485BPOS 1 a2183092z485bpos.txt 485BPOS As filed with the Securities and Exchange Commission on April 10, 2008 1933 Act Registration No. 333-36316 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 / / POST-EFFECTIVE AMENDMENT NO. 37 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 145 /X/ Lincoln Life Variable Annuity Account N (Exact Name of Registrant) Lincoln ChoicePlus Access, Lincoln ChoicePlus II Access, and Lincoln ChoicePlus Assurance (C Share) 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 Dennis L. Schoff, 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: Continuous It is proposed that this filing will become effective: / / immediately upon filing pursuant to paragraph (b) of Rule 485 /x/ on April 30, 2008, pursuant to paragraph (b) of Rule 485 / / 60 days after filing pursuant to paragraph (a)(1) of Rule 485 / / on ______________, pursuant to paragraph (a)(1) of Rule 485 Title of Securities being registered: Interests in a separate account under individual flexible payment deferred variable annuity contracts. Prospectus 1 Lincoln ChoicePlusSM Access 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 46802-7866 www.LFG.com 1-888-868-2583 This prospectus describes the individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). It is primarily for use with nonqualified plans and qualified retirement plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a variable or fixed amount, if available, or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. In the alternative, you generally may choose to receive a death benefit upon the death of the annuitant. The minimum initial purchase payment for the contract is $10,000. Additional purchase payments may be made to the contract and must be at least $100 per payment ($25 if transmitted electronically), and at least $300 annually. Except as noted below, you choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. If your purchase payments are in the fixed account, we guarantee 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, a market value adjustment may be applied to any withdrawal, surrender or transfer from the fixed account before the expiration date of a guaranteed period. 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: AIM Variable Insurance Funds (Series I): AIM V.I. Capital Appreciation Fund AIM V.I. Core Equity Fund AIM V.I. International Growth Fund AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Technology Portfolio AllianceBernstein VPS Growth and Income Portfolio AllianceBernstein VPS International Value Portfolio AllianceBernstein VPS Large Cap Growth Portfolio AllianceBernstein VPS Small/Mid Cap Value Portfolio American Century Investments Variable Products (Class II): American Century Investments VP Inflation Protection Fund American Funds Insurance SeriesSM (Class 2): American Funds Global Growth Fund American Funds Global Small Capitalization Fund American Funds Growth Fund American Funds Growth-Income Fund American Funds International Fund 1 Delaware VIP Trust (Service Class): Delaware VIP Capital Reserves Series Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP High Yield Series Delaware VIP REIT Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP U.S. Growth Series Delaware VIP Value Series DWS Investments VIT Funds (Class A): DWS Equity 500 Index VIP DWS Small Cap Index VIP Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund Portfolio Fidelity (Reg. TM) VIP Equity-Income Portfolio Fidelity (Reg. TM) VIP Growth Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Fidelity (Reg. TM) VIP Overseas Portfolio Franklin Templeton Variable Insurance Products Trust (Class 2): FTVIPT Franklin Income Securities Fund FTVIPT Franklin Small-Mid Cap Growth Securities Fund FTVIPT Mutual Shares Securities Fund FTVIPT Templeton Global Income Securities Fund FTVIPT Templeton Growth Securities Fund Janus Aspen Series (Service Class): Janus Aspen Balanced Portfolio Janus Aspen Mid Cap Growth Portfolio Janus Aspen Worldwide Growth Portfolio Lincoln Variable Insurance Products Trust (Standard Class): LVIP Delaware Bond Fund LVIP Delaware Social Awareness Fund LVIP Mondrian International Value Fund LVIP Money Market Fund LVIP SSGA S&P 500 Index Fund** (formerly S&P 500 Index Fund) Lincoln Variable Insurance Products Trust (Service Class) LVIP Baron Growth Opportunities Fund LVIP Capital Growth Fund LVIP Cohen & Steers Global Real Estate Fund LVIP Columbia Value Opportunities Fund (formerly Value Opportunities Fund) LVIP Delaware Growth and Income Fund Lincoln Variable Insurance Products Trust (Service Class) LVIP Delaware Special Opportunities