- -- - Net realized gain (loss) on investments -- -- -- -- - Net change in unrealized appreciation or depreciation on investments -- -- -- -- ---------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- -- -- - Contract withdrawals and transfers to annuity reserves -- -- -- -- - Contract transfers -- -- -- -- ---------- ----------- ---------- ----------- -- -- -- -- Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- ---------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- -- -- -- ---------- ----------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- -- -- ---------- ----------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 -- -- -- -- Changes From Operations: - Net investment income (loss) (3,272) (22,507) (2,740) (13,715) - Net realized gain (loss) on investments 19 1,465 28 12,539 - Net change in unrealized appreciation or depreciation on investments 48,766 277,191 36,745 218,707 ---------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 45,513 256,149 34,033 217,531 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,195,965 25,506,025 5,379,516 15,021,619 - Contract withdrawals and transfers to annuity reserves (2,608) (26,596) (3,259) (42,615) - Contract transfers 881,535 2,821,498 437,612 880,616 ---------- ----------- ---------- ----------- 4,074,892 28,300,927 5,813,869 15,859,620 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- ---------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,074,892 28,300,927 5,813,869 15,859,620 ---------- ----------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 4,120,405 28,557,076 5,847,902 16,077,151 ---------- ----------- ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $4,120,405 $28,557,076 $5,847,902 $16,077,151 ========== =========== ========== =========== LVIP SSGA LVIP SSGA S&P 500 INDEX LVIP SSGA LVIP SSGA SMALL-MID STANDARD S&P 500 INDEX SMALL-CAP INDEX CAP 200 CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 496,689 $ 64,897,157 $ 23,798,001 $ 9,999,517 Changes From Operations: - Net investment income (loss) 2,801 (234,721) (420,248) 43,504 - Net realized gain (loss) on investments (37,533) (982,341) (1,396,860) 1,047,750 - Net change in unrealized appreciation or depreciation on investments 352,281 38,286,866 12,939,009 11,486,235 ---------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 317,549 37,069,804 11,121,901 12,577,489 Changes From Unit Transactions: Accumulation Units: - Contract purchases 21,095 64,018,738 19,244,112 12,762,961 - Contract withdrawals and transfers to annuity reserves (58,196) (5,710,273) (1,539,684) (1,032,479) - Contract transfers 774,331 57,424,454 10,509,320 10,163,202 ---------- ------------ ------------ ----------- 737,230 115,732,919 28,213,748 21,893,684 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ------------ ------------ ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 737,230 115,732,919 28,213,748 21,893,684 ---------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,054,779 152,802,723 39,335,649 34,471,173 ---------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 1,551,468 217,699,880 63,133,650 44,470,690 Changes From Operations: - Net investment income (loss) (6,015) (1,750,283) (1,164,292) 60,164 - Net realized gain (loss) on investments 104,960 3,113,596 2,240,480 4,730,856 - Net change in unrealized appreciation or depreciation on investments 135,215 43,759,940 20,360,581 11,733,512 ---------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 234,160 45,123,253 21,436,769 16,524,532 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,698 97,121,325 28,335,340 23,604,937 - Contract withdrawals and transfers to annuity reserves (413,670) (18,938,137) (4,446,436) (4,127,598) - Contract transfers 639,099 77,904,247 14,229,059 14,403,314 ---------- ------------ ------------ ----------- 227,127 156,087,435 38,117,963 33,880,653 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ------------ ------------ ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 227,127 156,087,435 38,117,963 33,880,653 ---------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 461,287 201,210,688 59,554,732 50,405,185 ---------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $2,012,755 $418,910,568 $122,688,382 $94,875,875 ========== ============ ============ =========== LVIP T. ROWE PRICE GROWTH STOCK SERVICE CLASS SUBACCOUNT ------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $10,018,182 Changes From Operations: - Net investment income (loss) (416,149) - Net realized gain (loss) on investments (226,790) - Net change in unrealized appreciation or depreciation on investments 9,675,370 ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 9,032,431 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,284,265 - Contract withdrawals and transfers to annuity reserves (1,336,043) - Contract transfers 18,986,684 ----------- 24,934,906 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ----------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 24,934,906 ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 33,967,337 ----------- NET ASSETS AT DECEMBER 31, 2009 43,985,519 Changes From Operations: - Net investment income (loss) (865,591) - Net realized gain (loss) on investments 1,883,124 - Net change in unrealized appreciation or depreciation on investments 6,823,954 ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,841,487 Changes From Unit Transactions: Accumulation Units: - Contract purchases 11,793,471 - Contract withdrawals and transfers to annuity reserves (2,985,874) - Contract transfers 10,668,653 ----------- 19,476,250 Annuity Reserves: - Transfer from accumulation units and between subaccounts 42,538 - Annuity Payments (4,248) - Receipt (reimbursement) of mortality guarantee adjustments (20) ----------- 38,270 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 19,514,520 ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 27,356,007 ----------- NET ASSETS AT DECEMBER 31, 2010 $71,341,526 ===========
See accompanying notes. N-27
LVIP T. ROWE LVIP T. ROWE PRICE PRICE STRUCTURED STRUCTURED LVIP TURNER MID-CAP MID-CAP LVIP TEMPLETON MID-CAP GROWTH GROWTH GROWTH GROWTH STANDARD CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $1,390,133 $13,817,663 $ 67,756,355 $10,252,684 Changes From Operations: - Net investment income (loss) (28,698) (345,914) (82,061) (208,980) - Net realized gain (loss) on investments (62,054) (856,968) (8,875,355) (3,047,267) - Net change in unrealized appreciation or depreciation on investments 775,169 9,124,566 26,671,968 8,179,104 ---------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 684,417 7,921,684 17,714,552 4,922,857 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,371 6,119,550 11,690,098 2,627,877 - Contract withdrawals and transfers to annuity reserves (386,844) (861,665) (3,847,630) (638,091) - Contract transfers 523,311 2,000,306 (15,455,923) (2,007,720) ---------- ----------- ------------ ----------- 137,838 7,258,191 (7,613,455) (17,934) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- ------------ ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 137,838 7,258,191 (7,613,455) (17,934) ---------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 822,255 15,179,875 10,101,097 4,904,923 ---------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2009 2,212,388 28,997,538 77,857,452 15,157,607 Changes From Operations: - Net investment income (loss) (40,107) (559,636) 140,366 (302,281) - Net realized gain (loss) on investments 110,538 1,375,428 (1,663,025) (110,955) - Net change in unrealized appreciation or depreciation on investments 490,498 8,120,728 6,401,308 4,868,079 ---------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 560,929 8,936,520 4,878,649 4,454,843 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,750 7,645,640 14,841,125 3,754,354 - Contract withdrawals and transfers to annuity reserves (228,751) (2,176,383) (4,221,944) (983,578) - Contract transfers 321,528 4,157,691 9,100,576 7,055,388 ---------- ----------- ------------ ----------- 101,527 9,626,948 19,719,757 9,826,164 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- 3,836 - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ---------- ----------- ------------ ----------- -- -- -- 3,836 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 101,527 9,626,948 19,719,757 9,830,000 ---------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 662,456 18,563,468 24,598,406 14,284,843 ---------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2010 $2,874,844 $47,561,006 $102,455,858 $29,442,450 ========== =========== ============ ===========
N-28
LVIP WELLS FARGO LVIP WILSHIRE LVIP WILSHIRE LVIP WILSHIRE INTRINSIC VALUE 2010 PROFILE 2020 PROFILE 2030 PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $21,692,955 $ 5,875,176 $ 9,484,720 $ 4,561,711 Changes From Operations: - Net investment income (loss) (167,194) 6,397 7,409 (8,520) - Net realized gain (loss) on investments (3,839,033) (74,051) 58,666 (7,243) - Net change in unrealized appreciation or depreciation on investments 9,101,520 1,777,667 2,988,056 2,374,688 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,095,293 1,710,013 3,054,131 2,358,925 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,762,879 647,353 1,849,067 2,191,158 - Contract withdrawals and transfers to annuity reserves (1,864,659) (749,211) (433,555) (610,706) - Contract transfers 171,286 1,632,189 1,698,389 2,316,590 ----------- ----------- ----------- ----------- 69,506 1,530,331 3,113,901 3,897,042 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ----------- ----------- ----------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 69,506 1,530,331 3,113,901 3,897,042 ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,164,799 3,240,344 6,168,032 6,255,967 ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 26,857,754 9,115,520 15,652,752 10,817,678 Changes From Operations: - Net investment income (loss) (212,478) (75,180) (159,199) (123,078) - Net realized gain (loss) on investments (736,424) 276,093 262,621 389,107 - Net change in unrealized appreciation or depreciation on investments 4,601,006 584,723 1,537,479 690,289 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,652,104 785,636 1,640,901 956,318 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,131,422 28,858 312,814 86,453 - Contract withdrawals and transfers to annuity reserves (1,692,419) (788,947) (1,227,611) (1,411,566) - Contract transfers (3,416,212) (541,769) 1,794,626 184,880 ----------- ----------- ----------- ----------- (2,977,209) (1,301,858) 879,829 (1,140,233) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ----------- ----------- ----------- ----------- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,977,209) (1,301,858) 879,829 (1,140,233) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 674,895 (516,222) 2,520,730 (183,915) ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $27,532,649 $ 8,599,298 $18,173,482 $10,633,763 =========== =========== =========== =========== LVIP WILSHIRE LVIP WILSHIRE LVIP WILSHIRE MODERATELY LVIP WILSHIRE CONSERVATIVE MODERATE AGGRESSIVE 2040 PROFILE PROFILE PROFILE PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 3,326,300 $199,198,042 $ 654,007,813 $408,610,151 Changes From Operations: - Net investment income (loss) (26,477) 6,244,654 18,242,712 12,103,989 - Net realized gain (loss) on investments 160,360 (1,001,175) (8,878,511) (7,452,902) - Net change in unrealized appreciation or depreciation on investments 1,449,241 50,165,236 165,966,375 104,274,617 ----------- ------------ -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,583,124 55,408,715 175,330,576 108,925,704 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,144,605 55,246,748 78,541,975 32,775,586 - Contract withdrawals and transfers to annuity reserves (325,282) (24,563,559) (51,942,047) (25,008,656) - Contract transfers (2,551,466) 24,762,174 34,403,056 17,657,328 ----------- ------------ -------------- ------------ 267,857 55,445,363 61,002,984 25,424,258 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- 252,468 - Annuity Payments -- (366,732) (45,314) (36,440) - Receipt (reimbursement) of mortality guarantee adjustments -- (139) 617 (344) ----------- ------------ -------------- ------------ -- (366,871) (44,697) 215,684 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 267,857 55,078,492 60,958,287 25,639,942 ----------- ------------ -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 1,850,981 110,487,207 236,288,863 134,565,646 ----------- ------------ -------------- ------------ NET ASSETS AT DECEMBER 31, 2009 5,177,281 309,685,249 890,296,676 543,175,797 Changes From Operations: - Net investment income (loss) (61,852) 6,390,633 9,998,737 5,425,579 - Net realized gain (loss) on investments 96,023 6,577,060 (191,090) (6,046,983) - Net change in unrealized appreciation or depreciation on investments 573,553 15,747,029 82,172,467 60,367,344 ----------- ------------ -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 607,724 28,714,722 91,980,114 59,745,940 Changes From Unit Transactions: Accumulation Units: - Contract purchases 313,650 62,532,612 137,246,315 68,805,400 - Contract withdrawals and transfers to annuity reserves (183,155) (37,799,172) (74,602,831) (41,769,851) - Contract transfers 377,612 16,284,541 33,390,640 19,829,616 ----------- ------------ -------------- ------------ 508,107 41,017,981 96,034,124 46,865,165 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 26,098 9,009 - Annuity Payments -- (743,624) (52,010) (31,038) - Receipt (reimbursement) of mortality guarantee adjustments -- -- 912 (1,483) ----------- ------------ -------------- ------------ -- (743,624) (25,000) (23,512) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 508,107 40,274,357 96,009,124 46,841,653 ----------- ------------ -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 1,115,831 68,989,079 187,989,238 106,587,593 ----------- ------------ -------------- ------------ NET ASSETS AT DECEMBER 31, 2010 $ 6,293,112 $378,674,328 $1,078,285,914 $649,763,390 =========== ============ ============== ============ LORD ABBETT FUNDAMENTAL EQUITY CLASS VC SUBACCOUNT ----------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 32,465 Changes From Operations: - Net investment income (loss) (9,673) - Net realized gain (loss) on investments 27,150 - Net change in unrealized appreciation or depreciation on investments 579,828 ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 597,305 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,554,720 - Contract withdrawals and transfers to annuity reserves (50,536) - Contract transfers 2,633,216 ---------- 4,137,400 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ---------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,137,400 ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 4,734,705 ---------- NET ASSETS AT DECEMBER 31, 2009 4,767,170 Changes From Operations: - Net investment income (loss) (36,140) - Net realized gain (loss) on investments 129,017 - Net change in unrealized appreciation or depreciation on investments 1,284,818 ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,377,695 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,239,709 - Contract withdrawals and transfers to annuity reserves (242,188) - Contract transfers 2,840,582 ---------- 3,838,103 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ---------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 3,838,103 ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,215,798 ---------- NET ASSETS AT DECEMBER 31, 2010 $9,982,968 ==========
See accompanying notes. N-29
MFS VIT MFS VIT MFS VIT MFS VIT CORE EQUITY GROWTH GROWTH TOTAL RETURN SERVICE CLASS INITIAL CLASS SERVICE CLASS INITIAL CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $3,042,352 $3,066,522 $ 6,038,525 $17,288,570 Changes From Operations: - Net investment income (loss) (6,062) (32,823) (123,207) 402,655 - Net realized gain (loss) on investments (87,678) (470,321) 74,634 (947,459) - Net change in unrealized appreciation or depreciation on investments 821,616 1,407,977 2,575,523 2,793,314 ---------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 727,876 904,833 2,526,950 2,248,510 Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,256 27,719 1,766,126 119,333 - Contract withdrawals and transfers to annuity reserves (403,922) (445,326) (567,714) (2,884,217) - Contract transfers (396,301) (278,004) 291,696 (1,050,843) ---------- ---------- ----------- ----------- (795,967) (695,611) 1,490,108 (3,815,727) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- (8,430) - Annuity Payments -- (2,034) (1,523) 6,026 - Receipt (reimbursement) of mortality guarantee adjustments -- 706 -- 58 ---------- ---------- ----------- ----------- -- (1,328) (1,523) (2,346) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (795,967) (696,939) 1,488,585 (3,818,073) ---------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (68,091) 207,894 4,015,535 (1,569,563) ---------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2009 2,974,261 3,274,416 10,054,060 15,719,007 Changes From Operations: - Net investment income (loss) (19,633) (38,941) (187,299) 196,816 - Net realized gain (loss) on investments 70,733 (136,016) 594,943 (150,372) - Net change in unrealized appreciation or depreciation on investments 316,151 555,155 1,275,862 1,092,050 ---------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 367,251 380,198 1,683,506 1,138,494 Changes From Unit Transactions: Accumulation Units: - Contract purchases 9,266 26,060 2,828,157 61,923 - Contract withdrawals and transfers to annuity reserves (364,118) (419,795) (1,251,027) (2,070,731) - Contract transfers (257,013) (111,343) 1,201,985 (704,705) ---------- ---------- ----------- ----------- (611,865) (505,078) 2,779,115 (2,713,513) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- (153) - Annuity Payments -- (2,387) (1,643) (2,474) - Receipt (reimbursement) of mortality guarantee adjustments -- 1,092 -- (101) ---------- ---------- ----------- ----------- -- (1,295) (1,643) (2,728) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (611,865) (506,373) 2,777,472 (2,716,241) ---------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (244,614) (126,175) 4,460,978 (1,577,747) ---------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2010 $2,729,647 $3,148,241 $14,515,038 $14,141,260 ========== ========== =========== ===========
N-30
MORGAN STANLEY MFS VIT MFS VIT MFS VIT UIF CAPITAL TOTAL RETURN UTILITIES UTILITIES GROWTH SERVICE CLASS INITIAL CLASS SERVICE CLASS CLASS II SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $256,544,245 $15,767,161 $159,125,862 $ 8,735 Changes From Operations: - Net investment income (loss) 4,479,905 564,863 5,486,401 (2,220) - Net realized gain (loss) on investments (15,611,469) (1,399,900) (21,112,550) 5,581 - Net change in unrealized appreciation or depreciation on investments 50,078,845 4,623,299 59,631,843 109,838 ------------ ----------- ------------ ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 38,947,281 3,788,262 44,005,694 113,199 Changes From Unit Transactions: Accumulation Units: - Contract purchases 11,639,889 62,288 12,185,773 349,996 - Contract withdrawals and transfers to annuity reserves (22,778,362) (2,387,635) (12,752,266) (2,758) - Contract transfers 12,508,516 1,207,216 (35,372,811) 240,168 ------------ ----------- ------------ ---------- 1,370,043 (1,118,131) (35,939,304) 587,406 Annuity Reserves: - Transfer from accumulation units and between subaccounts 8,552 (9,781) -- -- - Annuity Payments (24,627) 463 (23,861) -- - Receipt (reimbursement) of mortality guarantee adjustments 654 2,782 272 -- ------------ ----------- ------------ ---------- (15,421) (6,536) (23,589) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,354,622 (1,124,667) (35,962,893) 587,406 ------------ ----------- ------------ ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 40,301,903 2,663,595 8,042,801 700,605 ------------ ----------- ------------ ---------- NET ASSETS AT DECEMBER 31, 2009 296,846,148 18,430,756 167,168,663 709,340 Changes From Operations: - Net investment income (loss) 2,679,650 223,517 2,305,204 (9,595) - Net realized gain (loss) on investments (3,853,276) 100,936 (3,323,740) 46,491 - Net change in unrealized appreciation or depreciation on investments 24,515,078 758,946 19,325,819 192,742 ------------ ----------- ------------ ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 23,341,452 1,083,399 18,307,283 229,638 Changes From Unit Transactions: Accumulation Units: - Contract purchases 19,006,217 68,312 10,502,284 224,727 - Contract withdrawals and transfers to annuity reserves (31,552,826) (2,217,993) (14,340,339) (22,628) - Contract transfers 13,261,012 (4,982,013) (5,204,747) 116,634 ------------ ----------- ------------ ---------- 714,403 (7,131,694) (9,042,802) 318,733 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (11,949) (9,901) (15,250) -- - Receipt (reimbursement) of mortality guarantee adjustments 1,022 (13,292) 474 -- ------------ ----------- ------------ ---------- (10,927) (23,193) (14,776) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 703,476 (7,154,887) (9,057,578) 318,733 ------------ ----------- ------------ ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 24,044,928 (6,071,488) 9,249,705 548,371 ------------ ----------- ------------ ---------- NET ASSETS AT DECEMBER 31, 2010 $320,891,076 $12,359,268 $176,418,368 $1,257,711 ============ =========== ============ ========== OPPENHEIMER PIMCO VIT NB AMT GLOBAL COMMODITY MID-CAP NB AMT SECURITIES REAL RETURN GROWTH I CLASS REGENCY I CLASS SERVICE CLASS ADVISOR CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 51,364,563 $ 52,195,507 $ 10,166 $ -- Changes From Operations: - Net investment income (loss) (801,311) 18,241 (2,638) 114,330 - Net realized gain (loss) on investments (1,771,566) (6,550,634) 6,101 364,444 - Net change in unrealized appreciation or depreciation on investments 14,971,729 25,874,309 122,874 (89,993) ------------ ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 12,398,852 19,341,916 126,337 388,781 Changes From Unit Transactions: Accumulation Units: - Contract purchases 416,355 399,077 477,454 438,323 - Contract withdrawals and transfers to annuity reserves (4,970,419) (5,948,704) (7,901) (33,674) - Contract transfers (9,397,110) (9,659,600) 654,902 3,350,760 ------------ ------------ ---------- ----------- (13,951,174) (15,209,227) 1,124,455 3,755,409 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (6,016) (10,390) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 445 23 -- -- ------------ ------------ ---------- ----------- (5,571) (10,367) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (13,956,745) (15,219,594) 1,124,455 3,755,409 ------------ ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,557,893) 4,122,322 1,250,792 4,144,190 ------------ ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2009 49,806,670 56,317,829 1,260,958 4,144,190 Changes From Operations: - Net investment income (loss) (809,249) (513,611) (1,355) 879,069 - Net realized gain (loss) on investments 2,014,076 (692,719) 35,798 (53,794) - Net change in unrealized appreciation or depreciation on investments 10,661,078 12,736,697 399,422 848,474 ------------ ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 11,865,905 11,530,367 433,865 1,673,749 Changes From Unit Transactions: Accumulation Units: - Contract purchases 304,435 258,961 931,563 873,451 - Contract withdrawals and transfers to annuity reserves (5,382,761) (6,863,768) (137,448) (697,036) - Contract transfers (3,373,006) (6,088,448) 1,325,649 5,814,408 ------------ ------------ ---------- ----------- (8,451,332) (12,693,255) 2,119,764 5,990,823 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- 33,873 - Annuity Payments (1,287) (11,278) -- (294) - Receipt (reimbursement) of mortality guarantee adjustments 666 46 -- -- ------------ ------------ ---------- ----------- (621) (11,232) -- 33,579 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (8,451,953) (12,704,487) 2,119,764 6,024,402 ------------ ------------ ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 3,413,952 (1,174,120) 2,553,629 7,698,151 ------------ ------------ ---------- ----------- NET ASSETS AT DECEMBER 31, 2010 $ 53,220,622 $ 55,143,709 $3,814,587 $11,842,341 ============ ============ ========== =========== PUTNAM VT GLOBAL HEALTH CARE CLASS IB SUBACCOUNT ----------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $ 5,006,622 Changes From Operations: - Net investment income (loss) (56,745) - Net realized gain (loss) on investments 78,289 - Net change in unrealized appreciation or depreciation on investments 591,255 ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 612,799 Changes From Unit Transactions: Accumulation Units: - Contract purchases 17,782 - Contract withdrawals and transfers to annuity reserves (358,445) - Contract transfers (1,969,207) ----------- (2,309,870) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ----------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,309,870) ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,697,071) ----------- NET ASSETS AT DECEMBER 31, 2009 3,309,551 Changes From Operations: - Net investment income (loss) 11,667 - Net realized gain (loss) on investments 27,074 - Net change in unrealized appreciation or depreciation on investments (15,577) ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 23,164 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,192 - Contract withdrawals and transfers to annuity reserves (377,650) - Contract transfers (74,335) ----------- (448,793) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ----------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (448,793) ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (425,629) ----------- NET ASSETS AT DECEMBER 31, 2010 $ 2,883,922 ===========
See accompanying notes. N-31
PUTNAM VT GROWTH & INCOME CLASS IB SUBACCOUNT ---------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2009 $2,633,726 Changes From Operations: - Net investment income (loss) 32,839 - Net realized gain (loss) on investments (763,445) - Net change in unrealized appreciation or depreciation on investments 1,233,984 ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 503,378 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,683 - Contract withdrawals and transfers to annuity reserves (722,345) - Contract transfers (214,502) ---------- (933,164) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ---------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (933,164) ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (429,786) ---------- NET ASSETS AT DECEMBER 31, 2009 2,203,940 Changes From Operations: - Net investment income (loss) (437) - Net realized gain (loss) on investments (206,694) - Net change in unrealized appreciation or depreciation on investments 432,181 ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 225,050 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,948 - Contract withdrawals and transfers to annuity reserves (302,047) - Contract transfers (124,495) ---------- (423,594) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- - Annuity Payments -- - Receipt (reimbursement) of mortality guarantee adjustments -- ---------- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (423,594) ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (198,544) ---------- NET ASSETS AT DECEMBER 31, 2010 $2,005,396 ==========
See accompanying notes. N-32 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION THE VARIABLE ACCOUNT: Lincoln Life Variable Annuity Account N (the Variable Account) is a segregated investment account of The Lincoln National Life Insurance Company (the Company) and is registered as a unit investment trust with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended. The operations of the Variable Account, which commenced on November 24, 1998, are part of the operations of the Company. The Variable Account consists of fifteen products as follows: - Lincoln ChoicePlus - Lincoln ChoicePlus Access - Lincoln ChoicePlus Bonus - Lincoln ChoicePlus II - Lincoln ChoicePlus II Access - Lincoln ChoicePlus II Advance - Lincoln ChoicePlus II Bonus - Lincoln ChoicePlus Design - Lincoln ChoicePlus Assurance A Share - Lincoln ChoicePlus Assurance B Share - Lincoln ChoicePlus Assurance Bonus - Lincoln ChoicePlus Assurance C Share - Lincoln ChoicePlus Assurance L Share - Lincoln ChoicePlus Assurance A Class - Lincoln ChoicePlus Assurance B Class The assets of the Variable Account are owned by the Company. The Variable Account's assets support the annuity contracts and may not be used to satisfy liabilities arising from any other business of the Company. BASIS OF PRESENTATION: The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for unit investment trusts. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts as of the date of the financial statements. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts that require use of estimates is the fair value of certain assets. INVESTMENTS: The assets of the Variable Account are divided into variable subaccounts, each of which may be invested in shares of one of one hundred eighty-five available mutual funds (the Funds) of nineteen diversified, open-ended management investment companies, each Fund with its own investment objective. The Funds are: AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF): ABVPSF Global Thematic Growth Class A Fund** ABVPSF Global Thematic Growth Class B Fund ABVPSF Growth and Income Class A Fund** ABVPSF Growth and Income Class B Fund ABVPSF International Value Class A Fund** ABVPSF International Value Class B Fund ABVPSF Large Cap Growth Class B Fund ABVPSF Small/Mid Cap Value Class A Fund** ABVPSF Small/Mid Cap Value Class B Fund American Century Variable Portfolios, Inc. (American Century VP): American Century VP Inflation Protection Class I Portfolio** American Century VP Inflation Protection Class II Portfolio American Funds Insurance Series (American Funds): American Funds Global Growth Class 1 Fund** American Funds Global Growth Class 2 Fund American Funds Global Small Capitalization Class 1 Fund** American Funds Global Small Capitalization Class 2 Fund American Funds Growth Class 1 Fund** American Funds Growth Class 2 Fund American Funds Growth-Income Class 1 Fund** American Funds Growth-Income Class 2 Fund American Funds International Class 1 Fund** American Funds International Class 2 Fund BlackRock Variable Series Funds, Inc. (BlackRock): BlackRock Global Allocation V.I. Class I Fund** BlackRock Global Allocation V.I. Class III Fund Delaware VIP Trust (Delaware VIP): Delaware VIP Diversified Income Standard Class Series** Delaware VIP Diversified Income Service Class Series Delaware VIP Emerging Markets Standard Class Series** Delaware VIP Emerging Markets Service Class Series Delaware VIP High Yield Standard Class Series Delaware VIP High Yield Service Class Series Delaware VIP International Value Equity Standard Class Series Delaware VIP Limited-Term Diversified Income Standard Class Series** Delaware VIP Limited-Term Diversified Income Service Class Series Delaware VIP REIT Standard Class Series Delaware VIP REIT Service Class Series Delaware VIP Small Cap Value Standard Class Series Delaware VIP Small Cap Value Service Class Series Delaware VIP Smid Cap Growth Standard Class Series Delaware VIP Smid Cap Growth Service Class Series Delaware VIP U.S. Growth Standard Class Series** Delaware VIP U.S. Growth Service Class Series Delaware VIP Value Standard Class Series Delaware VIP Value Service Class Series N-33 DWS Scudder VIP Funds (DWS VIP): DWS VIP Alternative Asset Allocation Plus Class A Fund** DWS VIP Alternative Asset Allocation Plus Class B Fund DWS VIP Equity 500 Index Class A Fund DWS VIP Equity 500 Index Class B Fund DWS VIP Small Cap Index Class A Fund DWS VIP Small Cap Index Class B Fund Fidelity Variable Insurance Products Fund (Fidelity VIP): Fidelity VIP Contrafund Initial Class Portfolio** Fidelity VIP Contrafund Service Class 2 Portfolio Fidelity VIP Equity-Income Initial Class Portfolio Fidelity VIP Equity-Income Service Class 2 Portfolio Fidelity VIP Growth Initial Class Portfolio Fidelity VIP Growth Service Class 2 Portfolio Fidelity VIP Mid Cap Initial Class Portfolio** Fidelity VIP Mid Cap Service Class 2 Portfolio Fidelity VIP Overseas Initial Class Portfolio Fidelity VIP Overseas Service Class 2 Portfolio Franklin Templeton Variable Insurance Products Trust (FTVIPT): FTVIPT Franklin Income Securities Class 1 Fund** FTVIPT Franklin Income Securities Class 2 Fund FTVIPT Franklin Small-Mid Cap Growth Securities Class 1 Fund** FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 Fund FTVIPT Mutual Shares Securities Class 1 Fund** FTVIPT Mutual Shares Securities Class 2 Fund FTVIPT Templeton Global Bond Securities Class 2 Fund FTVIPT Templeton Growth Securities Class 2 Fund Goldman Sachs Variable Insurance Trust (Goldman Sachs VIT): Goldman Sachs VIT Large Cap Value Service Class Fund Invesco Variable Insurance Funds (Invesco V.I.): Invesco V.I. Capital Appreciation Series I Fund Invesco V.I. Capital Appreciation Series II Fund Invesco V.I. Core Equity Series I Fund Invesco V.I. Core Equity Series II Fund Invesco V.I. International Growth Series I Fund Invesco V.I. International Growth Series II Fund Janus Aspen Series: Janus Aspen Series Balanced Service Class Portfolio Janus Aspen Series Enterprise Service Class Portfolio Janus Aspen Series Worldwide Service Class Portfolio Lincoln Variable Insurance Products Trust (LVIP)*: LVIP American Global Growth Service Class II Fund LVIP American Global Small Capitalization Service Class II Fund LVIP American Growth Service Class II Fund LVIP American Growth-Income Service Class II Fund LVIP American International Service Class II Fund LVIP Baron Growth Opportunities Standard Class Fund** LVIP Baron Growth Opportunities Service Class Fund LVIP BlackRock Inflation Protected Bond Standard Class Fund** LVIP BlackRock Inflation Protected Bond Service Class Fund LVIP Capital Growth Standard Class Fund** LVIP Capital Growth Service Class Fund LVIP Cohen & Steers Global Real Estate Standard Class Fund** LVIP Cohen & Steers Global Real Estate Service Class Fund LVIP Columbia Value Opportunities Standard Class Fund** LVIP Columbia Value Opportunities Service Class Fund LVIP Delaware Bond Standard Class Fund LVIP Delaware Bond Service Class Fund LVIP Delaware Diversified Floating Rate Standard Class Fund** LVIP Delaware Diversified Floating Rate Service Class Fund LVIP Delaware Foundation Aggressive Allocation Standard Class Fund LVIP Delaware Foundation Aggressive Allocation Service Class Fund LVIP Delaware Growth and Income Standard Class Fund** LVIP Delaware Growth and Income Service Class Fund LVIP Delaware Social Awareness Standard Class Fund LVIP Delaware Social Awareness Service Class Fund LVIP Delaware Special Opportunities Standard Class Fund** LVIP Delaware Special Opportunities Service Class Fund LVIP Global Income Standard Class Fund** LVIP Global Income Service Class Fund LVIP Janus Capital Appreciation Standard Class Fund LVIP Janus Capital Appreciation Service Class Fund LVIP JPMorgan High Yield Standard Class Fund** LVIP JPMorgan High Yield Service Class Fund LVIP MFS International Growth Standard Class Fund** LVIP MFS International Growth Service Class Fund LVIP MFS Value Standard Class Fund** LVIP MFS Value Service Class Fund LVIP Mid-Cap Value Standard Class Fund** LVIP Mid-Cap Value Service Class Fund LVIP Mondrian International Value Standard Class Fund N-34 LVIP Mondrian International Value Service Class Fund LVIP Money Market Standard Class Fund LVIP Money Market Service Class Fund LVIP SSgA Bond Index Standard Class Fund** LVIP SSgA Bond Index Service Class Fund LVIP SSgA Conservative Index Allocation Standard Class Fund** LVIP SSgA Conservative Index Allocation Service Class Fund LVIP SSgA Conservative Structured Allocation Standard Class Fund** LVIP SSgA Conservative Structured Allocation Service Class Fund LVIP SSgA Developed International 150 Standard Class Fund** LVIP SSgA Developed International 150 Service Class Fund LVIP SSgA Emerging Markets 100 Standard Class Fund** LVIP SSgA Emerging Markets 100 Service Class Fund LVIP SSgA Global Tactical Allocation Standard Class Fund** LVIP SSgA Global Tactical Allocation Service Class Fund LVIP SSgA International Index Standard Class Fund** LVIP SSgA International Index Service Class Fund LVIP SSgA Large Cap 100 Standard Class Fund** LVIP SSgA Large Cap 100 Service Class Fund LVIP SSgA Moderate Index Allocation Standard Class Fund** LVIP SSgA Moderate Index Allocation Service Class Fund LVIP SSgA Moderate Structured Allocation Standard Class Fund** LVIP SSgA Moderate Structured Allocation Service Class Fund LVIP SSgA Moderately Aggressive Index Allocation Standard Class Fund** LVIP SSgA Moderately Aggressive Index Allocation Service Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Standard Class Fund** LVIP SSgA Moderately Aggressive Structured Allocation Service Class Fund LVIP SSgA S&P 500 Index Standard Class Fund LVIP SSgA S&P 500 Index Service Class Fund LVIP SSgA Small-Cap Index Standard Class Fund** LVIP SSgA Small-Cap Index Service Class Fund LVIP SSgA Small-Mid Cap 200 Standard Class Fund** LVIP SSgA Small-Mid Cap 200 Service Class Fund LVIP T. Rowe Price Growth Stock Standard Class Fund** LVIP T. Rowe Price Growth Stock Service Class Fund LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class Fund LVIP T. Rowe Price Structured Mid-Cap Growth Service Class Fund LVIP Templeton Growth Standard Class Fund** LVIP Templeton Growth Service Class Fund LVIP Turner Mid-Cap Growth Standard Class Fund** LVIP Turner Mid-Cap Growth Service Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund** LVIP Wells Fargo Intrinsic Value Service Class Fund LVIP Wilshire 2010 Profile Service Class Fund LVIP Wilshire 2020 Profile Service Class Fund LVIP Wilshire 2030 Profile Service Class Fund LVIP Wilshire 2040 Profile Service Class Fund LVIP Wilshire Conservative Profile Standard Class Fund** LVIP Wilshire Conservative Profile Service Class Fund LVIP Wilshire Moderate Profile Standard Class Fund** LVIP Wilshire Moderate Profile Service Class Fund LVIP Wilshire Moderately Aggressive Profile Standard Class Fund** LVIP Wilshire Moderately Aggressive Profile Service Class Fund Lord Abbett Securities Trust (Lord Abbett): Lord Abbett Fundamental Equity Class VC Fund MFS Variable Insurance Trust (MFS VIT): MFS VIT Core Equity Service Class Series MFS VIT Growth Initial Class Series MFS VIT Growth Service Class Series MFS VIT Total Return Initial Class Series MFS VIT Total Return Service Class Series MFS VIT Utilities Initial Class Series MFS VIT Utilities Service Class Series Morgan Stanley Universal Institutional Funds (Morgan Stanley UIF): Morgan Stanley UIF Capital Growth Class II Portfolio Neuberger Berman Advisers Management Trust (NB AMT): NB AMT Mid-Cap Growth I Class Portfolio NB AMT Regency I Class Portfolio Oppenheimer Variable Account Funds (Oppenheimer): Oppenheimer Global Securities Service Class Fund/VA PIMCO Variable Insurance Trust (PIMCO VIT): PIMCO VIT Commodity Real Return Administrative Class Fund** PIMCO VIT Commodity Real Return Advisor Class Fund Putnam Variable Trust (Putnam VT): Putnam VT Global Health Care Class IB Fund Putnam VT Growth & Income Class IB Fund * Denotes an affiliate of The Lincoln National Life Insurance Company ** Available fund with no money invested at December 31, 2010 N-35 As of December 31, 2009, Delaware VIP Trust was an affiliate of the Company. On January 4, 2010, Lincoln National Corporation (the parent of the Company) sold Delaware Management Holdings Inc. and its subsidiaries, including Delaware Management Company, which is the investment advisor for the Delaware VIP Trust funds. Investments in the Funds are stated at fair value as determined by the closing net asset value per share on December 31, 2010. The difference between cost and net asset value is reflected as unrealized appreciation or depreciation of investments. The Variable Account's investments in the Funds are valued in accordance with the Fair Value Measurements and Disclosure Topic of the Financial Accounting Standards Board Accounting Standards Codification (Topic). The Topic defines fair value as the price that the Variable Account would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Topic also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assessment regarding the assumptions market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The Variable Account's investments in the Funds are assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below. Level 1 - inputs to the valuation methodology are quoted prices in active markets Level 2 - inputs to the valuation methodology are observable, directly or indirectly Level 3 - inputs to the valuation methodology are unobservable and reflect assumptions on the part of the reporting entity The Variable Account's investments in the Funds are valued within the fair value hierarchy as Level 2. Net asset value is quoted by the Funds as derived by the fair value of the Funds' underlying investments. The Funds are not considered Level 1 as they are not traded in the open market; rather the Company sells and redeems shares at net asset value with the Funds. Investment transactions are accounted for on a trade-date basis. The cost of investments sold is determined by the average cost method. DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested in shares of the Funds on the payable date. Dividend income is recorded on the ex-dividend date. FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are taxed with operations of the Company, which is taxed as a "life insurance company" under the Internal Revenue Code. The Variable Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended. Under current federal income tax law, no federal income taxes are payable or receivable with respect to the Variable Account's net investment income and the net realized gain (loss) on investments. ANNUITY RESERVES: Reserves on contracts not involving life contingencies are calculated using an assumed investment return of 3%, 4%, 5% or 6%, as approved in each state. Reserves on contracts involving life contingencies are calculated using a modification of the 1983a Individual Mortality Table and an assumed investment return of 3%, 4%, 5% or 6%, as approved in each state. INVESTMENT FUND CHANGES: During 2009, the following funds became available as investment options for account contract owners. Accordingly, the 2009 N-36 statements of changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2009: ABVPSF Global Thematic Growth Class A Fund ABVPSF Growth and Income Class A Fund ABVPSF International Value Class A Fund ABVPSF Small/Mid Cap Value Class A Fund American Century VP Inflation Protection Class 1 Fund American Funds Global Growth Class 1 Fund American Funds Global Small Capitalization Class 1 Fund American Funds Growth Class 1 Fund American Funds Growth-Income Class 1 Fund American Funds International Class 1 Fund BlackRock Global Allocation V.I. Class I Fund BlackRock Global Allocation V.I. Class III Fund Delaware VIP Diversified Income Standard Class Series Delaware VIP Emerging Markets Standard Class Series Delaware VIP Limited-Term Diversified Income Standard Class Series Delaware VIP U.S. Growth Standard Class Series DWS VIP Alternative Asset Allocation Plus Class A Fund DWS VIP Alternative Asset Allocation Plus Class B Fund Fidelity VIP Contrafund Initial Class Portfolio Fidelity VIP Mid Cap Initial Class Portfolio FTVIPT Franklin Income Securities Class 1 Fund FTVIPT Franklin Small-Mid Cap Growth Securities Class 1 Fund FTVIPT Mutual Shares Securities Class 1 Fund LVIP Baron Growth Opportunities Standard Class Fund LVIP Capital Growth Standard Class Fund LVIP Cohen & Steers Global Real Estate Standard Class Fund LVIP Columbia Value Opportunities Standard Class Fund LVIP Delaware Growth and Income Standard Class Fund LVIP Delaware Special Opportunities Standard Class Fund LVIP Global Income Standard Class Fund LVIP Global Income Service Class Fund LVIP Marsico International Growth Standard Class Fund LVIP MFS Value Standard Class Fund LVIP Mid-Cap Value Standard Class Fund LVIP SSgA Bond Index Standard Class Fund LVIP SSgA Developed International 150 Standard Class Fund LVIP SSgA Emerging Markets 100 Standard Class Fund LVIP SSgA International Index Standard Class Fund LVIP SSgA Large Cap 100 Standard Class Fund LVIP SSgA Small-Cap Index Standard Class Fund LVIP SSgA Small-Mid Cap 200 Standard Class Fund LVIP T. Rowe Price Growth Stock Standard Class Fund LVIP Templeton Growth Standard Class Fund LVIP Turner Mid-Cap Growth Standard Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund LVIP Wilshire Aggressive Profile Standard Class Fund LVIP Wilshire Conservative Profile Standard Class Fund LVIP Wilshire Moderate Profile Standard Class Fund LVIP Wilshire Moderately Aggressive Profile Standard Class Fund PIMCO VIT Commodity Real Return Administrative Class Fund PIMCO VIT Commodity Real Return Advisor Class Fund Also during 2009, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME --------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Technology Class B Fund ABVPSF Global Thematic Growth Class B Fund Delaware Capital Reserves Service Class Series Delaware Limited-Term Diversified Income Service Class Series FTVIPT Templeton Global Income Securities Class 2 Fund FTVIPT Templeton Global Bond Securities Class 2 Fund Janus Aspen Series Mid Cap Growth Service Class Portfolio Janus Aspen Series Enterprise Service Class Portfolio Janus Aspen Series Worldwide Growth Service Class Portfolio Janus Aspen Series Worldwide Service Class Portfolio LVIP FI Equity-Income Standard Class Fund LVIP Wells Fargo Intrinsic Value Standard Class Fund LVIP FI Equity-Income Service Class Fund LVIP Wells Fargo Intrinsic Value Service Class Fund Putnam VT Health Sciences Class IB Fund Putnam VT Global Health Care Class IB Fund
During 2009, the LVIP UBS Global Asset Allocation Standard Class Fund merged into the LVIP Delaware Foundation Aggressive Allocation Standard Class Fund and the LVIP UBS Global Asset Allocation Service Class Fund merged into the LVIP Delaware Foundation Aggressive Allocation Service Class Fund. During 2010, the following funds became available as investment options for account contract owners. Accordingly, the 2010 statements of operations and changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2010: Delaware VIP Smid Cap Growth Standard Class Series Delaware VIP Smid Cap Growth Service Class Series LVIP American Global Growth Service Class II Fund LVIP American Global Small Capitalization Service Class II Fund LVIP American Growth Service Class II Fund LVIP American Growth-Income Service Class II Fund LVIP American International Service Class II Fund LVIP BlackRock Inflation Protected Bond Standard Class Fund LVIP BlackRock Inflation Protected Bond Service Class Fund LVIP Delaware Diversified Floating Rate Standard Class Fund LVIP Delaware Diversified Floating Rate Service Class Fund LVIP JPMorgan High Yield Standard Class Fund LVIP JPMorgan High Yield Service Class Fund LVIP SSgA Conservative Index Allocation Standard Class Fund LVIP SSgA Conservative Index Allocation Service Class Fund LVIP SSgA Conservative Structured Allocation Standard Class Fund LVIP SSgA Conservative Structured Allocation Service Class Fund LVIP SSgA Moderate Index Allocation Standard Class Fund LVIP SSgA Moderate Index Allocation Service Class Fund LVIP SSgA Moderate Structured Allocation Standard Class Fund LVIP SSgA Moderate Structured Allocation Service Class Fund LVIP SSgA Moderately Aggressive Index Allocation Standard Class Fund LVIP SSgA Moderately Aggressive Index Allocation Service Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Standard Class Fund LVIP SSgA Moderately Aggressive Structured Allocation Service Class Fund N-37 During 2010, the AIM Variable Insurance Funds, Inc. (AIM V.I.) family of funds changed its name to the Invesco Variable Insurance Funds, Inc. (Invesco V.I.) During 2010, the Delaware VIP Trend Standard Class Series merged into the Delaware VIP Smid Cap Growth Standard Class Series and the Delaware VIP Trend Service Class Series merged into the Delaware VIP Smid Cap Growth Service Class Series. Also during 2010, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME --------------------------------------------------------------------------------------------------------------- Goldman Sachs VIT Growth & Income Service Class Fund Goldman Sachs VIT Large Cap Value Service Class Fund LVIP Marsico International Growth Fund** LVIP MFS International Growth Standard Class Fund LVIP Marsico International Growth Service Class Fund LVIP MFS International Growth Service Class Fund LVIP Wilshire Aggressive Profile Standard Class Fund LVIP SSgA Global Tactical Allocation Standard Class Fund LVIP Wilshire Aggressive Profile Service Class Fund LVIP SSgA Global Tactical Allocation Service Class Fund Lord Abbett All Value Class VC Fund Lord Abbett Fundamental Equity Class VC Fund Van Kampen Capital Growth Class II Portfolio Morgan Stanley UIF Capital Growth Class II Portfolio
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES Amounts are paid to the Company for mortality and expense guarantees at a percentage of each portfolio's average daily net assets within the Variable Account. The rates are as follows for the fifteen products: Lincoln ChoicePlus at a daily rate of .0038356% to .0073973% (1.40% to 2.70% on an annual basis) Lincoln ChoicePlus Access at a daily rate of .0038356% to .0080822% (1.40% to 2.95% on an annual basis) Lincoln ChoicePlus Bonus at a daily rate of .0038356% to .0079452% (1.40% to 2.90% on an annual basis) Lincoln ChoicePlus II at a daily rate of .0035616% to .0073973% (1.30% to 2.70% on an annual basis) Lincoln ChoicePlus II Access at a daily rate of .0038356% to .0080822% (1.40% to 2.95% on an annual basis) Lincoln ChoicePlus II Advance at a daily rate of .0038356% to .0082192% (1.40% to 3.00% on an annual basis) Lincoln ChoicePlus II Bonus at a daily rate of .0038356% to .0079452% (1.40% to 2.90% on an annual basis) Lincoln ChoicePlus Design at a daily rate of .0030137% to .0084932% (1.10% to 3.10% on an annual basis) Lincoln ChoicePlus Assurance A Share at a daily rate of .0016438% to .0063014% (.60% to 2.30% on an annual basis) Lincoln ChoicePlus Assurance B Share at a daily rate of .0034247% to .0076712% (1.25% to 2.80% on an annual basis) Lincoln ChoicePlus Assurance Bonus at a daily rate of .0038356% to .0083562% (1.40% to 3.05% on an annual basis) Lincoln ChoicePlus Assurance C Share at a daily rate of .0038356% to .0087671% (1.40% to 3.20% on an annual basis) Lincoln ChoicePlus Assurance L Share at a daily rate of .0038356% to .0086301% (1.40% to 3.15% on an annual basis) Lincoln ChoicePlus Assurance A Class at a daily rate of .0016438% to .0063014% (.60% to 2.30% on an annual basis) Lincoln ChoicePlus Assurance B Class at a daily rate of .0034247% to .0076712% (1.25% to 2.80% on an annual basis) In addition, $109,000,142 and $80,018,430 was retained by the Company for contract charges and surrender charges during 2010 and 2009, respectively. For the Assurance A Share and Assurance A Class products, a front-end load or sales charge is applied as a percentage (5.75% maximum) to all gross purchase payments. For the years ending December 31, 2010 and 2009, sales charges amounted to $13,790,007 and $9,297,064, respectively. The Company is responsible for all sales, general and administrative expenses applicable to the Variable Account. N-38 3. FINANCIAL HIGHLIGHTS A summary of the fee rates, unit values, units outstanding, net assets and total return and investment income ratios for variable annuity contracts as of and for each year or period in the five years ended December 31, 2010, follows:
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ ABVPSF GLOBAL THEMATIC GROWTH CLASS B 2010 0.65% 2.85% $ 4.67 $18.41 3,004,150 $ 29,512,963 15.25% 17.81% 2.00% 2009 0.65% 2.85% 4.01 15.82 3,372,425 27,481,352 48.84% 52.12% 0.00% 2008 0.65% 2.85% 2.67 10.52 3,262,920 16,985,544 -48.92% -48.07% 0.00% 2007 1.15% 2.80% 5.17 20.19 3,842,419 33,767,641 16.76% 18.52% 0.00% 2006 1.15% 2.65% 4.38 17.19 3,154,151 19,614,773 5.55% 7.03% 0.00% ABVPSF GROWTH AND INCOME CLASS B 2010 0.65% 2.85% 8.35 14.03 13,986,390 153,878,947 9.63% 12.07% 0.00% 2009 0.65% 2.85% 7.47 12.67 14,537,403 145,245,860 16.97% 19.57% 3.54% 2008 0.65% 2.85% 6.73 10.72 14,925,347 128,497,995 -42.34% -41.37% 1.77% 2007 1.15% 2.80% 11.89 18.42 15,940,246 238,553,594 1.96% 3.55% 1.20% 2006 1.25% 2.80% 11.67 17.89 16,298,422 237,605,213 13.75% 15.53% 1.15% ABVPSF INTERNATIONAL VALUE CLASS B 2010 0.65% 2.90% 7.10 7.81 23,913,577 177,374,151 1.37% 3.62% 3.08% 2009 0.65% 2.85% 6.88 7.58 16,087,503 116,859,013 30.58% 33.49% 1.14% 2008 0.65% 2.85% 5.44 5.71 15,725,322 87,885,870 -54.60% -53.79% 0.88% 2007 1.10% 2.85% 11.78 12.38 13,859,734 170,225,318 2.63% 4.38% 0.99% 2006 6/6/2006 1.15% 2.80% 11.29 11.87 2,907,081 34,424,483 7.38% 27.27% 0.00% ABVPSF LARGE CAP GROWTH CLASS B 2010 1.30% 2.65% 5.79 13.38 1,688,466 12,963,373 6.96% 8.41% 0.27% 2009 1.30% 2.65% 5.37 12.34 2,076,002 14,747,140 33.52% 35.33% 0.00% 2008 1.30% 2.65% 3.99 9.12 2,586,486 13,536,124 -41.40% -40.60% 0.00% 2007 1.30% 2.65% 6.74 15.39 3,281,465 29,322,568 10.65% 12.15% 0.00% 2006 1.30% 2.65% 6.04 13.87 3,981,992 31,699,870 -3.24% -1.92% 0.00% ABVPSF SMALL/MID CAP VALUE CLASS B 2010 0.65% 2.85% 11.45 24.00 8,248,951 150,623,922 23.04% 25.77% 0.27% 2009 0.65% 2.85% 9.13 19.31 7,108,955 104,160,839 38.65% 41.73% 0.88% 2008 0.65% 2.85% 6.98 13.79 7,758,456 84,894,668 -37.55% -36.45% 0.43% 2007 1.10% 2.85% 11.03 21.87 5,982,290 110,145,206 -1.34% 0.37% 0.72% 2006 1.15% 2.85% 11.73 21.76 4,266,114 81,467,069 11.05% 12.78% 0.23% AMERICAN CENTURY VP INFLATION PROTECTION CLASS II 2010 0.65% 2.85% 10.79 12.42 41,433,338 494,227,301 2.15% 4.42% 1.65% 2009 0.65% 2.85% 10.56 11.97 33,469,110 387,360,324 7.14% 9.52% 1.88% 2008 0.65% 2.85% 9.86 11.00 22,134,456 237,085,710 -4.37% -2.73% 4.69% 2007 1.15% 2.85% 10.31 11.33 13,044,498 144,760,051 6.43% 8.15% 4.52% 2006 1.25% 2.85% 9.69 10.48 11,863,503 122,539,340 -1.27% 0.32% 3.33% AMERICAN FUNDS GLOBAL GROWTH CLASS 2 2010 0.65% 2.85% 11.02 16.14 22,438,581 331,309,961 8.61% 11.02% 1.54% 2009 0.65% 2.85% 10.07 14.63 20,566,657 279,623,028 38.31% 41.38% 1.42% 2008 0.65% 2.85% 7.32 10.42 22,029,895 216,967,583 -40.12% -39.06% 2.00% 2007 1.10% 2.85% 12.48 17.13 16,765,804 278,606,031 11.62% 13.59% 3.00% 2006 1.10% 2.85% 13.27 15.11 10,355,625 153,145,467 17.10% 18.93% 0.85% AMERICAN FUNDS GLOBAL SMALL CAPITALIZATION CLASS 2 2010 0.65% 2.85% 11.10 29.31 23,033,389 405,935,380 18.98% 21.62% 1.76% 2009 0.65% 2.85% 9.16 24.39 18,454,035 288,154,824 56.77% 60.25% 0.28% 2008 0.65% 2.85% 6.29 15.40 16,178,894 174,409,032 -54.83% -54.03% 0.00% 2007 1.10% 2.85% 13.68 33.76 14,813,916 359,008,332 18.02% 20.10% 3.00% 2006 1.10% 2.85% 12.95 28.32 12,213,535 238,117,221 20.63% 22.51% 0.46% AMERICAN FUNDS GROWTH CLASS 2 2010 0.65% 2.85% 9.51 18.81 139,384,213 1,945,075,727 15.35% 17.91% 0.73% 2009 0.65% 2.85% 8.16 16.14 143,144,088 1,713,386,575 35.49% 38.51% 0.69% 2008 0.65% 2.85% 5.96 11.80 126,204,408 1,096,444,796 -45.55% -44.58% 0.87% 2007 1.10% 2.85% 10.82 21.45 114,062,671 1,772,430,459 9.19% 11.12% 0.83% 2006 1.10% 2.85% 9.81 19.45 102,526,103 1,392,831,743 7.12% 8.85% 0.87%
N-39
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ AMERICAN FUNDS GROWTH-INCOME CLASS 2 2010 0.60% 2.85% $ 9.19 $15.95 160,676,140 $1,965,743,078 8.30% 10.70% 1.51% 2009 0.65% 2.85% 8.34 14.58 154,732,127 1,766,480,965 27.55% 30.39% 1.70% 2008 0.65% 2.85% 6.69 11.32 133,043,914 1,213,955,684 -39.60% -38.53% 1.82% 2007 1.10% 2.85% 11.31 18.55 119,952,131 1,837,362,865 2.09% 3.89% 1.59% 2006 1.10% 2.85% 11.75 17.99 106,178,440 1,580,788,507 11.97% 13.77% 1.68% AMERICAN FUNDS INTERNATIONAL CLASS 2 2010 0.65% 2.85% 10.06 23.27 47,415,131 763,935,853 4.22% 6.54% 2.09% 2009 0.65% 2.85% 9.52 22.11 45,438,851 690,446,358 39.05% 42.15% 1.49% 2008 0.65% 2.85% 6.75 15.74 52,149,321 567,950,440 -43.75% -42.76% 2.03% 2007 1.10% 2.85% 11.82 27.70 48,317,076 904,894,574 16.65% 18.71% 1.65% 2006 1.10% 2.85% 9.99 23.51 41,893,852 632,070,987 15.64% 17.50% 1.82% BLACKROCK GLOBAL ALLOCATION V.I. CLASS III 2010 0.60% 2.90% 12.25 12.69 49,546,291 617,625,604 6.68% 9.05% 1.72% 2009 6/30/2009 0.65% 2.85% 11.48 11.64 17,623,448 203,695,578 1.44% 15.58% 2.31% DELAWARE VIP DIVERSIFIED INCOME SERVICE CLASS 2010 0.65% 2.90% 12.70 15.04 69,940,824 998,422,247 4.84% 7.17% 4.24% 2009 0.65% 2.85% 12.11 14.12 52,883,597 715,222,239 23.10% 25.84% 5.14% 2008 0.65% 2.85% 9.84 11.30 35,059,220 383,243,656 -7.57% -5.94% 3.55% 2007 1.10% 2.85% 10.65 12.04 25,769,243 302,157,201 4.40% 6.08% 2.59% 2006 1.25% 2.85% 10.20 11.35 16,777,113 186,983,777 4.55% 6.23% 1.25% DELAWARE VIP EMERGING MARKETS SERVICE CLASS 2010 0.65% 2.85% 11.14 52.13 14,644,887 312,915,951 14.89% 17.44% 0.57% 2009 0.65% 2.85% 9.92 44.92 11,762,070 223,132,089 72.68% 76.52% 0.94% 2008 0.65% 2.85% 5.69 25.76 12,841,316 141,037,891 -53.04% -52.22% 1.28% 2007 1.10% 2.85% 18.56 54.30 10,582,568 256,714,563 34.62% 36.79% 1.24% 2006 1.25% 2.85% 14.74 39.94 6,958,755 129,919,378 23.31% 25.24% 0.94% DELAWARE VIP HIGH YIELD STANDARD CLASS 2010 1.40% 2.35% 15.39 21.42 750,316 11,622,616 12.64% 13.72% 6.76% 2009 1.40% 2.35% 13.53 18.98 574,400 7,859,946 45.52% 46.90% 9.42% 2008 1.40% 2.35% 9.21 13.02 862,558 8,034,157 -25.94% -25.23% 8.20% 2007 1.40% 2.35% 12.32 17.54 1,277,232 15,879,806 0.41% 1.37% 6.52% 2006 1.40% 2.35% 12.16 17.43 1,175,099 14,399,604 10.06% 10.88% 6.73% DELAWARE VIP HIGH YIELD SERVICE CLASS 2010 0.65% 2.85% 12.47 21.54 19,118,188 319,535,835 11.69% 14.17% 7.33% 2009 0.65% 2.85% 11.14 19.10 17,730,626 265,885,036 44.48% 47.69% 7.18% 2008 0.65% 2.85% 8.01 13.09 15,955,990 166,499,584 -26.55% -25.25% 8.03% 2007 1.10% 2.85% 10.72 17.64 14,288,786 202,639,176 -0.34% 1.37% 6.15% 2006 1.15% 2.85% 11.09 17.52 13,057,671 186,729,667 9.04% 10.80% 6.15% DELAWARE VIP INTERNATIONAL VALUE EQUITY STANDARD CLASS 2010 1.40% 2.15% 17.19 19.53 19,350 334,606 8.57% 9.38% 3.98% 2009 1.40% 2.15% 15.72 17.99 23,655 373,841 31.86% 32.86% 3.47% 2008 1.40% 2.15% 11.83 13.64 35,587 423,335 -43.65% -43.22% 2.98% 2007 1.40% 2.15% 20.84 22.81 81,729 1,714,184 3.51% 3.77% 2.21% 2006 1.40% 1.65% 20.08 22.04 136,295 2,737,672 21.56% 21.87% 2.83% DELAWARE VIP LIMITED-TERM DIVERSIFIED INCOME SERVICE CLASS 2010 0.60% 2.85% 10.84 11.90 56,532,719 658,386,518 1.36% 3.62% 2.03% 2009 0.65% 2.85% 10.72 11.51 32,029,490 362,100,137 9.48% 11.86% 3.33% 2008 0.65% 2.80% 9.79 10.35 7,989,474 81,388,856 -3.39% -1.78% 4.10% 2007 1.15% 2.80% 10.14 10.55 1,745,444 18,209,455 1.35% 2.94% 4.55% 2006 1.25% 2.80% 10.05 10.25 1,068,351 10,878,852 1.75% 3.03% 4.31% DELAWARE VIP REIT STANDARD CLASS 2010 1.40% 2.35% 19.43 27.25 200,164 5,329,560 24.04% 25.22% 2.80% 2009 1.40% 2.35% 15.67 21.76 234,742 4,993,625 20.45% 21.60% 4.94% 2008 1.40% 2.35% 13.01 17.89 337,494 5,881,815 -36.57% -35.97% 2.60% 2007 1.40% 2.35% 20.51 27.95 497,495 13,641,050 -15.94% -15.14% 1.50% 2006 1.40% 2.35% 24.60 32.93 745,569 24,391,247 29.81% 30.79% 1.93%
N-40
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ DELAWARE VIP REIT SERVICE CLASS 2010 0.65% 2.85% $ 8.46 $22.70 6,696,391 $ 110,546,563 23.06% 25.79% 2.55% 2009 0.65% 2.85% 7.55 18.18 6,492,661 89,686,763 19.77% 21.89% 4.61% 2008 1.10% 2.85% 6.20 14.96 8,564,358 97,607,134 -37.11% -35.99% 2.14% 2007 1.10% 2.85% 9.68 23.45 10,520,517 190,815,163 -16.59% -15.16% 1.15% 2006 1.15% 2.85% 13.30 27.70 11,378,212 251,608,279 28.67% 30.68% 1.54% DELAWARE VIP SMALL CAP VALUE STANDARD CLASS 2010 1.40% 2.35% 22.13 26.35 363,786 9,531,790 29.20% 30.43% 0.65% 2009 1.40% 2.35% 17.13 20.20 442,151 8,885,188 28.77% 30.00% 1.04% 2008 1.40% 2.35% 13.30 15.54 624,210 9,651,885 -31.51% -30.85% 0.83% 2007 1.40% 2.35% 19.30 22.48 911,687 20,420,995 -8.79% -7.92% 0.54% 2006 1.40% 2.35% 21.00 24.41 1,259,195 30,657,532 13.49% 14.57% 0.26% DELAWARE VIP SMALL CAP VALUE SERVICE CLASS 2010 0.65% 2.85% 11.62 26.63 17,716,673 309,429,689 28.21% 31.06% 0.46% 2009 0.65% 2.85% 8.93 20.47 17,867,130 247,088,668 27.87% 30.72% 0.71% 2008 0.65% 2.85% 7.20 15.78 21,006,014 230,267,773 -32.04% -30.94% 0.46% 2007 1.25% 2.85% 10.53 22.89 19,715,307 327,861,445 -9.46% -8.00% 0.25% 2006 1.25% 2.85% 12.05 24.91 15,981,027 306,852,146 12.69% 14.45% 0.02% DELAWARE VIP SMID CAP GROWTH STANDARD CLASS 2010 10/8/2010 1.40% 2.35% 17.06 21.40 442,067 9,442,351 13.16% 13.41% 0.00% DELAWARE VIP SMID CAP GROWTH SERVICE CLASS 2010 10/8/2010 0.65% 2.80% 9.31 19.87 5,869,618 84,963,927 12.98% 13.54% 0.00% DELAWARE VIP TREND STANDARD CLASS 2009 1.40% 2.35% 12.64 15.83 531,817 8,405,150 51.13% 52.58% 0.00% 2008 1.40% 2.35% 8.30 10.37 677,030 7,010,663 -47.98% -47.48% 0.00% 2007 1.40% 2.35% 15.84 19.75 967,792 19,092,097 8.18% 9.21% 0.00% 2006 1.40% 2.35% 14.53 18.09 1,376,772 24,889,509 5.30% 6.10% 0.00% DELAWARE VIP TREND SERVICE CLASS 2009 0.65% 2.80% 6.93 14.84 6,221,993 66,463,438 50.11% 53.37% 0.00% 2008 0.65% 2.80% 4.57 9.81 7,395,820 52,003,840 -48.33% -47.47% 0.00% 2007 1.15% 2.80% 8.76 18.84 8,624,685 115,826,354 7.41% 9.20% 0.00% 2006 1.15% 2.80% 8.07 17.56 9,363,478 114,451,808 4.37% 6.00% 0.00% DELAWARE VIP U.S. GROWTH SERVICE CLASS 2010 0.65% 2.85% 9.68 13.56 11,708,708 124,714,441 10.35% 12.81% 0.00% 2009 0.65% 2.85% 8.77 12.17 6,365,710 62,326,594 38.93% 42.02% 0.00% 2008 0.65% 2.85% 6.32 8.67 2,886,087 21,229,340 -44.44% -43.57% 0.00% 2007 1.25% 2.80% 11.37 15.46 2,918,817 38,693,665 9.27% 10.98% 0.00% 2006 1.25% 2.80% 11.08 14.02 2,954,477 35,560,878 -0.61% 0.74% 0.00% DELAWARE VIP VALUE STANDARD CLASS 2010 1.40% 2.35% 12.25 15.78 508,244 6,281,230 12.94% 14.02% 2.43% 2009 1.40% 2.35% 10.74 13.90 559,770 6,065,594 15.22% 16.32% 3.25% 2008 1.40% 2.35% 9.23 11.78 682,623 6,352,152 -34.97% -34.35% 3.16% 2007 1.40% 2.35% 14.07 18.08 1,057,669 14,923,996 -4.79% -4.08% 1.64% 2006 1.40% 2.15% 14.66 18.99 1,264,708 18,576,994 21.46% 22.38% 1.59% DELAWARE VIP VALUE SERVICE CLASS 2010 0.65% 2.85% 8.38 15.22 10,530,555 125,406,966 12.09% 14.46% 2.20% 2009 0.75% 2.85% 7.39 13.47 11,033,921 117,051,364 14.35% 16.77% 2.78% 2008 0.75% 2.85% 6.77 11.69 9,940,337 92,632,743 -35.44% -34.33% 2.59% 2007 1.15% 2.85% 10.71 17.96 11,006,428 158,874,478 -5.67% -4.10% 1.26% 2006 1.15% 2.80% 12.38 19.06 8,374,330 129,017,666 20.38% 22.26% 1.17% DWS VIP ALTERNATIVE ASSET ALLOCATION PLUS CLASS B 2010 0.65% 2.80% 12.44 13.38 1,476,223 18,687,740 9.05% 11.42% 0.74% 2009 7/7/2009 0.65% 2.80% 11.41 12.10 285,305 3,278,794 -0.10% 15.38% 0.00% DWS VIP EQUITY 500 INDEX CLASS A 2010 1.30% 2.65% 8.41 14.81 2,369,761 24,773,760 11.71% 13.22% 1.94% 2009 1.30% 2.65% 7.47 13.15 2,778,210 25,482,492 23.02% 24.69% 2.88% 2008 1.30% 2.65% 6.02 10.41 3,279,387 24,170,085 -38.80% -37.96% 2.55% 2007 1.30% 2.65% 9.75 16.93 4,338,906 51,876,026 2.54% 3.94% 1.54% 2006 1.30% 2.65% 9.43 16.43 5,354,369 61,937,097 12.50% 14.03% 1.20%
N-41
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ DWS VIP EQUITY 500 INDEX CLASS B 2010 1.15% 2.80% $ 9.84 $13.83 2,867,522 $ 35,007,227 11.36% 13.21% 1.67% 2009 1.15% 2.80% 8.76 12.24 3,130,133 33,955,820 22.55% 24.59% 2.53% 2008 1.15% 2.80% 7.03 9.84 3,323,686 29,391,732 -39.07% -38.06% 2.13% 2007 1.15% 2.85% 11.78 15.92 3,221,316 47,252,950 2.08% 3.73% 1.22% 2006 1.25% 2.85% 11.59 15.36 2,969,805 42,703,560 12.06% 13.81% 0.88% DWS VIP SMALL CAP INDEX CLASS A 2010 1.30% 2.65% 10.92 20.33 390,509 7,149,169 23.09% 24.76% 0.93% 2009 1.30% 2.65% 8.86 16.44 490,142 7,212,160 23.26% 24.94% 1.83% 2008 1.30% 2.65% 11.45 13.27 575,785 6,804,093 -35.85% -34.98% 1.65% 2007 1.30% 2.65% 17.72 20.69 735,210 13,405,275 -4.47% -3.17% 0.89% 2006 1.30% 2.65% 18.42 21.71 885,927 16,714,898 14.42% 15.97% 0.70% DWS VIP SMALL CAP INDEX CLASS B 2010 1.10% 2.80% 10.88 18.06 1,109,169 16,421,906 22.63% 24.73% 0.70% 2009 1.10% 2.80% 8.73 14.52 1,412,601 16,755,116 22.78% 24.89% 1.69% 2008 1.10% 2.80% 6.99 11.65 1,941,075 18,430,158 -36.14% -35.05% 1.35% 2007 1.10% 2.85% 11.16 17.98 2,539,796 37,470,213 -4.91% -3.38% 0.61% 2006 1.25% 2.85% 12.19 18.63 2,088,524 32,947,863 13.95% 15.73% 0.34% FIDELITY VIP CONTRAFUND SERVICE CLASS 2 2010 0.65% 2.85% 10.16 17.87 61,036,851 938,786,812 13.64% 16.17% 1.06% 2009 0.65% 2.85% 8.87 15.48 58,487,568 794,109,979 31.66% 34.59% 1.30% 2008 0.65% 2.85% 6.78 11.58 48,230,649 500,282,061 -44.30% -43.32% 0.90% 2007 1.10% 2.85% 12.42 20.48 38,112,592 724,082,879 14.01% 15.96% 0.85% 2006 1.15% 2.85% 12.08 17.71 28,310,996 473,272,060 8.30% 10.05% 1.07% FIDELITY VIP EQUITY-INCOME INITIAL CLASS 2010 1.40% 2.35% 11.96 15.00 556,864 6,992,880 12.48% 13.55% 1.73% 2009 1.40% 2.35% 10.56 13.27 685,293 7,578,540 27.44% 28.40% 2.17% 2008 1.40% 2.15% 8.24 10.19 885,428 7,625,372 -43.88% -43.45% 2.06% 2007 1.40% 2.15% 14.60 18.16 1,299,142 19,795,659 -0.63% 0.12% 1.59% 2006 1.40% 2.15% 14.61 18.28 1,717,020 26,097,151 17.64% 18.52% 3.32% FIDELITY VIP EQUITY-INCOME SERVICE CLASS 2 2010 1.30% 2.65% 9.38 14.70 3,620,280 45,488,308 11.91% 13.43% 1.53% 2009 1.30% 2.65% 8.37 13.03 4,451,795 49,328,897 26.49% 28.21% 1.98% 2008 1.30% 2.65% 6.61 10.22 5,495,296 47,467,613 -44.31% -43.55% 2.10% 2007 1.30% 2.65% 11.84 18.21 6,845,010 104,868,409 -1.38% -0.04% 1.54% 2006 1.30% 2.65% 14.01 18.31 7,682,647 118,013,433 16.79% 18.38% 2.98% FIDELITY VIP GROWTH INITIAL CLASS 2010 1.40% 2.35% 10.46 14.72 538,248 5,652,969 21.29% 22.45% 0.26% 2009 1.40% 2.35% 8.55 12.08 647,204 5,549,321 25.31% 26.50% 0.43% 2008 1.40% 2.35% 6.75 9.41 777,690 5,288,086 -48.40% -47.90% 0.71% 2007 1.40% 2.35% 12.97 18.20 1,060,215 13,793,116 24.26% 25.20% 0.88% 2006 1.40% 2.15% 10.36 14.65 1,434,303 14,883,568 4.58% 5.36% 0.42% FIDELITY VIP GROWTH SERVICE CLASS 2 2010 0.65% 2.85% 6.49 14.42 6,704,736 72,730,755 20.38% 22.94% 0.03% 2009 0.75% 2.85% 5.34 11.86 6,516,911 57,271,821 24.37% 27.01% 0.20% 2008 0.65% 2.85% 4.25 9.44 6,858,292 46,897,614 -48.79% -47.91% 0.61% 2007 1.15% 2.85% 8.21 18.06 6,111,259 78,588,080 23.10% 25.09% 0.35% 2006 1.25% 2.85% 6.60 14.55 4,789,808 46,860,781 3.63% 5.25% 0.16% FIDELITY VIP MID CAP SERVICE CLASS 2 2010 0.65% 2.90% 11.75 15.32 27,343,150 403,627,732 24.96% 27.74% 0.14% 2009 0.65% 2.85% 9.40 12.07 22,158,329 259,905,147 35.83% 38.85% 0.45% 2008 0.65% 2.85% 6.91 8.74 24,760,020 212,067,044 -41.31% -40.27% 0.24% 2007 1.10% 2.85% 12.02 14.66 18,422,757 266,663,938 12.10% 14.02% 0.50% 2006 1.15% 2.85% 12.55 12.87 10,522,063 134,453,898 9.24% 11.01% 0.09% FIDELITY VIP OVERSEAS INITIAL CLASS 2010 1.40% 2.15% 13.38 18.87 169,524 2,285,225 10.71% 11.54% 1.31% 2009 1.40% 2.15% 12.00 17.04 212,209 2,561,986 23.84% 24.77% 1.96% 2008 1.40% 2.15% 9.61 13.76 278,109 2,693,356 -45.00% -44.59% 2.30% 2007 1.40% 2.35% 17.35 25.02 377,037 6,583,118 14.82% 15.68% 3.30% 2006 1.40% 2.15% 15.00 21.79 488,806 7,368,801 15.57% 16.44% 0.92%
N-42
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY VIP OVERSEAS SERVICE CLASS 2 2010 0.65% 2.85% $ 9.25 $19.21 6,387,666 $ 87,005,111 9.66% 12.10% 1.25% 2009 0.65% 2.85% 8.34 17.25 6,143,849 76,136,561 22.68% 25.40% 1.86% 2008 0.65% 2.85% 6.94 13.85 7,199,120 72,016,219 -45.51% -44.60% 2.44% 2007 1.15% 2.80% 12.61 25.03 7,192,637 131,134,843 13.82% 15.60% 2.94% 2006 1.25% 2.80% 10.97 21.67 7,119,275 113,192,556 14.52% 16.31% 0.68% FTVIPT FRANKLIN INCOME SECURITIES CLASS 2 2010 0.65% 2.85% 10.65 11.93 43,099,161 498,814,149 9.51% 11.94% 6.56% 2009 0.65% 2.85% 9.72 10.72 40,161,631 419,768,277 31.79% 34.72% 9.07% 2008 0.65% 2.85% 7.37 8.01 45,663,538 358,972,880 -31.63% -30.43% 5.51% 2007 1.10% 2.85% 11.00 11.53 30,630,668 350,024,275 0.84% 2.57% 3.16% 2006 6/2/2006 1.15% 2.85% 10.72 11.25 6,957,894 78,020,239 0.29% 12.36% 0.10% FTVIPT FRANKLIN SMALL-MID CAP GROWTH SECURITIES CLASS 2 2010 0.65% 2.80% 8.09 20.31 8,661,182 115,470,893 24.10% 26.80% 0.00% 2009 0.65% 2.80% 6.43 16.21 8,125,612 84,045,660 39.61% 42.64% 0.00% 2008 0.65% 2.80% 4.54 11.50 8,416,602 61,007,232 -44.09% -43.13% 0.00% 2007 1.10% 2.80% 8.01 20.38 8,116,799 99,601,237 8.17% 9.97% 0.00% 2006 1.15% 2.80% 7.30 18.66 7,258,566 75,574,109 5.69% 7.34% 0.00% FTVIPT MUTUAL SHARES SECURITIES CLASS 2 2010 0.60% 2.85% 8.88 9.80 54,494,842 509,112,460 8.07% 10.47% 1.69% 2009 0.65% 2.85% 8.15 8.92 38,857,221 332,056,609 22.51% 25.23% 1.91% 2008 0.65% 2.85% 6.69 7.17 32,812,982 229,277,740 -38.88% -37.80% 3.40% 2007 1.10% 2.85% 11.18 11.54 19,477,930 223,014,246 0.62% 2.30% 1.36% 2006 6/2/2006 1.15% 2.80% 10.92 11.29 4,444,345 50,055,830 2.61% 15.87% 0.03% FTVIPT TEMPLETON GLOBAL BOND SECURITIES CLASS 2 2010 0.65% 2.85% 15.36 16.79 40,764,015 663,735,354 11.23% 13.71% 1.44% 2009 0.65% 2.85% 13.81 14.85 43,922,491 634,785,795 15.35% 17.91% 13.76% 2008 0.65% 2.85% 11.97 12.67 32,135,561 398,547,664 3.22% 5.04% 3.61% 2007 1.10% 2.85% 11.44 12.08 14,537,470 173,292,272 7.94% 9.73% 2.53% 2006 1.15% 2.80% 10.76 11.02 5,794,344 63,394,259 9.66% 11.37% 2.84% FTVIPT TEMPLETON GROWTH SECURITIES CLASS 2 2010 1.10% 2.80% 8.82 15.43 4,977,019 63,340,595 4.43% 6.22% 1.38% 2009 1.10% 2.80% 8.31 14.64 5,941,949 71,676,759 27.48% 29.67% 3.42% 2008 1.10% 2.80% 6.41 11.37 8,941,572 83,661,526 -43.92% -42.95% 1.79% 2007 1.10% 2.80% 11.25 20.08 11,165,734 184,159,759 -0.48% 1.18% 1.38% 2006 1.15% 2.80% 12.73 19.99 9,557,112 157,168,558 18.45% 20.30% 1.27% GOLDMAN SACHS VIT LARGE CAP VALUE SERVICE CLASS 2010 0.65% 2.45% 12.91 13.41 7,082,817 94,298,079 8.21% 10.17% 1.10% 2009 0.65% 2.45% 12.05 12.09 1,764,860 21,433,908 16.05% 16.35% 5.61% 2008 12/18/2008 1.30% 1.55% 10.39 10.39 3,757 39,029 2.82% 4.56% 2.59% INVESCO V.I. CAPITAL APPRECIATION SERIES I 2010 1.40% 2.35% 4.12 12.80 507,972 3,167,577 12.80% 13.88% 0.73% 2009 1.40% 2.35% 3.64 11.32 603,996 3,291,006 18.27% 19.40% 0.61% 2008 1.40% 2.35% 3.06 9.56 748,284 3,358,095 -43.83% -43.29% 0.00% 2007 1.40% 2.35% 5.41 16.98 996,399 7,865,602 9.63% 10.46% 0.00% 2006 4/28/2006 1.40% 2.55% 4.92 15.49 1,300,177 9,411,659 -1.98% -1.22% 0.06% INVESCO V.I. CAPITAL APPRECIATION SERIES II 2010 1.30% 2.35% 9.25 12.53 169,708 1,684,412 12.53% 13.72% 0.52% 2009 1.30% 2.35% 8.19 10.95 200,661 1,748,252 17.92% 19.16% 0.26% 2008 1.30% 2.35% 6.92 9.29 273,162 1,996,280 -43.96% -43.37% 0.00% 2007 1.30% 2.35% 12.29 16.57 348,396 4,499,119 9.14% 10.29% 0.00% 2006 4/28/2006 1.30% 2.35% 11.22 15.51 417,948 4,908,825 -2.02% -1.33% 0.00% INVESCO V.I. CORE EQUITY SERIES I 2010 1.40% 2.35% 7.39 14.92 1,084,566 10,646,779 7.01% 8.03% 0.95% 2009 1.40% 2.35% 6.86 13.92 1,322,617 11,940,692 25.32% 26.51% 1.80% 2008 1.40% 2.35% 5.45 11.08 1,568,047 11,156,757 -31.77% -31.11% 1.95% 2007 1.40% 2.35% 7.94 16.21 2,005,117 20,947,610 5.61% 6.61% 1.01% 2006 4/28/2006 1.40% 2.35% 7.48 15.39 2,593,323 25,607,172 7.45% 8.14% 0.53%
N-43
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ INVESCO V.I. CORE EQUITY SERIES II 2010 1.30% 2.55% $11.06 $14.99 308,954 $ 3,809,067 6.50% 7.84% 0.79% 2009 1.30% 2.55% 10.32 13.98 340,947 3,868,376 24.76% 26.33% 1.52% 2008 1.30% 2.55% 8.23 11.12 430,419 3,828,214 -32.08% -31.22% 1.74% 2007 1.30% 2.55% 12.04 15.84 519,086 6,677,207 5.37% 6.49% 0.84% 2006 4/28/2006 1.30% 2.35% 11.38 15.04 688,914 8,237,493 7.28% 8.04% 0.53% INVESCO V.I. INTERNATIONAL GROWTH SERIES I 2010 1.40% 2.35% 10.94 22.39 263,208 3,840,873 10.24% 11.29% 2.20% 2009 1.40% 2.35% 9.87 20.27 336,089 4,428,359 32.11% 33.36% 1.45% 2008 1.40% 2.35% 7.43 15.32 420,693 4,158,730 -41.76% -41.21% 0.47% 2007 1.40% 2.35% 12.69 26.25 605,909 10,314,167 12.28% 13.12% 0.37% 2006 1.40% 2.55% 11.26 23.48 786,249 11,887,911 25.51% 26.45% 0.96% INVESCO V.I. INTERNATIONAL GROWTH SERIES II 2010 1.30% 2.65% 18.52 21.96 172,385 3,412,347 9.74% 11.15% 1.80% 2009 1.30% 2.60% 16.77 19.89 212,633 3,784,526 31.43% 33.17% 1.36% 2008 1.30% 2.60% 12.68 15.07 271,812 3,639,727 -42.05% -41.32% 0.41% 2007 1.30% 2.55% 21.74 25.55 371,367 8,469,878 11.68% 12.97% 0.36% 2006 1.30% 2.45% 19.37 23.16 423,372 8,546,047 24.79% 26.23% 1.01% JANUS ASPEN SERIES BALANCED SERVICE CLASS 2010 1.30% 2.65% 12.67 16.15 1,509,432 23,906,019 5.29% 6.72% 2.48% 2009 1.30% 2.65% 12.01 15.15 1,785,177 26,594,635 22.30% 23.96% 2.70% 2008 1.30% 2.65% 9.81 12.23 2,066,947 24,907,981 -18.26% -17.14% 2.36% 2007 1.30% 2.65% 14.05 14.78 2,436,050 35,522,643 7.40% 8.86% 2.22% 2006 1.30% 2.65% 13.02 13.77 2,786,799 37,445,853 7.53% 8.99% 1.89% JANUS ASPEN SERIES ENTERPRISE SERVICE CLASS 2010 1.30% 2.65% 13.05 22.15 433,483 8,185,966 22.24% 23.90% 0.00% 2009 1.30% 2.65% 10.66 18.01 539,746 8,235,735 40.67% 42.58% 0.00% 2008 1.30% 2.65% 7.57 12.73 664,109 7,127,862 -45.27% -44.58% 0.05% 2007 1.30% 2.55% 13.82 23.14 904,616 17,592,253 18.68% 20.17% 0.07% 2006 1.30% 2.65% 15.29 19.40 946,465 15,346,221 10.45% 11.84% 0.00% JANUS ASPEN SERIES WORLDWIDE SERVICE CLASS 2010 1.30% 2.20% 11.05 13.92 161,259 1,893,080 13.01% 14.03% 0.48% 2009 1.30% 2.20% 9.76 12.21 182,927 1,885,015 34.41% 35.63% 1.24% 2008 1.30% 2.45% 7.24 9.00 237,488 1,809,532 -46.15% -45.52% 0.96% 2007 1.30% 2.45% 13.38 16.52 305,686 4,317,816 6.72% 7.95% 0.56% 2006 1.30% 2.45% 12.47 15.30 353,919 4,616,538 15.08% 16.41% 1.61% LVIP AMERICAN GLOBAL GROWTH SERVICE CLASS II 2010 9/30/2010 0.65% 2.55% 12.30 12.42 215,895 2,669,105 -0.11% 8.17% 0.00% LVIP AMERICAN GLOBAL SMALL CAPITALIZATION SERVICE CLASS II 2010 11/15/2010 1.15% 2.80% 12.67 12.78 272,886 3,475,601 0.64% 5.16% 0.00% LVIP AMERICAN GROWTH SERVICE CLASS II 2010 11/15/2010 1.15% 2.90% 12.00 12.51 1,002,804 12,501,693 -5.95% 7.68% 0.00% LVIP AMERICAN GROWTH-INCOME SERVICE CLASS II 2010 11/15/2010 1.15% 2.90% 11.58 12.19 716,818 8,707,074 0.81% 6.27% 0.00% LVIP AMERICAN INTERNATIONAL SERVICE CLASS II 2010 9/30/2010 0.65% 2.80% 12.18 12.31 491,701 6,021,912 0.05% 6.50% 0.00% LVIP BARON GROWTH OPPORTUNITIES SERVICE CLASS 2010 0.65% 2.80% 10.37 11.84 8,058,862 87,917,150 22.90% 25.57% 0.00% 2009 0.65% 2.85% 8.42 9.47 7,094,204 62,270,365 34.43% 37.43% 0.00% 2008 0.65% 2.85% 6.27 6.92 6,418,205 41,420,290 -40.85% -39.80% 0.00% 2007 1.10% 2.85% 10.60 11.49 3,386,775 36,545,045 0.56% 2.24% 0.00% 2006 6/2/2006 1.15% 2.80% 10.54 11.24 455,476 4,835,350 -1.18% 16.51% 0.00% LVIP BLACKROCK INFLATION PROTECTED BOND SERVICE CLASS 2010 11/15/2010 0.75% 2.85% 9.87 10.15 1,401,242 14,135,797 -2.27% 1.40% 0.59% LVIP CAPITAL GROWTH SERVICE CLASS 2010 0.65% 2.80% 9.09 9.82 14,883,910 144,635,021 15.39% 17.90% 0.00% 2009 0.65% 2.80% 7.88 8.33 6,996,813 57,764,897 30.81% 33.66% 0.11% 2008 0.65% 2.80% 6.06 6.19 1,248,367 7,720,820 -43.12% -42.37% 0.00% 2007 6/5/2007 1.10% 2.70% 10.63 10.74 121,888 1,304,575 -2.84% 9.70% 0.00%
N-44
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ LVIP COHEN & STEERS GLOBAL REAL ESTATE SERVICE CLASS 2010 0.65% 2.85% $ 7.01 $ 7.59 9,934,577 $ 72,646,063 14.36% 16.90% 0.00% 2009 0.65% 2.85% 6.13 6.49 8,708,761 55,042,103 33.62% 36.60% 0.00% 2008 0.65% 2.85% 4.58 4.72 8,333,923 38,920,478 -43.80% -42.81% 1.32% 2007 6/1/2007 1.10% 2.85% 8.16 8.25 3,891,548 31,969,536 -18.94% -7.02% 0.59% LVIP COLUMBIA VALUE OPPORTUNITIES SERVICE CLASS 2010 0.65% 2.80% 8.71 9.40 1,678,328 15,228,244 21.02% 23.64% 0.00% 2009 0.65% 2.80% 7.19 7.60 1,005,257 7,453,659 20.92% 23.55% 0.41% 2008 0.65% 2.80% 5.95 6.11 636,739 3,857,022 -35.96% -34.89% 0.33% 2007 6/1/2007 1.15% 2.80% 9.29 9.38 87,108 814,572 -8.28% 2.76% 0.67% LVIP CORE STANDARD CLASS 2006 1.40% 1.60% 11.54 11.54 13,155 151,833 12.36% 12.36% 0.79% LVIP CORE SERVICE CLASS 2006 1.25% 2.80% 11.28 11.53 315,822 3,613,476 10.69% 12.25% 0.80% LVIP DELAWARE BOND STANDARD CLASS 2010 1.30% 2.65% 12.12 17.65 12,528,320 202,938,969 5.65% 7.09% 3.28% 2009 1.30% 2.65% 11.46 16.50 14,710,742 223,876,924 15.79% 17.37% 4.14% 2008 1.30% 2.65% 9.88 14.07 17,222,416 224,703,303 -5.46% -4.18% 4.36% 2007 1.30% 2.65% 10.44 14.70 21,356,530 292,323,892 2.69% 4.08% 4.72% 2006 1.30% 2.65% 10.15 14.13 24,595,170 325,383,540 1.98% 3.36% 4.24% LVIP DELAWARE BOND SERVICE CLASS 2010 0.65% 2.90% 11.58 13.36 118,782,318 1,497,358,649 5.08% 7.42% 3.52% 2009 0.65% 2.85% 11.02 12.53 83,225,660 987,925,269 15.15% 17.71% 4.68% 2008 0.65% 2.85% 9.57 10.72 57,669,586 590,700,221 -5.98% -4.32% 4.75% 2007 1.10% 2.85% 10.18 11.23 48,409,964 525,317,008 2.22% 3.97% 4.98% 2006 1.15% 2.85% 9.96 10.82 40,643,042 428,938,186 1.52% 3.15% 4.59% LVIP DELAWARE DIVERSIFIED FLOATING RATE SERVICE CLASS 2010 11/15/2010 0.75% 2.85% 9.96 10.09 1,228,387 12,318,833 -0.19% 0.07% 0.21% LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION STANDARD CLASS 2010 1.30% 2.55% 10.92 15.50 882,963 13,017,473 9.65% 11.03% 2.51% 2009 1.30% 2.55% 9.96 14.07 1,115,182 14,893,081 28.67% 30.29% 1.52% 2008 1.30% 2.65% 7.73 10.81 1,511,001 15,329,718 -34.97% -34.09% 5.79% 2007 1.30% 2.65% 11.87 16.54 2,317,237 36,186,157 3.59% 5.00% 1.67% 2006 1.30% 2.65% 11.45 15.89 2,597,901 39,013,663 11.63% 13.03% 1.39% LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION SERVICE CLASS 2010 0.65% 2.85% 10.26 14.88 2,214,985 29,667,952 9.05% 11.48% 2.34% 2009 0.65% 2.85% 9.22 13.44 2,908,852 35,537,545 27.96% 30.81% 1.20% 2008 0.65% 2.85% 7.43 10.35 4,435,530 41,922,453 -35.26% -34.15% 6.46% 2007 1.15% 2.85% 11.28 15.75 4,099,903 59,389,376 3.18% 4.90% 1.60% 2006 1.15% 2.80% 11.67 15.04 2,226,993 31,324,052 11.07% 12.75% 1.63% LVIP DELAWARE GROWTH AND INCOME SERVICE CLASS 2010 0.75% 2.80% 9.26 10.36 3,514,396 35,521,339 9.44% 11.70% 0.67% 2009 0.75% 2.80% 8.30 9.32 3,192,725 29,147,328 20.81% 23.31% 0.91% 2008 0.75% 2.80% 7.19 7.60 2,365,920 17,695,340 -37.76% -36.73% 1.06% 2007 1.15% 2.80% 11.55 12.02 1,889,411 22,449,840 2.93% 4.54% 1.19% 2006 1.25% 2.80% 11.28 11.50 944,449 10,787,344 9.32% 10.69% 1.43% LVIP DELAWARE SOCIAL AWARENESS STANDARD CLASS 2010 1.30% 2.65% 10.09 16.31 859,633 12,406,132 8.65% 10.13% 0.58% 2009 1.30% 2.65% 9.27 14.92 1,015,178 13,335,713 26.60% 28.32% 0.67% 2008 1.30% 2.65% 7.31 11.72 1,260,321 12,930,385 -36.13% -35.26% 0.83% 2007 1.30% 2.65% 11.43 18.23 1,584,462 25,166,950 0.27% 1.64% 0.84% 2006 1.30% 2.65% 15.19 18.07 1,777,660 27,934,321 9.37% 10.86% 0.85% LVIP DELAWARE SOCIAL AWARENESS SERVICE CLASS 2010 0.65% 2.80% 9.41 15.21 3,768,826 49,233,488 8.22% 10.46% 0.26% 2009 0.65% 2.70% 8.54 13.86 4,055,609 49,637,690 26.09% 28.70% 0.36% 2008 0.65% 2.70% 7.31 10.85 4,384,397 42,910,993 -36.38% -35.45% 0.55% 2007 1.25% 2.80% 11.43 16.82 4,848,658 75,403,936 -0.03% 1.43% 0.64% 2006 1.25% 2.70% 11.67 16.60 4,897,457 76,874,132 9.04% 10.63% 0.68%
N-45
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ LVIP DELAWARE SPECIAL OPPORTUNITIES SERVICE CLASS 2010 0.65% 2.80% $ 8.92 $ 9.64 2,926,149 $ 27,220,347 26.59% 29.33% 0.51% 2009 0.65% 2.80% 7.04 7.45 1,579,299 11,479,826 26.40% 29.15% 0.66% 2008 0.65% 2.80% 5.59 5.71 1,463,515 8,306,542 -38.51% -37.64% 1.24% 2007 6/12/2007 1.25% 2.65% 9.08 9.16 364,016 3,326,595 -9.80% 2.13% 0.99% LVIP GLOBAL INCOME SERVICE CLASS 2010 0.60% 2.85% 11.26 11.67 20,536,946 235,905,015 6.34% 8.71% 3.35% 2009 7/1/2009 0.65% 2.85% 10.59 10.74 5,360,215 57,213,255 -0.15% 6.19% 2.72% LVIP GROWTH STANDARD CLASS 2006 1.40% 1.65% 11.31 11.36 10,237 116,096 4.44% 4.70% 0.00% LVIP GROWTH SERVICE CLASS 2006 1.15% 2.80% 11.07 11.34 679,394 7,655,941 2.99% 4.60% 0.00% LVIP GROWTH OPPORTUNITIES SERVICE CLASS 2006 1.25% 2.80% 12.14 12.44 306,765 3,794,567 6.86% 8.53% 0.00% LVIP JANUS CAPITAL APPRECIATION STANDARD CLASS 2010 1.30% 2.65% 10.94 14.97 215,585 2,825,485 8.54% 9.91% 0.70% 2009 1.30% 2.55% 10.07 13.74 236,966 2,833,177 35.04% 36.74% 0.81% 2008 1.30% 2.55% 7.46 10.13 278,559 2,443,401 -42.31% -41.59% 0.68% 2007 1.30% 2.55% 12.92 17.31 298,124 4,493,378 17.38% 18.86% 0.26% 2006 1.30% 2.55% 12.26 14.72 330,585 4,267,592 6.91% 8.26% 0.19% LVIP JANUS CAPITAL APPRECIATION SERVICE CLASS 2010 0.65% 2.80% 10.64 14.44 4,790,609 63,658,856 8.01% 10.25% 0.52% 2009 0.75% 2.80% 9.67 13.17 4,489,735 54,781,676 34.36% 37.14% 0.95% 2008 0.75% 2.80% 7.41 9.66 2,805,952 24,856,506 -42.60% -41.64% 0.51% 2007 1.15% 2.80% 12.91 16.59 2,223,674 34,519,014 16.80% 18.62% 0.08% 2006 1.25% 2.80% 11.11 14.00 1,196,126 16,166,073 6.54% 8.04% 0.00% LVIP JPMORGAN HIGH YIELD SERVICE CLASS 2010 11/16/2010 1.15% 2.90% 10.54 10.84 300,856 3,246,962 0.07% 1.53% 1.12% LVIP MFS INTERNATIONAL GROWTH SERVICE CLASS 2010 0.60% 2.85% 7.91 8.56 11,583,789 96,896,427 9.66% 12.09% 0.58% 2009 0.65% 2.85% 7.21 7.64 7,190,493 53,643,846 31.70% 34.63% 0.83% 2008 0.65% 2.85% 5.48 5.63 4,128,581 23,019,042 -50.50% -49.65% 1.05% 2007 6/1/2007 1.15% 2.85% 11.06 11.18 1,856,720 20,680,646 -4.83% 14.91% 0.98% LVIP MFS VALUE SERVICE CLASS 2010 0.65% 2.85% 8.02 8.69 48,122,826 409,771,177 8.19% 10.59% 1.24% 2009 0.65% 2.85% 7.42 7.86 29,898,812 231,005,259 17.28% 19.89% 1.61% 2008 0.65% 2.85% 6.33 6.50 12,586,764 81,499,360 -34.33% -33.23% 1.97% 2007 6/5/2007 1.15% 2.80% 9.64 9.74 1,167,639 11,323,296 -4.50% 5.67% 1.27% LVIP MID-CAP VALUE SERVICE CLASS 2010 0.65% 2.85% 8.17 8.85 4,779,106 40,801,285 20.12% 22.79% 0.01% 2009 0.65% 2.85% 6.80 7.21 3,294,804 23,145,869 38.09% 41.17% 0.30% 2008 0.65% 2.85% 4.93 5.07 2,592,831 13,021,942 -42.52% -41.50% 0.09% 2007 6/5/2007 1.10% 2.85% 8.57 8.66 1,598,830 13,800,842 -15.89% -7.65% 0.28% LVIP MONDRIAN INTERNATIONAL VALUE STANDARD CLASS 2010 1.30% 2.65% 10.55 19.61 1,202,225 22,423,804 -0.21% 1.14% 3.16% 2009 1.30% 2.65% 10.55 19.53 1,444,227 26,747,196 18.06% 19.67% 3.16% 2008 1.30% 2.65% 8.92 16.45 1,825,281 28,349,359 -38.31% -37.47% 4.45% 2007 1.30% 2.65% 14.45 26.50 2,434,134 60,083,052 8.57% 10.05% 1.89% 2006 1.30% 2.65% 13.29 24.26 2,835,163 64,314,382 26.61% 28.33% 2.99% LVIP MONDRIAN INTERNATIONAL VALUE SERVICE CLASS 2010 0.65% 2.85% 8.52 18.25 7,872,078 111,459,611 -0.66% 1.55% 3.15% 2009 0.65% 2.85% 8.67 18.10 7,692,810 111,025,754 17.53% 20.14% 2.98% 2008 0.65% 2.85% 7.59 15.17 8,454,702 105,135,796 -38.59% -37.54% 4.54% 2007 1.15% 2.85% 14.45 24.34 9,014,480 185,875,399 8.08% 9.83% 1.82% 2006 1.25% 2.85% 13.90 22.18 8,430,392 164,122,807 26.11% 28.07% 2.87%
N-46
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ LVIP MONEY MARKET STANDARD CLASS 2010 1.30% 2.65% $ 9.50 $11.71 6,137,587 $ 66,685,675 -2.57% -1.24% 0.05% 2009 1.30% 2.65% 9.75 11.87 9,480,305 104,203,478 -2.32% -0.99% 0.32% 2008 1.30% 2.65% 9.98 12.00 16,028,543 178,597,067 -0.33% 1.02% 2.26% 2007 1.30% 2.65% 10.02 11.89 11,203,496 124,212,124 2.22% 3.61% 4.84% 2006 1.30% 2.65% 9.80 11.49 9,944,798 106,534,813 1.94% 3.33% 4.58% LVIP MONEY MARKET SERVICE CLASS 2010 0.60% 2.85% 9.44 10.60 33,514,174 342,966,801 -2.77% -0.61% 0.04% 2009 0.65% 2.85% 9.69 10.73 41,001,437 425,778,435 -2.73% -0.57% 0.09% 2008 0.65% 2.85% 9.94 10.85 58,655,759 619,101,956 -0.78% 0.92% 1.91% 2007 1.15% 2.85% 10.00 10.77 26,010,828 273,357,558 1.76% 3.40% 4.59% 2006 1.25% 2.85% 9.81 10.41 16,178,038 165,087,589 1.54% 3.12% 4.41% LVIP SSGA BOND INDEX SERVICE CLASS 2010 0.65% 2.90% 10.82 11.43 85,241,062 948,775,048 2.74% 5.02% 2.10% 2009 0.65% 2.85% 10.53 10.89 45,904,548 491,682,947 1.33% 3.59% 2.21% 2008 6/24/2008 0.65% 2.85% 10.39 10.51 12,107,364 126,524,359 2.17% 6.13% 0.95% LVIP SSgA CONSERVATIVE INDEX ALLOCATION SERVICE CLASS 2010 11/17/2010 1.30% 2.80% 10.39 10.45 282,388 2,944,310 0.50% 1.74% 0.00% LVIP SSgA CONSERVATIVE STRUCTURED ALLOCATION SERVICE CLASS 2010 11/17/2010 1.30% 2.70% 10.35 10.41 1,020,141 10,594,850 0.00% 1.55% 0.00% LVIP SSgA DEVELOPED INTERNATIONAL 150 SERVICE CLASS 2010 0.65% 2.85% 9.07 9.59 14,813,167 138,293,111 3.99% 6.31% 1.23% 2009 0.65% 2.85% 8.72 9.02 7,672,745 68,094,266 40.27% 43.39% 1.72% 2008 6/26/2008 0.65% 2.85% 6.22 6.29 2,737,409 17,122,014 -36.36% 20.35% 2.37% LVIP SSgA EMERGING MARKETS 100 SERVICE CLASS 2010 0.65% 2.85% 13.71 14.50 11,936,863 168,453,712 23.87% 26.62% 1.10% 2009 0.65% 2.85% 11.07 11.45 7,338,465 82,652,795 84.14% 88.24% 1.48% 2008 6/26/2008 0.65% 2.85% 6.01 6.08 2,345,082 14,179,848 -38.84% 21.08% 1.46% LVIP SSgA GLOBAL TACTICAL ALLOCATION SERVICE CLASS 2010 0.65% 2.80% 9.21 11.09 5,918,960 63,997,052 5.48% 7.78% 0.84% 2009 0.65% 2.85% 8.61 10.35 5,385,891 54,613,994 26.80% 29.49% 5.30% 2008 0.75% 2.85% 7.13 8.03 8,907,561 70,291,413 -42.29% -41.27% 0.30% 2007 1.10% 2.85% 13.16 13.69 8,376,524 113,226,459 7.69% 9.37% 0.73% 2006 1.25% 2.80% 12.22 12.52 4,704,780 58,537,754 13.04% 14.81% 0.64% LVIP SSgA INTERNATIONAL INDEX SERVICE CLASS 2010 0.65% 2.85% 8.17 8.64 23,605,346 198,623,794 3.78% 6.09% 1.49% 2009 0.65% 2.85% 7.88 8.15 11,816,356 94,717,158 23.95% 26.71% 1.91% 2008 6/26/2008 0.65% 2.85% 6.36 6.43 3,478,166 22,232,589 -35.72% 18.05% 1.74% LVIP SSgA LARGE CAP 100 SERVICE CLASS 2010 0.65% 2.85% 10.50 11.10 26,778,012 289,254,755 15.56% 18.13% 1.21% 2009 0.65% 2.85% 9.09 9.40 15,341,530 141,798,422 31.16% 34.08% 1.51% 2008 6/26/2008 0.65% 2.85% 6.93 7.01 4,737,060 33,002,221 -31.01% 9.87% 0.83% LVIP SSgA MODERATE INDEX ALLOCATION SERVICE CLASS 2010 11/16/2010 1.15% 2.60% 10.61 10.67 386,790 4,120,405 -0.04% 2.82% 0.00% LVIP SSgA MODERATE STRUCTURED ALLOCATION SERVICE CLASS 2010 11/16/2010 0.75% 2.90% 10.51 10.75 2,706,824 28,557,076 0.32% 2.75% 0.00% LVIP SSgA MODERATELY AGGRESSIVE INDEX ALLOCATION SERVICE CLASS 2010 11/18/2010 1.15% 2.80% 10.74 10.81 542,212 5,847,902 -0.04% 2.21% 0.00% LVIP SSgA MODERATELY AGGRESSIVE STRUCTURED ALLOCATION SERVICE CLASS 2010 11/18/2010 0.75% 2.70% 10.80 10.89 1,483,235 16,077,151 0.03% 3.66% 0.00% LVIP SSgA S&P 500 INDEX STANDARD CLASS 2010 1.40% 2.60% 9.37 9.99 204,002 2,012,755 11.84% 13.13% 1.25% 2009 1.40% 2.55% 8.67 8.83 176,761 1,551,468 23.86% 24.36% 1.79% 2008 1.40% 1.80% 7.05 7.10 70,013 496,689 -38.19% -38.07% 6.15% 2007 4/27/2007 1.40% 1.60% 11.41 11.47 22,682 259,980 -1.64% -1.51% 1.11%
N-47
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ LVIP SSgA S&P 500 INDEX SERVICE CLASS 2010 0.65% 2.85% $ 8.77 $ 9.94 43,337,481 $ 418,910,568 11.23% 13.71% 1.14% 2009 0.65% 2.85% 7.77 8.79 25,348,953 217,699,880 22.25% 24.97% 1.56% 2008 0.65% 2.85% 6.68 7.08 9,350,393 64,897,157 -39.08% -38.06% 5.62% 2007 4/27/2007 1.15% 2.80% 10.79 11.44 1,724,252 19,455,047 -3.29% 1.87% 1.23% LVIP SSgA SMALL-CAP INDEX SERVICE CLASS 2010 0.65% 2.85% 8.68 9.40 13,551,043 122,688,382 22.34% 25.06% 0.36% 2009 0.65% 2.85% 7.10 7.52 8,628,513 63,133,650 22.17% 24.89% 0.65% 2008 0.65% 2.85% 5.81 5.98 4,021,344 23,798,001 -35.96% -34.86% 1.31% 2007 6/5/2007 1.10% 2.80% 9.08 9.18 733,570 6,708,346 -10.14% -0.28% 0.79% LVIP SSgA SMALL-MID CAP 200 SERVICE CLASS 2010 0.65% 2.85% 13.07 13.81 7,055,885 94,875,875 23.85% 26.61% 1.81% 2009 0.65% 2.85% 10.55 10.91 4,142,174 44,470,690 47.05% 50.31% 1.90% 2008 6/26/2008 0.65% 2.85% 7.18 7.26 1,385,280 9,999,517 -34.57% 11.96% 1.49% LVIP T. ROWE PRICE GROWTH STOCK SERVICE CLASS 2010 0.65% 2.85% 8.72 9.44 7,849,330 71,341,526 13.17% 15.68% 0.00% 2009 0.65% 2.85% 7.71 8.16 5,541,855 43,985,519 38.79% 41.80% 0.00% 2008 0.65% 2.80% 5.56 5.70 1,771,051 10,018,182 -43.59% -42.71% 0.00% 2007 6/1/2007 1.25% 2.80% 9.85 9.94 678,322 6,726,069 -4.45% 2.43% 0.20% LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH STANDARD CLASS 2010 1.30% 2.65% 12.40 19.27 169,937 2,874,844 25.02% 26.71% 0.00% 2009 1.30% 2.65% 9.90 15.34 164,956 2,212,388 42.51% 44.45% 0.10% 2008 1.30% 2.65% 6.94 10.71 149,632 1,390,133 -44.28% -43.52% 0.00% 2007 1.30% 2.65% 15.81 19.12 166,583 2,745,922 10.62% 12.12% 0.00% 2006 1.30% 2.65% 14.19 17.02 154,402 2,284,009 6.41% 7.86% 0.00% LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH SERVICE CLASS 2010 0.65% 2.85% 11.59 18.38 3,027,569 47,561,006 24.46% 27.23% 0.00% 2009 0.65% 2.85% 9.13 14.55 2,315,538 28,997,538 41.87% 45.02% 0.00% 2008 0.65% 2.85% 6.90 10.10 1,579,142 13,817,663 -44.53% -43.57% 0.00% 2007 1.15% 2.85% 12.22 17.94 1,103,701 17,411,256 10.12% 12.00% 0.00% 2006 1.15% 2.85% 11.55 16.05 771,700 11,235,624 5.94% 7.65% 0.00% LVIP TEMPLETON GROWTH SERVICE CLASS 2010 0.65% 2.90% 7.53 8.15 13,007,007 102,455,858 3.31% 5.61% 1.78% 2009 0.65% 2.85% 7.29 7.72 10,349,314 77,857,452 24.21% 26.98% 1.55% 2008 0.65% 2.85% 5.87 6.03 11,336,582 67,756,355 -39.61% -38.58% 2.42% 2007 6/1/2007 1.10% 2.80% 9.72 9.82 4,655,053 45,556,801 -4.11% 3.03% 2.40% LVIP TURNER MID-CAP GROWTH SERVICE CLASS 2010 0.65% 2.80% 9.49 10.26 2,994,921 29,442,450 23.44% 26.12% 0.00% 2009 0.65% 2.80% 7.67 8.14 1,924,863 15,157,607 43.96% 47.09% 0.00% 2008 0.65% 2.80% 5.31 5.49 1,899,168 10,252,684 -50.83% -49.99% 0.00% 2007 6/4/2007 1.10% 2.80% 10.78 10.98 1,108,808 12,033,221 1.67% 9.71% 0.00% LVIP WELLS FARGO INTRINSIC VALUE SERVICE CLASS 2010 0.65% 2.80% 9.11 10.14 2,793,737 27,532,649 14.39% 16.88% 0.77% 2009 0.65% 2.80% 7.81 8.73 3,150,307 26,857,754 19.60% 22.20% 0.97% 2008 0.65% 2.80% 6.70 7.19 3,076,733 21,692,955 -40.18% -39.18% 1.67% 2007 1.15% 2.80% 11.02 11.83 1,991,296 23,290,149 1.22% 2.90% 1.11% 2006 1.15% 2.80% 11.23 11.50 1,382,666 15,800,547 7.93% 9.61% 1.35% LVIP WILSHIRE 2010 PROFILE SERVICE CLASS 2010 0.75% 2.80% 9.98 10.74 828,075 8,599,298 8.11% 10.35% 0.81% 2009 0.75% 2.80% 9.25 9.74 958,871 9,115,520 20.79% 23.17% 1.76% 2008 0.75% 2.70% 7.66 7.85 754,985 5,875,176 -26.12% -24.97% 2.27% 2007 7/11/2007 1.15% 2.70% 10.37 10.47 122,994 1,280,748 0.02% 6.47% 0.41% LVIP WILSHIRE 2020 PROFILE SERVICE CLASS 2010 0.75% 2.80% 9.59 10.33 1,816,906 18,173,482 8.67% 10.92% 0.68% 2009 0.75% 2.80% 8.82 9.31 1,720,813 15,652,752 21.89% 24.41% 1.71% 2008 0.75% 2.80% 7.25 7.43 1,286,969 9,484,720 -29.01% -27.90% 1.65% 2007 6/14/2007 1.15% 2.70% 10.21 10.31 210,936 2,167,954 -1.81% 7.80% 0.36%
N-48
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ LVIP WILSHIRE 2030 PROFILE SERVICE CLASS 2010 0.75% 2.85% $ 9.37 $10.10 1,090,359 $ 10,633,763 9.10% 11.42% 0.55% 2009 0.75% 2.85% 8.58 9.07 1,223,378 10,817,678 24.06% 26.70% 1.59% 2008 0.75% 2.85% 6.94 7.09 646,887 4,561,711 -32.79% -31.84% 0.93% 2007 6/5/2007 1.30% 2.70% 10.32 10.41 90,098 934,122 -2.40% 8.65% 0.40% LVIP WILSHIRE 2040 PROFILE SERVICE CLASS 2010 1.15% 2.85% 8.86 9.42 681,006 6,293,112 10.20% 12.09% 0.56% 2009 1.15% 2.85% 8.04 8.37 624,977 5,177,281 26.96% 28.94% 1.27% 2008 1.30% 2.85% 6.35 6.49 517,107 3,326,300 -37.43% -36.54% 0.24% 2007 7/16/2007 1.30% 2.70% 10.15 10.23 39,057 397,179 -2.92% 4.57% 1.08% LVIP WILSHIRE CONSERVATIVE PROFILE SERVICE CLASS 2010 0.65% 2.90% 11.56 12.64 30,806,255 378,674,328 7.13% 9.52% 3.58% 2009 0.65% 2.85% 10.70 11.61 27,297,773 309,685,249 21.05% 23.61% 4.15% 2008 0.75% 2.85% 8.92 9.44 21,489,015 199,198,042 -20.94% -19.58% 2.03% 2007 1.15% 2.85% 11.23 11.75 13,219,924 153,394,188 4.49% 6.28% 1.94% 2006 1.15% 2.85% 10.79 11.07 7,119,991 78,175,548 6.00% 7.71% 1.52% LVIP WILSHIRE MODERATE PROFILE SERVICE CLASS 2010 0.65% 2.85% 11.16 12.54 88,617,281 1,078,285,914 8.54% 10.96% 2.80% 2009 0.65% 2.85% 10.08 11.37 80,244,518 890,296,676 24.14% 26.90% 4.21% 2008 0.65% 2.85% 8.39 9.01 73,977,108 654,007,813 -28.87% -27.61% 1.88% 2007 1.10% 2.85% 11.98 12.47 52,232,085 642,331,532 5.99% 7.65% 1.28% 2006 1.25% 2.80% 11.30 11.58 32,019,579 367,914,736 8.68% 10.38% 0.92% LVIP WILSHIRE MODERATELY AGGRESSIVE PROFILE SERVICE CLASS 2010 0.65% 2.85% 10.24 12.02 55,624,756 649,763,390 9.27% 11.70% 2.66% 2009 0.65% 2.85% 9.35 10.82 51,327,593 543,175,797 25.09% 27.88% 4.39% 2008 0.65% 2.85% 7.77 8.51 48,840,768 408,610,151 -35.45% -34.31% 0.83% 2007 1.10% 2.85% 12.46 12.98 36,610,548 469,022,681 6.46% 8.18% 1.56% 2006 1.25% 2.85% 11.71 12.00 20,741,324 246,977,890 10.71% 12.44% 0.99% LORD ABBETT FUNDAMENTAL EQUITY CLASS VC 2010 0.65% 2.45% 15.41 15.92 630,717 9,982,968 16.44% 18.26% 0.39% 2009 0.65% 2.20% 13.45 13.45 355,079 4,767,170 25.03% 25.03% 0.39% 2008 12/18/2008 0.75% 1.15% 10.75 10.75 3,019 32,465 1.80% 3.60% 0.41% MFS VIT CORE EQUITY SERVICE CLASS 2010 1.30% 2.65% 10.44 14.91 214,952 2,729,647 13.81% 15.35% 0.92% 2009 1.30% 2.65% 9.16 13.07 268,829 2,974,261 28.78% 30.53% 1.41% 2008 1.30% 2.65% 7.10 10.39 353,475 3,042,352 -40.91% -40.11% 0.42% 2007 1.30% 2.65% 13.49 17.47 424,313 6,074,976 7.97% 9.44% 0.09% 2006 1.30% 2.65% 12.41 16.22 491,941 6,464,047 10.53% 12.04% 0.17% MFS VIT GROWTH INITIAL CLASS 2010 1.40% 2.35% 12.39 17.93 252,322 3,148,241 12.66% 13.73% 0.12% 2009 1.40% 2.35% 10.90 15.88 298,447 3,274,416 34.48% 35.76% 0.32% 2008 1.40% 2.35% 8.03 11.79 378,142 3,066,522 -38.87% -38.29% 0.24% 2007 1.40% 2.35% 13.00 19.24 517,426 6,774,625 18.60% 19.49% 0.00% 2006 1.40% 2.15% 10.88 16.22 687,510 7,517,503 5.60% 6.39% 0.00% MFS VIT GROWTH SERVICE CLASS 2010 0.65% 2.80% 6.13 17.99 1,377,501 14,515,038 11.85% 14.16% 0.00% 2009 0.75% 2.80% 5.43 15.94 1,133,560 10,054,060 33.74% 35.76% 0.03% 2008 1.15% 2.65% 4.02 11.82 934,809 6,038,525 -39.18% -38.35% 0.00% 2007 1.30% 2.65% 6.56 18.98 1,044,638 10,822,665 17.71% 19.31% 0.00% 2006 1.30% 2.65% 5.52 16.05 1,182,456 10,083,571 5.01% 6.22% 0.00% MFS VIT TOTAL RETURN INITIAL CLASS 2010 1.40% 2.35% 13.25 15.28 930,794 14,141,260 7.38% 8.40% 2.78% 2009 1.40% 2.35% 12.25 14.10 1,122,524 15,719,007 15.29% 16.39% 3.99% 2008 1.40% 2.35% 10.55 12.11 1,434,962 17,288,570 -23.95% -23.22% 3.27% 2007 1.40% 2.35% 13.76 15.77 1,988,068 31,231,708 1.79% 2.77% 2.67% 2006 1.40% 2.35% 13.42 15.35 2,647,641 40,422,820 9.30% 10.34% 2.40%
N-49
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ MFS VIT TOTAL RETURN SERVICE CLASS 2010 0.65% 2.85% $ 9.89 $14.10 26,324,559 $ 320,891,076 6.55% 8.92% 2.53% 2009 0.65% 2.85% 9.17 13.04 25,879,249 296,846,148 14.42% 16.96% 3.36% 2008 0.65% 2.85% 8.32 11.24 25,474,232 256,544,245 -24.51% -23.17% 2.88% 2007 1.10% 2.85% 11.02 14.67 25,882,431 346,662,283 1.01% 2.75% 2.31% 2006 1.15% 2.85% 10.91 14.31 24,265,011 322,763,764 8.49% 10.24% 2.04% MFS VIT UTILITIES INITIAL CLASS 2010 1.40% 2.35% 20.57 31.41 528,719 12,359,268 11.17% 12.23% 3.15% 2009 1.40% 2.35% 18.36 28.19 886,526 18,430,756 30.12% 31.37% 5.42% 2008 1.40% 2.35% 14.01 21.62 995,022 15,767,161 -39.12% -38.54% 1.59% 2007 1.40% 2.35% 22.83 35.45 1,272,814 32,805,573 25.18% 26.12% 1.00% 2006 1.40% 2.15% 18.14 28.32 1,684,550 34,300,683 28.47% 29.44% 2.06% MFS VIT UTILITIES SERVICE CLASS 2010 0.65% 2.85% 11.62 31.03 9,659,921 176,418,368 10.32% 12.77% 3.03% 2009 0.65% 2.85% 10.41 27.90 10,128,784 167,168,663 29.14% 32.01% 5.05% 2008 0.65% 2.85% 8.88 21.44 12,430,632 159,125,862 -39.56% -38.49% 1.28% 2007 1.10% 2.85% 14.44 35.18 12,469,463 266,499,134 23.97% 26.10% 0.71% 2006 1.15% 2.85% 13.90 28.15 8,120,398 137,578,687 27.34% 29.34% 1.71% MORGAN STANLEY UIF CAPITAL GROWTH CLASS II 2010 0.65% 1.65% 20.24 20.67 61,149 1,257,711 20.61% 21.82% 0.00% 2009 0.65% 1.65% 16.95 16.95 41,902 709,340 63.92% 63.92% 0.00% 2008 12/22/2008 0.75% 0.75% 10.34 10.34 845 8,735 2.74% 2.74% 0.00% NB AMT MID-CAP GROWTH I CLASS 2010 1.15% 2.80% 12.49 19.87 3,131,370 53,220,622 25.54% 27.62% 0.00% 2009 1.15% 2.80% 9.79 15.59 3,722,577 49,806,670 27.96% 30.09% 0.00% 2008 1.15% 2.80% 7.52 12.00 4,977,879 51,364,563 -44.94% -44.02% 0.00% 2007 1.15% 2.80% 14.26 21.59 6,187,385 114,623,693 19.15% 21.01% 0.00% 2006 1.25% 2.80% 12.42 17.95 5,831,644 90,256,338 11.64% 13.27% 0.00% NB AMT REGENCY I CLASS 2010 1.15% 2.85% 10.63 19.29 3,131,986 55,143,709 22.64% 24.74% 0.68% 2009 1.15% 2.85% 8.61 15.57 3,960,978 56,317,829 42.44% 44.88% 1.67% 2008 1.15% 2.85% 6.01 10.69 5,282,840 52,195,507 -47.35% -46.44% 1.13% 2007 1.15% 2.85% 11.29 20.14 6,588,064 122,165,598 0.40% 2.12% 0.43% 2006 1.15% 2.85% 11.82 19.90 7,198,734 132,629,385 8.04% 9.78% 0.41% OPPENHEIMER GLOBAL SECURITIES SERVICE CLASS 2010 0.65% 2.20% 17.26 17.69 218,942 3,814,587 13.64% 14.95% 0.82% 2009 0.65% 1.80% 15.22 15.22 82,118 1,260,958 37.09% 37.09% 0.17% 2008 12/26/2008 1.65% 1.65% 11.10 11.10 916 10,166 3.71% 3.71% 0.00% PIMCO VIT COMMODITY REAL RETURN ADVISOR CLASS 2010 0.65% 2.80% 14.99 15.53 774,132 11,842,341 20.82% 23.44% 15.68% 2009 7/1/2009 0.65% 2.80% 12.41 12.58 331,446 4,144,190 3.62% 29.90% 6.63% PUTNAM VT GLOBAL HEALTH CARE CLASS IB 2010 1.30% 2.65% 11.08 13.33 247,720 2,883,922 -0.21% 1.14% 1.96% 2009 1.30% 2.65% 11.03 13.18 286,303 3,309,551 22.71% 24.38% 0.00% 2008 1.30% 2.65% 8.92 10.59 537,709 5,006,622 -19.24% -18.15% 0.00% 2007 1.30% 2.65% 10.97 12.94 465,168 5,315,847 -2.96% -1.88% 0.84% 2006 1.30% 2.40% 11.26 13.32 635,211 7,443,615 0.35% 1.46% 0.35% PUTNAM VT GROWTH & INCOME CLASS IB 2010 1.30% 2.35% 10.89 13.41 175,377 2,005,396 11.72% 12.90% 1.61% 2009 1.30% 2.35% 9.71 11.98 217,059 2,203,940 26.80% 28.14% 3.12% 2008 1.30% 2.35% 7.63 9.43 332,327 2,633,726 -40.12% -39.49% 2.24% 2007 1.30% 2.35% 12.68 15.72 432,588 5,673,498 -8.22% -7.25% 1.33% 2006 1.30% 2.35% 13.77 17.31 518,444 7,357,174 13.39% 14.41% 1.54%
(1) Reflects less than a full year of activity. Funds were first received in this option on the commencement date noted or the option was inactive at the date funds were received. N-50 (2) These amounts represent the annualized minimum and maximum contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying funds have been excluded. (3) As the unit value is presented as a range of minimum to maximum values for only those subaccounts which existed for the entire year, some individual contract unit values may not be within the ranges presented as a result of partial year activity. (4) These amounts represent the total return, including changes in value of mutual funds, and reflect deductions for all items included in the fee rate. The total return does not include contract charges deducted directly from policy account values. The total return is not annualized. As the total return is presented as a range of minimum to maximum values for only those subaccounts which existed for the entire year, some individual contract total returns may not be within the ranges presented as a result of partial year activity. (5) These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense guarantee charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. Investment income ratios are not annualized. Note: Fee rate, unit value and total return minimum and maximum are the same where there is only one active contract level charge for the subaccount. 4. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2010:
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B $ 6,067,807 $ 7,966,473 ABVPSF Growth and Income Class B 9,328,419 18,236,273 ABVPSF International Value Class B 65,072,955 10,223,659 ABVPSF Large Cap Growth Class B 182,640 3,076,539 ABVPSF Small/Mid Cap Value Class B 36,686,574 19,842,038 American Century VP Inflation Protection Class II 139,554,485 46,194,601 American Funds Global Growth Class 2 49,431,299 27,810,883 American Funds Global Small Capitalization Class 2 86,812,379 34,107,841 American Funds Growth Class 2 111,852,491 178,264,273 American Funds Growth-Income Class 2 173,685,402 150,628,938 American Funds International Class 2 100,186,070 64,185,524 BlackRock Global Allocation V.I. Class III 380,472,225 3,511,442 Delaware VIP Diversified Income Service Class 292,697,721 33,265,503 Delaware VIP Emerging Markets Service Class 69,822,130 23,692,973 Delaware VIP High Yield Standard Class 10,667,590 7,591,558 Delaware VIP High Yield Service Class 98,300,927 62,843,820 Delaware VIP International Value Equity Standard Class 15,574 74,041 Delaware VIP Limited-Term Diversified Income Service Class 307,589,835 18,564,938 Delaware VIP REIT Standard Class 423,673 1,163,647 Delaware VIP REIT Service Class 14,416,337 14,231,500 Delaware VIP Small Cap Value Standard Class 1,365,716 3,215,757 Delaware VIP Small Cap Value Service Class 29,941,588 42,040,377 Delaware VIP Smid Cap Growth Standard Class 8,655,016 394,305 Delaware VIP Smid Cap Growth Service Class 78,468,396 3,941,459 Delaware VIP Trend Standard Class 1,746,173 11,403,006 Delaware VIP Trend Service Class 10,222,108 86,661,502 Delaware VIP U.S. Growth Service Class 57,214,687 9,428,143 Delaware VIP Value Standard Class 272,341 863,766 Delaware VIP Value Service Class 9,748,027 15,951,064 DWS VIP Alternative Asset Allocation Plus Class B 15,155,926 1,004,565 DWS VIP Equity 500 Index Class A 941,622 4,411,024
N-51
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ------------------------------------------------------------------------------------------------- DWS VIP Equity 500 Index Class B $ 2,672,009 $ 5,591,350 DWS VIP Small Cap Index Class A 261,559 1,804,792 DWS VIP Small Cap Index Class B 2,728,983 6,472,601 Fidelity VIP Contrafund Service Class 2 95,140,720 76,934,802 Fidelity VIP Equity-Income Initial Class 151,505 1,577,146 Fidelity VIP Equity-Income Service Class 2 820,223 10,171,913 Fidelity VIP Growth Initial Class 194,069 1,191,798 Fidelity VIP Growth Service Class 2 16,514,910 13,517,197 Fidelity VIP Mid Cap Service Class 2 80,891,346 17,241,691 Fidelity VIP Overseas Initial Class 115,159 615,628 Fidelity VIP Overseas Service Class 2 11,900,514 9,544,243 FTVIPT Franklin Income Securities Class 2 104,854,662 50,535,934 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 22,770,905 14,288,494 FTVIPT Mutual Shares Securities Class 2 148,093,021 11,730,223 FTVIPT Templeton Global Bond Securities Class 2 51,340,434 97,905,174 FTVIPT Templeton Growth Securities Class 2 4,553,937 16,202,750 Goldman Sachs VIT Large Cap Value Service Class 65,250,812 215,696 Invesco V.I. Capital Appreciation Series I 52,882 601,427 Invesco V.I. Capital Appreciation Series II 110,138 407,835 Invesco V.I. Core Equity Series I 138,901 2,277,412 Invesco V.I. Core Equity Series II 143,472 496,489 Invesco V.I. International Growth Series I 113,636 1,050,986 Invesco V.I. International Growth Series II 191,630 892,409 Janus Aspen Series Balanced Service Class 2,230,867 6,169,392 Janus Aspen Series Enterprise Service Class 189,870 1,999,793 Janus Aspen Series Worldwide Service Class 168,100 406,367 LVIP American Global Growth Service Class II 2,497,637 68 LVIP American Global Small Capitalization Service Class II 3,231,169 -- LVIP American Growth Service Class II 12,017,619 -- LVIP American Growth-Income Service Class II 8,341,179 -- LVIP American International Service Class II 5,816,616 67 LVIP Baron Growth Opportunities Service Class 15,624,750 7,471,066 LVIP BlackRock Inflation Protected Bond Service Class 14,202,264 136,374 LVIP Capital Growth Service Class 71,478,206 6,085,456 LVIP Cohen & Steers Global Real Estate Service Class 15,401,533 8,119,350 LVIP Columbia Value Opportunities Service Class 7,582,597 2,385,664 LVIP Delaware Bond Standard Class 22,048,414 49,554,000 LVIP Delaware Bond Service Class 507,863,008 17,544,631 LVIP Delaware Diversified Floating Rate Service Class 11,878,774 -- LVIP Delaware Foundation Aggressive Allocation Standard Class 405,120 3,422,975 LVIP Delaware Foundation Aggressive Allocation Service Class 5,427,258 13,729,694 LVIP Delaware Growth and Income Service Class 7,593,354 4,901,168 LVIP Delaware Social Awareness Standard Class 260,173 2,444,314 LVIP Delaware Social Awareness Service Class 3,208,709 8,520,939 LVIP Delaware Special Opportunities Service Class 14,233,497 3,534,546 LVIP Global Income Service Class 172,952,405 2,171,039 LVIP Janus Capital Appreciation Standard Class 263,996 552,549 LVIP Janus Capital Appreciation Service Class 12,679,535 9,837,567 LVIP JPMorgan High Yield Service Class 3,174,482 13,815 LVIP MFS International Growth Service Class 47,310,449 13,169,622 LVIP MFS Value Service Class 146,428,382 3,849,317 LVIP Mid-Cap Value Service Class 15,227,445 4,969,575 LVIP Mondrian International Value Standard Class 1,121,646 5,022,696 LVIP Mondrian International Value Service Class 16,684,875 15,303,706 LVIP Money Market Standard Class 28,112,691 66,086,363 LVIP Money Market Service Class 203,919,849 286,450,552 LVIP SSgA Bond Index Service Class 456,750,227 16,411,240 LVIP SSgA Conservative Index Allocation Service Class 2,705,398 19,221 LVIP SSgA Conservative Structured Allocation Service Class 9,924,880 624 LVIP SSgA Developed International 150 Service Class 62,438,949 1,585,076 LVIP SSgA Emerging Markets 100 Service Class 67,456,481 12,325,896
N-52
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ------------------------------------------------------------------------------------------------- LVIP SSgA Global Tactical Allocation Service Class $ 14,956,500 $ 9,451,742 LVIP SSgA International Index Service Class 100,223,470 9,572,057 LVIP SSgA Large Cap 100 Service Class 122,160,059 10,672,618 LVIP SSgA Moderate Index Allocation Service Class 3,927,533 453 LVIP SSgA Moderate Structured Allocation Service Class 27,064,914 413 LVIP SSgA Moderately Aggressive Index Allocation Service Class 4,636,909 131 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 15,688,184 -- LVIP SSgA S&P 500 Index Standard Class 849,157 628,891 LVIP SSgA S&P 500 Index Service Class 167,232,325 11,831,314 LVIP SSgA Small-Cap Index Service Class 49,452,098 12,042,445 LVIP SSgA Small-Mid Cap 200 Service Class 49,927,334 15,829,093 LVIP T. Rowe Price Growth Stock Service Class 27,816,780 9,293,357 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 691,063 623,103 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 14,753,514 5,775,411 LVIP Templeton Growth Service Class 27,297,036 7,462,242 LVIP Turner Mid-Cap Growth Service Class 12,860,395 3,318,912 LVIP Wells Fargo Intrinsic Value Service Class 4,151,221 7,391,604 LVIP Wilshire 2010 Profile Service Class 1,093,554 2,471,024 LVIP Wilshire 2020 Profile Service Class 2,735,322 2,014,686 LVIP Wilshire 2030 Profile Service Class 1,724,084 2,938,028 LVIP Wilshire 2040 Profile Service Class 1,918,878 1,572,248 LVIP Wilshire Conservative Profile Service Class 100,016,276 53,023,360 LVIP Wilshire Moderate Profile Service Class 170,091,498 63,836,022 LVIP Wilshire Moderately Aggressive Profile Service Class 96,088,891 42,669,747 Lord Abbett Fundamental Equity Class VC 4,531,721 726,276 MFS VIT Core Equity Service Class 57,968 689,477 MFS VIT Growth Initial Class 19,720 565,040 MFS VIT Growth Service Class 4,876,445 2,292,597 MFS VIT Total Return Initial Class 537,200 3,058,667 MFS VIT Total Return Service Class 32,840,275 29,021,032 MFS VIT Utilities Initial Class 626,982 7,563,574 MFS VIT Utilities Service Class 21,893,463 28,758,862 Morgan Stanley UIF Capital Growth Class II 595,607 286,455 NB AMT Mid-Cap Growth I Class 1,885,514 11,155,470 NB AMT Regency I Class 2,390,004 15,584,764 Oppenheimer Global Securities Service Class 2,408,572 290,094 PIMCO VIT Commodity Real Return Advisor Class 9,877,647 2,748,399 Putnam VT Global Health Care Class IB 231,215 668,364 Putnam VT Growth & Income Class IB 119,124 543,172
5. INVESTMENTS The following is a summary of investments owned at December 31, 2010:
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ---------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B 1,550,970 $18.99 $ 29,452,922 $ 25,056,874 ABVPSF Growth and Income Class B 9,047,647 17.01 153,900,475 175,664,292 ABVPSF International Value Class B 12,001,926 14.77 177,268,453 193,151,432 ABVPSF Large Cap Growth Class B 478,731 27.08 12,964,047 11,574,592 ABVPSF Small/Mid Cap Value Class B 8,899,255 16.87 150,130,429 127,484,811 American Century VP Inflation Protection Class II 44,559,622 11.09 494,166,212 472,863,630 American Funds Global Growth Class 2 15,434,744 21.48 331,538,292 309,511,021 American Funds Global Small Capitalization Class 2 19,035,219 21.35 406,401,930 352,820,922 American Funds Growth Class 2 35,795,077 54.34 1,945,104,462 1,796,515,700 American Funds Growth-Income Class 2 57,403,504 34.25 1,966,070,007 1,914,689,767 American Funds International Class 2 42,508,787 17.98 764,307,994 739,992,539 BlackRock Global Allocation V.I. Class III 42,538,925 14.49 616,389,023 573,660,717 Delaware VIP Diversified Income Service Class 88,881,909 11.22 997,255,020 912,922,423 Delaware VIP Emerging Markets Service Class 14,125,201 22.13 312,590,699 264,796,309
N-53
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ---------------------------------------------------------------------------------------------------------------------------- Delaware VIP High Yield Standard Class 1,924,374 $ 6.04 $ 11,623,217 $ 10,582,661 Delaware VIP High Yield Service Class 53,142,935 6.02 319,920,469 282,880,599 Delaware VIP International Value Equity Standard Class 31,538 10.61 334,619 448,120 Delaware VIP Limited-Term Diversified Income Service Class 65,144,998 10.09 657,313,026 643,171,255 Delaware VIP REIT Standard Class 556,420 9.58 5,330,507 6,882,261 Delaware VIP REIT Service Class 11,537,195 9.58 110,526,327 142,127,723 Delaware VIP Small Cap Value Standard Class 298,057 31.96 9,525,890 6,995,569 Delaware VIP Small Cap Value Service Class 9,709,535 31.89 309,637,070 261,974,711 Delaware VIP Smid Cap Growth Standard Class 424,822 22.22 9,439,536 8,298,382 Delaware VIP Smid Cap Growth Service Class 3,915,964 21.65 84,780,627 75,046,871 Delaware VIP U.S. Growth Service Class 15,466,134 8.05 124,502,378 104,830,752 Delaware VIP Value Standard Class 374,971 16.49 6,183,266 6,300,172 Delaware VIP Value Service Class 7,596,030 16.47 125,106,621 130,650,948 DWS VIP Alternative Asset Allocation Plus Class B 1,343,989 13.84 18,600,811 17,394,295 DWS VIP Equity 500 Index Class A 1,881,290 13.17 24,776,584 22,245,011 DWS VIP Equity 500 Index Class B 2,659,454 13.17 35,025,009 32,570,811 DWS VIP Small Cap Index Class A 576,123 12.41 7,149,686 6,828,736 DWS VIP Small Cap Index Class B 1,328,876 12.40 16,478,059 16,468,287 Fidelity VIP Contrafund Service Class 2 39,940,429 23.49 938,200,679 950,103,795 Fidelity VIP Equity-Income Initial Class 367,674 19.02 6,993,151 8,308,563 Fidelity VIP Equity-Income Service Class 2 2,426,420 18.75 45,495,370 53,177,585 Fidelity VIP Growth Initial Class 152,418 37.09 5,653,197 6,491,114 Fidelity VIP Growth Service Class 2 1,980,659 36.72 72,729,806 65,556,473 Fidelity VIP Mid Cap Service Class 2 12,565,829 32.13 403,740,103 353,601,659 Fidelity VIP Overseas Initial Class 136,274 16.77 2,285,321 2,393,385 Fidelity VIP Overseas Service Class 2 5,236,166 16.62 87,025,083 88,569,125 FTVIPT Franklin Income Securities Class 2 33,661,292 14.82 498,860,342 498,843,342 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 5,362,905 21.53 115,463,343 98,486,117 FTVIPT Mutual Shares Securities Class 2 31,889,486 15.95 508,637,307 494,693,232 FTVIPT Templeton Global Bond Securities Class 2 34,068,581 19.49 663,996,655 573,055,300 FTVIPT Templeton Growth Securities Class 2 5,754,363 11.01 63,355,539 74,064,956 Goldman Sachs VIT Large Cap Value Service Class 9,207,095 10.23 94,188,587 85,322,671 Invesco V.I. Capital Appreciation Series I 135,953 23.30 3,167,707 3,514,679 Invesco V.I. Capital Appreciation Series II 73,494 22.92 1,684,479 1,785,108 Invesco V.I. Core Equity Series I 393,904 27.03 10,647,234 9,823,317 Invesco V.I. Core Equity Series II 142,030 26.82 3,809,256 3,498,248 Invesco V.I. International Growth Series I 133,880 28.69 3,841,028 2,511,705 Invesco V.I. International Growth Series II 120,371 28.35 3,412,517 2,565,207 Janus Aspen Series Balanced Service Class 814,222 29.42 23,954,408 20,671,032 Janus Aspen Series Enterprise Service Class 218,130 37.53 8,186,405 5,975,711 Janus Aspen Series Worldwide Service Class 63,529 29.80 1,893,160 1,701,988 LVIP American Global Growth Service Class II 204,557 12.46 2,549,397 2,497,585 LVIP American Global Small Capitalization Service Class II 255,570 12.85 3,284,591 3,231,272 LVIP American Growth Service Class II 971,569 12.58 12,222,342 12,019,111 LVIP American Growth-Income Service Class II 691,293 12.26 8,475,943 8,341,515 LVIP American International Service Class II 477,233 12.36 5,896,216 5,816,898 LVIP Baron Growth Opportunities Service Class 2,908,707 30.27 88,046,566 71,824,715 LVIP BlackRock Inflation Protected Bond Service Class 1,383,663 10.13 14,013,741 14,053,136 LVIP Capital Growth Service Class 5,678,755 25.56 145,143,291 116,932,438 LVIP Cohen & Steers Global Real Estate Service Class 9,774,582 7.44 72,674,014 64,304,837 LVIP Columbia Value Opportunities Service Class 1,432,208 10.53 15,075,418 12,482,093 LVIP Delaware Bond Standard Class 14,827,587 13.70 203,063,801 192,385,507 LVIP Delaware Bond Service Class 109,247,513 13.70 1,496,363,181 1,445,272,459 LVIP Delaware Diversified Floating Rate Service Class 1,177,577 10.09 11,877,043 11,878,298 LVIP Delaware Foundation Aggressive Allocation Standard Class 1,051,916 12.38 13,018,509 13,882,037 LVIP Delaware Foundation Aggressive Allocation Service Class 2,402,254 12.37 29,718,286 30,824,481 LVIP Delaware Growth and Income Service Class 1,227,267 28.93 35,502,391 34,218,940 LVIP Delaware Social Awareness Standard Class 405,807 30.57 12,406,734 10,963,629 LVIP Delaware Social Awareness Service Class 1,613,218 30.52 49,240,242 45,757,810 LVIP Delaware Special Opportunities Service Class 685,451 39.29 26,929,988 22,498,117 LVIP Global Income Service Class 20,293,619 11.59 235,182,745 228,350,803
N-54
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ---------------------------------------------------------------------------------------------------------------------------- LVIP Janus Capital Appreciation Standard Class 131,406 $21.50 $ 2,825,619 $ 2,394,495 LVIP Janus Capital Appreciation Service Class 2,980,657 21.35 63,634,037 54,128,148 LVIP JPMorgan High Yield Service Class 305,866 10.37 3,171,835 3,160,360 LVIP MFS International Growth Service Class 7,738,801 12.52 96,858,831 88,878,435 LVIP MFS Value Service Class 17,953,882 22.80 409,366,474 358,070,132 LVIP Mid-Cap Value Service Class 2,877,809 14.18 40,810,224 33,506,540 LVIP Mondrian International Value Standard Class 1,452,691 15.45 22,439,723 23,666,643 LVIP Mondrian International Value Service Class 7,220,401 15.44 111,490,217 119,265,310 LVIP Money Market Standard Class 6,669,078 10.00 66,690,777 66,690,772 LVIP Money Market Service Class 34,355,205 10.00 343,552,049 343,552,040 LVIP SSgA Bond Index Service Class 86,390,257 10.98 948,478,634 924,357,476 LVIP SSgA Conservative Index Allocation Service Class 257,193 10.51 2,703,359 2,686,375 LVIP SSgA Conservative Structured Allocation Service Class 955,531 10.46 9,998,682 9,924,380 LVIP SSgA Developed International 150 Service Class 16,161,347 8.55 138,244,165 117,228,610 LVIP SSgA Emerging Markets 100 Service Class 12,057,943 13.96 168,340,941 121,995,908 LVIP SSgA Global Tactical Allocation Service Class 6,237,888 10.32 64,343,813 68,755,776 LVIP SSgA International Index Service Class 25,022,671 7.93 198,529,872 172,449,794 LVIP SSgA Large Cap 100 Service Class 27,976,368 10.34 289,275,649 230,922,078 LVIP SSgA Moderate Index Allocation Service Class 370,745 10.72 3,975,865 3,927,099 LVIP SSgA Moderate Structured Allocation Service Class 2,573,231 10.63 27,343,157 27,065,966 LVIP SSgA Moderately Aggressive Index Allocation Service Class 430,227 10.86 4,673,551 4,636,806 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 1,457,423 10.92 15,919,430 15,700,723 LVIP SSgA S&P 500 Index Standard Class 228,344 8.82 2,012,856 1,677,747 LVIP SSgA S&P 500 Index Service Class 47,555,704 8.82 419,441,313 353,141,230 LVIP SSgA Small-Cap Index Service Class 6,866,800 17.91 122,970,660 96,395,855 LVIP SSgA Small-Mid Cap 200 Service Class 7,381,169 12.86 94,907,064 72,698,115 LVIP T. Rowe Price Growth Stock Service Class 4,025,600 17.65 71,067,939 59,037,131 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 199,687 14.43 2,881,488 2,121,042 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 3,350,163 14.17 47,475,160 36,748,797 LVIP Templeton Growth Service Class 4,013,036 25.51 102,380,570 102,893,094 LVIP Turner Mid-Cap Growth Service Class 2,636,509 11.18 29,470,899 25,836,065 LVIP Wells Fargo Intrinsic Value Service Class 2,058,971 13.35 27,483,144 26,695,555 LVIP Wilshire 2010 Profile Service Class 814,596 10.56 8,599,695 7,332,355 LVIP Wilshire 2020 Profile Service Class 1,777,968 10.22 18,174,391 15,584,583 LVIP Wilshire 2030 Profile Service Class 1,051,787 10.16 10,684,055 8,819,554 LVIP Wilshire 2040 Profile Service Class 639,188 9.69 6,193,731 5,012,671 LVIP Wilshire Conservative Profile Service Class 31,484,084 12.03 378,847,970 348,157,559 LVIP Wilshire Moderate Profile Service Class 90,383,018 11.93 1,077,817,488 1,015,405,769 LVIP Wilshire Moderately Aggressive Profile Service Class 56,929,577 11.42 650,249,634 642,475,823 Lord Abbett Fundamental Equity Class VC 564,945 17.66 9,976,924 8,111,133 MFS VIT Core Equity Service Class 175,098 15.59 2,729,770 2,174,201 MFS VIT Growth Initial Class 127,516 24.69 3,148,374 3,420,992 MFS VIT Growth Service Class 597,781 24.27 14,508,145 11,417,264 MFS VIT Total Return Initial Class 755,737 18.71 14,139,835 13,984,643 MFS VIT Total Return Service Class 17,386,842 18.48 321,308,840 321,092,395 MFS VIT Utilities Initial Class 488,933 25.27 12,355,335 10,692,416 MFS VIT Utilities Service Class 7,069,900 24.95 176,394,007 169,954,577 Morgan Stanley UIF Capital Growth Class II 61,684 20.39 1,257,742 954,928 NB AMT Mid-Cap Growth I Class 1,941,303 27.42 53,230,537 37,512,567 NB AMT Regency I Class 3,590,462 15.36 55,149,491 49,253,275 Oppenheimer Global Securities Service Class 126,987 30.04 3,814,702 3,292,040 PIMCO VIT Commodity Real Return Advisor Class 1,307,420 9.06 11,845,225 11,086,744 Putnam VT Global Health Care Class IB 235,626 12.24 2,884,064 2,726,515 Putnam VT Growth & Income Class IB 123,566 16.23 2,005,482 2,466,795
N-55 6. CHANGES IN UNITS OUTSTANDING The change in units outstanding for the year ended December 31, 2010, is as follows:
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- ABVPSF Global Thematic Growth Class B 1,085,618 (1,453,893) (368,275) ABVPSF Growth and Income Class B 2,893,477 (3,444,490) (551,013) ABVPSF International Value Class B 13,016,765 (5,190,691) 7,826,074 ABVPSF Large Cap Growth Class B 63,884 (451,420) (387,536) ABVPSF Small/Mid Cap Value Class B 3,922,325 (2,782,329) 1,139,996 American Century VP Inflation Protection Class II 20,682,401 (12,718,173) 7,964,228 American Funds Global Growth Class 2 7,319,108 (5,447,184) 1,871,924 American Funds Global Small Capitalization Class 2 10,007,335 (5,427,981) 4,579,354 American Funds Growth Class 2 26,558,548 (30,318,423) (3,759,875) American Funds Growth-Income Class 2 35,327,133 (29,383,120) 5,944,013 American Funds International Class 2 13,001,343 (11,025,063) 1,976,280 BlackRock Global Allocation V.I. Class III 39,714,371 (7,791,528) 31,922,843 Delaware VIP Diversified Income Service Class 32,856,279 (15,799,052) 17,057,227 Delaware VIP Emerging Markets Service Class 7,077,601 (4,194,784) 2,882,817 Delaware VIP High Yield Standard Class 700,762 (524,846) 175,916 Delaware VIP High Yield Service Class 9,015,344 (7,627,782) 1,387,562 Delaware VIP International Value Equity Standard Class 158 (4,463) (4,305) Delaware VIP Limited-Term Diversified Income Service Class 38,717,379 (14,214,150) 24,503,229 Delaware VIP REIT Standard Class 15,961 (50,539) (34,578) Delaware VIP REIT Service Class 2,522,529 (2,318,799) 203,730 Delaware VIP Small Cap Value Standard Class 67,880 (146,245) (78,365) Delaware VIP Small Cap Value Service Class 5,701,619 (5,852,076) (150,457) Delaware VIP Smid Cap Growth Standard Class 460,962 (18,895) 442,067 Delaware VIP Smid Cap Growth Service Class 6,393,268 (523,650) 5,869,618 Delaware VIP Trend Standard Class 92,555 (624,372) (531,817) Delaware VIP Trend Service Class 1,329,068 (7,551,061) (6,221,993) Delaware VIP U.S. Growth Service Class 7,789,330 (2,446,332) 5,342,998 Delaware VIP Value Standard Class 23,936 (75,462) (51,526) Delaware VIP Value Service Class 2,216,516 (2,719,882) (503,366) DWS VIP Alternative Asset Allocation Plus Class B 1,533,502 (342,584) 1,190,918 DWS VIP Equity 500 Index Class A 75,716 (484,165) (408,449) DWS VIP Equity 500 Index Class B 368,432 (631,043) (262,611) DWS VIP Small Cap Index Class A 15,199 (114,832) (99,633) DWS VIP Small Cap Index Class B 326,127 (629,559) (303,432) Fidelity VIP Contrafund Service Class 2 15,939,049 (13,389,766) 2,549,283 Fidelity VIP Equity-Income Initial Class 6,042 (134,471) (128,429) Fidelity VIP Equity-Income Service Class 2 125,441 (956,956) (831,515) Fidelity VIP Growth Initial Class 22,418 (131,374) (108,956) Fidelity VIP Growth Service Class 2 2,686,129 (2,498,304) 187,825 Fidelity VIP Mid Cap Service Class 2 12,109,804 (6,924,983) 5,184,821 Fidelity VIP Overseas Initial Class 8,678 (51,363) (42,685) Fidelity VIP Overseas Service Class 2 2,044,756 (1,800,939) 243,817 FTVIPT Franklin Income Securities Class 2 15,131,221 (12,193,691) 2,937,530 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 3,449,782 (2,914,212) 535,570 FTVIPT Mutual Shares Securities Class 2 24,210,922 (8,573,301) 15,637,621 FTVIPT Templeton Global Bond Securities Class 2 8,467,491 (11,625,967) (3,158,476) FTVIPT Templeton Growth Securities Class 2 799,205 (1,764,135) (964,930) Goldman Sachs VIT Large Cap Value Service Class 5,707,729 (389,772) 5,317,957 Invesco V.I. Capital Appreciation Series I 8,705 (104,729) (96,024) Invesco V.I. Capital Appreciation Series II 10,718 (41,671) (30,953) Invesco V.I. Core Equity Series I 10,038 (248,089) (238,051) Invesco V.I. Core Equity Series II 13,151 (45,144) (31,993) Invesco V.I. International Growth Series I 3,939 (76,820) (72,881) Invesco V.I. International Growth Series II 15,001 (55,249) (40,248) Janus Aspen Series Balanced Service Class 148,265 (424,010) (275,745) Janus Aspen Series Enterprise Service Class 20,048 (126,311) (106,263) Janus Aspen Series Worldwide Service Class 15,834 (37,502) (21,668) LVIP American Global Growth Service Class II 215,949 (54) 215,895 LVIP American Global Small Capitalization Service Class II 273,922 (1,036) 272,886
N-56
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- LVIP American Growth Service Class II 1,013,881 (11,077) 1,002,804 LVIP American Growth-Income Service Class II 722,088 (5,270) 716,818 LVIP American International Service Class II 494,640 (2,939) 491,701 LVIP Baron Growth Opportunities Service Class 3,348,885 (2,384,227) 964,658 LVIP BlackRock Inflation Protected Bond Service Class 1,474,855 (73,613) 1,401,242 LVIP Capital Growth Service Class 10,151,580 (2,264,483) 7,887,097 LVIP Cohen & Steers Global Real Estate Service Class 4,759,288 (3,533,472) 1,225,816 LVIP Columbia Value Opportunities Service Class 1,337,472 (664,401) 673,071 LVIP Delaware Bond Standard Class 1,632,534 (3,814,956) (2,182,422) LVIP Delaware Bond Service Class 55,026,043 (19,469,385) 35,556,658 LVIP Delaware Diversified Floating Rate Service Class 1,314,659 (86,272) 1,228,387 LVIP Delaware Foundation Aggressive Allocation Standard Class 20,681 (252,900) (232,219) LVIP Delaware Foundation Aggressive Allocation Service Class 580,632 (1,274,499) (693,867) LVIP Delaware Growth and Income Service Class 1,224,078 (902,407) 321,671 LVIP Delaware Social Awareness Standard Class 36,556 (192,101) (155,545) LVIP Delaware Social Awareness Service Class 772,638 (1,059,421) (286,783) LVIP Delaware Special Opportunities Service Class 2,355,302 (1,008,452) 1,346,850 LVIP Global Income Service Class 18,503,099 (3,326,368) 15,176,731 LVIP Janus Capital Appreciation Standard Class 28,207 (49,588) (21,381) LVIP Janus Capital Appreciation Service Class 1,803,924 (1,503,050) 300,874 LVIP JPMorgan High Yield Service Class 311,018 (10,162) 300,856 LVIP MFS International Growth Service Class 8,220,808 (3,827,512) 4,393,296 LVIP MFS Value Service Class 23,585,825 (5,361,811) 18,224,014 LVIP Mid-Cap Value Service Class 3,151,793 (1,667,491) 1,484,302 LVIP Mondrian International Value Standard Class 85,401 (327,403) (242,002) LVIP Mondrian International Value Service Class 2,413,705 (2,234,437) 179,268 LVIP Money Market Standard Class 4,768,704 (8,111,422) (3,342,718) LVIP Money Market Service Class 38,621,313 (46,108,576) (7,487,263) LVIP SSgA Bond Index Service Class 53,021,842 (13,685,328) 39,336,514 LVIP SSgA Conservative Index Allocation Service Class 287,801 (5,413) 282,388 LVIP SSgA Conservative Structured Allocation Service Class 1,056,130 (35,989) 1,020,141 LVIP SSgA Developed International 150 Service Class 9,717,760 (2,577,338) 7,140,422 LVIP SSgA Emerging Markets 100 Service Class 8,393,017 (3,794,619) 4,598,398 LVIP SSgA Global Tactical Allocation Service Class 1,941,400 (1,408,331) 533,069 LVIP SSgA International Index Service Class 16,950,024 (5,161,034) 11,788,990 LVIP SSgA Large Cap 100 Service Class 17,104,763 (5,668,281) 11,436,482 LVIP SSgA Moderate Index Allocation Service Class 387,697 (907) 386,790 LVIP SSgA Moderate Structured Allocation Service Class 2,768,223 (61,399) 2,706,824 LVIP SSgA Moderately Aggressive Index Allocation Service Class 542,516 (304) 542,212 LVIP SSgA Moderately Aggressive Structured Allocation Service Class 1,614,010 (130,775) 1,483,235 LVIP SSgA S&P 500 Index Standard Class 121,009 (93,768) 27,241 LVIP SSgA S&P 500 Index Service Class 26,045,045 (8,056,517) 17,988,528 LVIP SSgA Small-Cap Index Service Class 9,539,452 (4,616,922) 4,922,530 LVIP SSgA Small-Mid Cap 200 Service Class 5,930,468 (3,016,757) 2,913,711 LVIP T. Rowe Price Growth Stock Service Class 4,878,925 (2,571,450) 2,307,475 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 51,533 (46,552) 4,981 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 1,664,203 (952,172) 712,031 LVIP Templeton Growth Service Class 5,920,732 (3,263,039) 2,657,693 LVIP Turner Mid-Cap Growth Service Class 1,961,405 (891,347) 1,070,058 LVIP Wells Fargo Intrinsic Value Service Class 752,803 (1,109,373) (356,570) LVIP Wilshire 2010 Profile Service Class 129,836 (260,632) (130,796) LVIP Wilshire 2020 Profile Service Class 349,888 (253,795) 96,093 LVIP Wilshire 2030 Profile Service Class 204,204 (337,223) (133,019) LVIP Wilshire 2040 Profile Service Class 254,851 (198,822) 56,029 LVIP Wilshire Conservative Profile Service Class 13,472,502 (9,964,020) 3,508,482 LVIP Wilshire Moderate Profile Service Class 26,042,915 (17,670,152) 8,372,763 LVIP Wilshire Moderately Aggressive Profile Service Class 14,245,677 (9,948,514) 4,297,163 Lord Abbett Fundamental Equity Class VC 362,842 (87,204) 275,638 MFS VIT Core Equity Service Class 3,664 (57,541) (53,877) MFS VIT Growth Initial Class 3,977 (50,102) (46,125) MFS VIT Growth Service Class 669,186 (425,245) 243,941 MFS VIT Total Return Initial Class 20,729 (212,459) (191,730)
N-57
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- MFS VIT Total Return Service Class 6,329,473 (5,884,163) 445,310 MFS VIT Utilities Initial Class 25,247 (383,054) (357,807) MFS VIT Utilities Service Class 2,714,593 (3,183,456) (468,863) Morgan Stanley UIF Capital Growth Class II 35,383 (16,136) 19,247 NB AMT Mid-Cap Growth I Class 326,215 (917,422) (591,207) NB AMT Regency I Class 383,025 (1,212,017) (828,992) Oppenheimer Global Securities Service Class 162,561 (25,737) 136,824 PIMCO VIT Commodity Real Return Advisor Class 807,187 (364,501) 442,686 Putnam VT Global Health Care Class IB 20,536 (59,119) (38,583) Putnam VT Growth & Income Class IB 9,063 (50,745) (41,682)
The change in units outstanding for the year ended December 31, 2009, is as follows:
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- Invesco V.I. Capital Appreciation Series I 12,699 (156,987) (144,288) Invesco V.I. Capital Appreciation Series II 76,365 (148,866) (72,501) Invesco V.I. Core Equity Series I 31,519 (276,949) (245,430) Invesco V.I. Core Equity Series II 21,914 (111,386) (89,472) Invesco V.I. International Growth Series I 10,883 (95,487) (84,604) Invesco V.I. International Growth Series II 20,468 (79,647) (59,179) ABVPSF Global Thematic Growth Class B 2,051,800 (1,942,295) 109,505 ABVPSF Growth and Income Class B 3,564,852 (3,952,796) (387,944) ABVPSF International Value Class B 9,156,715 (8,794,534) 362,181 ABVPSF Large Cap Growth Class B 114,801 (625,285) (510,484) ABVPSF Small/Mid Cap Value Class B 3,075,237 (3,724,738) (649,501) American Century VP Inflation Protection Class II 20,122,319 (8,787,665) 11,334,654 American Funds Global Growth Class 2 7,109,487 (8,572,725) (1,463,238) American Funds Global Small Capitalization Class 2 9,257,832 (6,982,691) 2,275,141 American Funds Growth Class 2 43,820,266 (26,880,586) 16,939,680 American Funds Growth-Income Class 2 48,658,004 (26,969,791) 21,688,213 American Funds International Class 2 10,742,728 (17,453,198) (6,710,470) BlackRock Global Allocation V.I. Class III 19,088,726 (1,465,278) 17,623,448 Delaware VIP Diversified Income Service Class 29,854,212 (12,029,835) 17,824,377 Delaware VIP Emerging Markets Service Class 5,518,397 (6,597,643) (1,079,246) Delaware VIP High Yield Standard Class 315,528 (603,686) (288,158) Delaware VIP High Yield Service Class 12,025,876 (10,251,240) 1,774,636 Delaware VIP International Value Equity Standard Class 9 (11,941) (11,932) Delaware VIP Limited-Term Diversified Income Service Class 33,925,422 (9,885,406) 24,040,016 Delaware VIP REIT Standard Class 18,621 (121,373) (102,752) Delaware VIP REIT Service Class 1,405,083 (3,476,780) (2,071,697) Delaware VIP Small Cap Value Standard Class 21,668 (203,727) (182,059) Delaware VIP Small Cap Value Service Class 5,066,013 (8,204,897) (3,138,884) Delaware VIP Trend Standard Class 18,764 (163,977) (145,213) Delaware VIP Trend Service Class 1,237,102 (2,410,929) (1,173,827) Delaware VIP U.S. Growth Service Class 4,701,756 (1,222,133) 3,479,623 Delaware VIP Value Standard Class 30,322 (153,175) (122,853) Delaware VIP Value Service Class 3,741,595 (2,648,011) 1,093,584 DWS VIP Alternative Asset Allocation Plus Class B 644,968 (359,663) 285,305 DWS VIP Equity 500 Index Class A 213,155 (714,332) (501,177) DWS VIP Equity 500 Index Class B 634,556 (828,109) (193,553) DWS VIP Small Cap Index Class A 39,899 (125,542) (85,643) DWS VIP Small Cap Index Class B 248,132 (776,606) (528,474) Fidelity VIP Contrafund Service Class 2 22,176,213 (11,919,294) 10,256,919 Fidelity VIP Equity-Income Initial Class 29,282 (229,417) (200,135) Fidelity VIP Equity-Income Service Class 2 420,667 (1,464,168) (1,043,501) Fidelity VIP Growth Initial Class 38,360 (168,846) (130,486) Fidelity VIP Growth Service Class 2 2,693,974 (3,035,355) (341,381) Fidelity VIP Mid Cap Service Class 2 9,554,461 (12,156,152) (2,601,691) Fidelity VIP Overseas Initial Class 14,086 (79,986) (65,900) Fidelity VIP Overseas Service Class 2 1,588,891 (2,644,162) (1,055,271) FTVIPT Franklin Income Securities Class 2 16,746,396 (22,248,303) (5,501,907)
N-58
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 2,937,950 (3,228,940) (290,990) FTVIPT Mutual Shares Securities Class 2 21,424,713 (15,380,474) 6,044,239 FTVIPT Templeton Global Bond Securities Class 2 23,309,005 (11,522,075) 11,786,930 FTVIPT Templeton Growth Securities Class 2 675,644 (3,675,267) (2,999,623) Goldman Sachs VIT Large Cap Value Service Class 1,835,322 (74,219) 1,761,103 Janus Aspen Series Balanced Service Class 212,086 (493,856) (281,770) Janus Aspen Series Enterprise Service Class 99,320 (223,683) (124,363) Janus Aspen Series Worldwide Service Class 14,476 (69,037) (54,561) LVIP Baron Growth Opportunities Service Class 3,881,281 (3,205,282) 675,999 LVIP Capital Growth Service Class 6,369,699 (621,253) 5,748,446 LVIP Cohen & Steers Global Real Estate Service Class 5,609,889 (5,235,051) 374,838 LVIP Columbia Value Opportunities Service Class 1,145,257 (776,739) 368,518 LVIP Delaware Bond Standard Class 1,888,779 (4,400,453) (2,511,674) LVIP Delaware Bond Service Class 41,358,645 (15,802,571) 25,556,074 LVIP Delaware Foundation Aggressive Allocation Standard Class 141,276 (537,095) (395,819) LVIP Delaware Foundation Aggressive Allocation Service Class 987,418 (2,514,096) (1,526,678) LVIP Delaware Growth and Income Service Class 1,547,249 (720,444) 826,805 LVIP Delaware Social Awareness Standard Class 67,697 (312,840) (245,143) LVIP Delaware Social Awareness Service Class 907,644 (1,236,432) (328,788) LVIP Delaware Special Opportunities Service Class 1,167,924 (1,052,140) 115,784 LVIP Global Income Service Class 5,830,614 (470,399) 5,360,215 LVIP Janus Capital Appreciation Standard Class 51,506 (93,099) (41,593) LVIP Janus Capital Appreciation Service Class 3,118,350 (1,434,567) 1,683,783 LVIP MFS International Growth Service Class 5,817,745 (2,755,833) 3,061,912 LVIP MFS Value Service Class 21,950,143 (4,638,095) 17,312,048 LVIP Mid-Cap Value Service Class 2,511,409 (1,809,436) 701,973 LVIP Mondrian International Value Standard Class 119,087 (500,141) (381,054) LVIP Mondrian International Value Service Class 2,483,843 (3,245,735) (761,892) LVIP Money Market Standard Class 8,620,860 (15,169,098) (6,548,238) LVIP Money Market Service Class 36,640,771 (54,295,093) (17,654,322) LVIP SSgA Bond Index Service Class 41,206,464 (7,409,280) 33,797,184 LVIP SSgA Developed International 150 Service Class 7,356,912 (2,421,576) 4,935,336 LVIP SSgA Emerging Markets 100 Service Class 7,603,284 (2,609,901) 4,993,383 LVIP SSgA International Index Service Class 10,965,027 (2,626,837) 8,338,190 LVIP SSgA Large Cap 100 Service Class 14,491,826 (3,887,356) 10,604,470 LVIP SSgA S&P 500 Index Standard Class 162,490 (55,742) 106,748 LVIP SSgA S&P 500 Index Service Class 21,466,791 (5,468,231) 15,998,560 LVIP SSgA Small-Cap Index Service Class 7,282,574 (2,675,405) 4,607,169 LVIP SSgA Small-Mid Cap 200 Service Class 4,275,270 (1,518,376) 2,756,894 LVIP T. Rowe Price Growth Stock Service Class 4,965,784 (1,194,980) 3,770,804 LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 83,388 (68,064) 15,324 LVIP T. Rowe Price Structured Mid-Cap Growth Service Class 1,734,342 (997,946) 736,396 LVIP Templeton Growth Service Class 5,074,169 (6,061,437) (987,268) LVIP Turner Mid-Cap Growth Service Class 1,292,996 (1,267,301) 25,695 LVIP Wells Fargo Intrinsic Value Service Class 1,551,632 (1,478,058) 73,574 LVIP Wilshire 2010 Profile Service Class 841,033 (637,147) 203,886 LVIP Wilshire 2020 Profile Service Class 842,494 (408,650) 433,844 LVIP Wilshire 2030 Profile Service Class 1,040,025 (463,534) 576,491 LVIP Wilshire 2040 Profile Service Class 993,428 (885,558) 107,870 LVIP SSgA Global Tactical Allocation Service Class 2,014,693 (5,536,363) (3,521,670) LVIP Wilshire Conservative Profile Service Class 15,415,141 (9,606,383) 5,808,758 LVIP Wilshire Moderate Profile Service Class 23,492,422 (17,225,012) 6,267,410 LVIP Wilshire Moderately Aggressive Profile Service Class 11,065,549 (8,578,724) 2,486,825 Lord Abbett Fundamental Equity Class VC 384,624 (32,564) 352,060 MFS VIT Core Equity Service Class 93,874 (178,520) (84,646) MFS VIT Growth Initial Class 15,106 (94,801) (79,695) MFS VIT Growth Service Class 665,211 (466,460) 198,751 MFS VIT Total Return Initial Class 42,515 (354,953) (312,438) MFS VIT Total Return Service Class 6,994,589 (6,589,572) 405,017 MFS VIT Utilities Initial Class 366,541 (475,037) (108,496) MFS VIT Utilities Service Class 3,543,895 (5,845,743) (2,301,848) NB AMT Mid-Cap Growth I Class 401,560 (1,656,862) (1,255,302)
N-59
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------- NB AMT Regency I Class 337,689 (1,659,551) (1,321,862) Oppenheimer Global Securities Service Class 84,436 (3,234) 81,202 PIMCO VIT Commodity Real Return Advisor Class 446,780 (115,334) 331,446 Putnam VT Global Health Care Class IB 26,938 (278,344) (251,406) Putnam VT Growth & Income Class IB 14,145 (129,413) (115,268) Morgan Stanley UIF Capital Growth Class II 43,448 (2,391) 41,057
N-60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Lincoln Life Variable Annuity Account N We have audited the accompanying statements of assets and liabilities of Lincoln Life Variable Annuity Account N ("Variable Account"), comprised of the subaccounts described in Note 1, as of December 31, 2010, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, or for those sub-accounts operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Variable Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of December 31, 2010, by correspondence with the fund companies, or their transfer agent, as applicable. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting Lincoln Life Variable Annuity Account N at December 31, 2010, and the results of their operations and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 6, 2011 N-61 Lincoln Life Variable Annuity Account N PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) List of Financial Statements 1. Part A The Table of Condensed Financial Information is included in Part A of this Registration Statement. (Not Applicable) 2. Part B The following financial statements for the Variable Account are included in Part B of this Registration Statement. Statement of Assets and Liabilities - December 31, 2010 Statement of Operations - Year ended December 31, 2010 Statements of Changes in Net Assets - Years ended December 31, 2010 and 2009 Notes to Financial Statements - December 31, 2010 Report of Independent Registered Public Accounting Firm 3. Part B The following consolidated financial statements for The Lincoln National Life Insurance Company are included in Part B of this Registration Statement. Consolidated Balance Sheets - December 31, 2010 and 2009 Consolidated Statements of Income - Years ended December 31, 2010, 2009, and 2008 Consolidated Statements of Shareholder's Equity - Years ended December 31, 2010, 2009, and 2008 Consolidated Statements of Cash Flows - Years ended December 31, 2010, 2009, and 2008 Notes to Consolidated Financial Statements - December 31, 2010 Report of Independent Registered Public Accounting Firm (b) List of Exhibits (1) Resolutions of the Board of Directors of The Lincoln National Life Insurance Company establishing Separate Account N incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-40937) filed on November 25, 1997. (2) Not Applicable (3) (a) Broker-Dealer Selling Agreement among The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York and Lincoln Financial Distributors, Inc. incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-170897) filed on April 8, 2011. (b) Amended and Restated Principal Underwriting Agreement dated May 1, 2007 between The Lincoln National Life Insurance Company and Lincoln Financial Distributors, Inc. incorporated herein by reference to Post-Effective Amendment No. 24 (File No. 333-61554) filed on December 18, 2007. (4) (a) Annuity Contract (30070-B) incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-36304) filed on August 8, 2001. (b) Contract Specifications (30070-CP Rollover) (To Be Filed by Amendment) (c) Annuity Payment Option Rider (32147) incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-36304) filed on August 8, 2001. (d) Interest Adjusted Fixed Account Rider (32143) incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-36304) filed on August 8, 2001. (e) DCA Fixed Account Rider (32145) incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-135039) filed on June 15, 2006. (f) IRA Contract Amendment (28877-E) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (g) IRA Contract Amendment (28877) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 40937) filed on April 24, 2003. (h) Roth IRA Endorsement (5305) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (i) Estate Enhancement Benefit Rider (32151-A) incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-35780) filed on April 22, 2003. (j) EGMDB Rider (32149 5/03) incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-35780) filed on April 22, 2003. (k) Guarantee of Principal Rider (32148 5/03) incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-35780) filed on April 22, 2003. (l) Variable Annuity Death Benefit Rider (DB-3 1/06) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on April 13, 2007. (m) Allocation Amendment (AR503 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 19, 2006. (n) Variable Annuity Rider (LSSA 7/06) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on December 21, 2006. (o) SmartIncome Rider and Amendment (AE 525 2/09) incorporated herein by reference to Post-Effective Amendment No. 38 (File No. 333-61554) filed on November 20, 2009. (p) Variable Annuity Living Benefits Rider (LINC 2.0) (AR-529 8/10) incorporated herein by reference to Post-Effective Amendment No. 44 (File No. 333-40937) filed on October 28, 2010. (q) Guaranteed Income Benefit Rider (GIB v4) (AR-528 8/10) incorporated herein by reference to Post-Effective Amendment No. 44 (File No. 333-40937) filed on October 28, 2010. (r) Contract Benefit Data (CBD 8/10) incorporated herein by reference to Post-Effective Amendment No. 44 (File No. 333-40937) filed on October 28, 2010. (s) Variable Annuity Payment Option Rider (I4LA-NQ 8/10) incorporated herein by reference to Post-Effective Amendment No. 44 (File No. 333-40937) filed on October 28, 2010. (t) Variable Annuity Payment Option Rider (I4LA-Q 8/10) incorporated herein by reference to Post-Effective Amendment No. 44 (File No. 333-40937) filed on October 28, 2010. (5) ChoicePlus Rollover Application (ANF06747 CPAR 1/08) (6) (a) Articles of Incorporation of The Lincoln National Life Insurance Company incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-04999) filed on September 24, 1996. (b) By-laws of The Lincoln National Life Insurance Company incorporated herein by reference to Post-Effective Amendment No. 3 on Form N-6 (File No. 333-118478) filed on April 5, 2007. (7) (a) Automatic Indemnity Reinsurance Agreement Amended and Restated as of October 1, 2009 between The Lincoln National Life Insurance Company and Lincoln National Reinsurance Company (Barbados) Limited incorporated herein by reference to Post-Effective Amendment No. 43 (File No. 033-26032) filed on April 7, 2010. (b) Automatic Reinsurance Agreement dated July 1, 2007 between The Lincoln National Life Insurance Company and Swiss Re Life & Health America Inc. incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-138190) filed on April 8, 2008. (i) Amendments to Automatic Reinsurance Agreement dated July 1, 2007 between The Lincoln National Life Insurance Company and Swiss Re Life & Health America Inc. incorporated herein by reference to Post-Effective Amendment No. 40 (File No. 333-40937) filed on April 7, 2010. (8) (a) Fund Participation Agreements and Amendments between The Lincoln National Life Insurance Company and: (i) AllianceBernstein Variable Products Series Fund incorporated herein by reference to Post-Effective Amendment No. 13 on Form N-6 (File No. 333-146507) filed on April 1, 2010. (ii) BlackRock Variable Series Funds, Inc. incorporated herein by reference to Post-Effective Amendment No. 16 on Form N-6 (File No. 333-146507) filed on April 1, 2011. B-2 (iii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 13 on Form N-6 (File No. 333-146507) filed on April 1, 2010. (v) DWS Variable Series II incorporated herein by reference to Post-Effective Amendment No. 13 on Form N-6 (File No. 333-146507) filed on April 1, 2010. (vi) Fidelity Variable Insurance Products Fund incorporated herein by reference to Post-Effective Amendment No. 13 on Form N-6 (File No. 333-146507) filed on April 1, 2010. (vii) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 16 on Form N-6 (File No. 333-146507) filed on April 1, 2011. (viii) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 16 on Form N-6 (File No. 333-146507) filed on April 1, 2011. (ix) MFS Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (x) PIMCO Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 16 on Form N-6 (File No. 333-146507) filed on April 1, 2011. (b) Rule 22c-2 Agreements between The Lincoln National Life Insurance Company and: (i) BlackRock Variable Series Funds, Inc. incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-68842) filed on June 22, 2009. (ii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 29 (File No. 333-61554) filed on March 16, 2009. (iii) Fidelity Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (iv) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (v) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (vi) MFS Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (c) Accounting and Financial Administration Services Agreement dated October 1, 2007 among Mellon Bank, N.A., The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York is incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-147673) filed on November 28, 2007. (9) Opinion and Consent of Mary Jo Ardington, Associate General Counsel of The Lincoln National Life Insurance Company as to the legality of securities being issued (10) (a) Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (b) Power of Attorney - Principal Officers and Directors of The Lincoln National Life Insurance Company incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-170529) filed on April 8, 2011. (11) Not applicable (12) Not applicable (13) Organizational Chart of the Lincoln National Insurance Holding Company System incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-145531) filed on August 26, 2010. Item 25. Directors and Officers of the Depositor The following list contains the officers and directors of The Lincoln National Life Insurance Company who are engaged directly or indirectly in activities relating to Lincoln Life Variable Annuity Account N as well as the contracts. The list also shows The Lincoln National Life Insurance Company's executive officers. B-3
Name Positions and Offices with Depositor --------------------------- -------------------------------------------------------------------- Dennis R. Glass** President and Director Chuck C. Cornelio*** Executive Vice President, Chief Administrative Officer and Director Randal J. Freitag** Executive Vice President, Chief Financial Officer and Director Frederick J. Crawford** Executive Vice President and Director Mark E. Konen*** Senior Vice President and Director Keith J. Ryan* Vice President and Director Charles A. Brawley, III** Vice President and Secretary C. Phillip Elam, II*** Senior Vice President and Chief Investment Officer Anant Bhalla** Vice President and Treasurer
* Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802 ** Principal business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087 *** Principal business address is 100 North Greene Street, Greensboro, NC 27401 Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant See Exhibit 13: Organizational Chart of the Lincoln National Insurance Holding Company System. Item 27. Number of Contractowners As of February 28, 2011 there were 179,792 contract owners under Account N. Item 28. Indemnification (a) Brief description of indemnification provisions. In general, Article VII of the By-Laws of The Lincoln National Life Insurance Company (Lincoln Life) provides that Lincoln Life will indemnify certain persons against expenses, judgments and certain other specified costs incurred by any such person if he/she is made a party or is threatened to be made a party to a suit or proceeding because he/she was a director, officer, or employee of Lincoln Life, as long as he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of, or act opposed to the best interests of, Lincoln Life. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officers, and employees of Lincoln Life in connection with suits by, or in the right of, Lincoln Life. Please refer to Article VII of the By-Laws of Lincoln Life (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) Lincoln Financial Distributors, Inc. ("LFD") currently serves as Principal Underwriter for: Lincoln National Variable Annuity Fund A (Group & Individual); Lincoln National Variable Annuity Account C; Lincoln National Flexible Premium Variable Life Account D; Lincoln National Variable Annuity Account E; Lincoln National Flexible Premium Variable Life Account F; Lincoln National Flexible Premium Variable Life Account G; Lincoln National Variable Annuity Account H; Lincoln Life & Annuity Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life Account J; Lincoln Life Flexible Premium Variable Life B-4 Account K; Lincoln National Variable Annuity Account L; Lincoln Life & Annuity Variable Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M; Lincoln Life & Annuity Flexible Premium Variable Life Account M; Lincoln Life Variable Annuity Account N; Lincoln New York Account N for Variable Annuities; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible Premium Variable Life Account R; LLANY Separate Account R for Flexible Premium Variable Life Insurance; Lincoln Life Flexible Premium Variable Life Account S; LLANY Separate Account S for Flexible Premium Variable Life Insurance; Lincoln Life Variable Annuity Account T; Lincoln Life Variable Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account Y and Lincoln Life & Annuity Flexible Premium Variable Life Account Y. (b) Officers and Directors of Lincoln Financial Distributors, Inc.:
Name Positions and Offices with Underwriter ------------------------ ------------------------------------------------ Wilford H. Fuller* President, Chief Executive Officer and Director David M. Kittredge* Senior Vice President Anant Bhalla* Vice President and Treasurer Patrick J. Caulfield** Vice President and Chief Compliance Officer Joel Schwartz* Vice President and Director Keith J. Ryan*** Vice President and Chief Financial Officer Patricia A. Insley* Director Thomas P. O'Neill* Vice President and Director Linda E. Woodward*** Secretary
* Principal Business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087 ** Principal Business address is 350 Church Street, Hartford, CT 06103 *** Principal Business address is 1300 S. Clinton Street, Ft. Wayne, IN 46802 (c) N/A Item 30. Location of Accounts and Records All accounts, books, and other documents, except accounting records, required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by The Lincoln National Life Insurance Company, 1300 South Clinton Street, Fort Wayne, Indiana 46802. The accounting records are maintained by The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258. Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) Registrant undertakes that it will include either (1) as part of any application to purchase a Certificate or an Individual Contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or a similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to Lincoln Life at the address or phone number listed in the Prospectus. (d) Lincoln Life hereby represents that the fees and charges deducted under the contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Lincoln Life. (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 B-5 a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has caused this Pre-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf, in the City of Fort Wayne, and State of Indiana on this 11th day of May, 2011. Lincoln Life Variable Annuity Account N (Registrant) Lincoln ChoicePlusSM Rollover By: /s/ Delson R. Campbell ------------------------------------ Delson R. Campbell Assistant Vice President, The Lincoln National Life Insurance Company (Title) THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Depositor) By: /s/ Brian A. Kroll ------------------------------------ Brian A. Kroll (Signature-Officer of Depositor) Vice President, The Lincoln National Life Insurance Company (Title)
(b) As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in their capacities indicated on May 11, 2011. Signature Title * President and Director (Principal Executive Officer) ------------------------------ Dennis R. Glass * Executive Vice President, Chief Administrative Officer and Direc- Charles C. Cornelio tor * Executive Vice President and Director ------------------------------ Frederick J. Crawford * Senior Vice President and Chief Investment Officer ------------------------------ C. Phillip Elam II * Executive Vice President, Chief Financial Officer and Director ------------------------------ (Principal Financial Officer) Randal J. Freitag * Senior Vice President and Director ------------------------------ Mark E. Konen * Vice President and Director ------------------------------ Keith J. Ryan *By:/s/ Delson R. Campbell Pursuant to a Power of Attorney --------------------------- Delson R. Campbell
B-6