Fund LVIP Janus Capital Appreciation Fund LVIP Marsico International Growth Fund LVIP MFS Value Fund LVIP Mid-Cap Value Fund LVIP SSgA Bond Index Fund* LVIP SSgA Developed International 150 Fund* LVIP SSgA Emerging Markets 100 Fund* LVIP SSgA International Index Fund* LVIP SSgA Large Cap 100 Fund* LVIP SSgA Small/Mid Cap 200 Fund* LVIP SSgA Small-Cap Index Fund (formerly Small-Cap Index Fund) LVIP T. Rowe Price Growth Stock Fund LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP Templeton Growth Fund LVIP Turner Mid-Cap Growth Fund (formerly Mid-Cap Growth Fund) LVIP UBS Global Asset Allocation Fund LVIP Wilshire 2010 Profile Fund LVIP Wilshire 2020 Profile Fund LVIP Wilshire 2030 Profile Fund LVIP Wilshire 2040 Profile Fund LVIP Wilshire Aggressive Profile Fund LVIP Wilshire Conservative Profile Fund LVIP Wilshire Moderate Profile Fund LVIP Wilshire Moderately Aggressive Profile Fund MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Core Equity Series MFS (Reg. TM) VIT Growth Series (formerly Emerging Growth Series) MFS (Reg. TM) VIT Total Return Series MFS (Reg. TM) VIT Utilities Series Neuberger Berman Advisers Management Trust (I Class): Neuberger Berman AMT Mid-Cap Growth Portfolio Neuberger Berman AMT Regency Portfolio Putnam Variable Trust (Class IB): Putnam VT Growth & Income Fund Putnam VT Health Sciences Fund * Not all funds are available in all contracts. Refer to Description of Funds for specific information regarding the availability of funds. **"S&P 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing the product. (Please see the Statement of Additional Information which sets forth additional disclaimers and limitations of liability on behalf of S&P.) This prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectuses for the funds that accompany this prospectus, and keep all prospectuses for future reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI is incorporated by reference into this prospectus and is legally part of this prospectus. For a free copy of the SAI, write: The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, 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. 2 April 30, 2008 Table of Contents
Item Page Special Terms 4 Expense Tables 5 Summary of Common Questions 7 The Lincoln National Life Insurance Company 9 Variable Annuity Account (VAA) 9 Investments of the Variable Annuity Account 10 Charges and Other Deductions 15 The Contracts 19 Purchase Payments 19 Transfers On or Before the Annuity Commencement Date 20 Surrenders and Withdrawals 23 Death Benefit 25 Investment Requirements - Option 1 29 Investment Requirements - Option 2 30 Lincoln Lifetime IncomeSM Advantage 32 Lincoln SmartSecurity (Reg. TM) Advantage 41 i4LIFE (Reg. TM) Advantage 46 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 50 4LATER (Reg. TM) Advantage 53 Annuity Payouts 57 Fixed Side of the Contract 59 Distribution of the Contracts 61 Federal Tax Matters 62 Additional Information 66 Voting Rights 66 Return Privilege 67 Other Information 67 Legal Proceedings 67 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 68 Appendix A - Condensed Financial Information A-1
3 Special Terms In this prospectus, the following terms have the indicated meanings: 4LATER (Reg. TM) Advantage or 4LATER (Reg. TM) - An option that provides an Income Base during the accumulation period, which can be used to establish a Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage in the future. Account or variable annuity account (VAA) - The segregated investment account, Account N, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date. 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. Guaranteed Income Benefits - Options that each provide a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. 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 - Provides minimum guaranteed lifetime periodic withdrawals that may increase. The Lincoln Lifetime IncomeSM Advantage Plus may provide an amount equal to the excess of the initial Guaranteed Amount over the current contract value. Lincoln SmartSecurity (Reg. TM) Advantage - Provides minimum guaranteed periodic withdrawals (for life, if the 1 Year Automatic Step-Up option is chosen), 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 Smart Security (Reg. TM) Advantage, Lincoln Lifetime Income AdvantageSM, 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit). 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 is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 4 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 the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: We may apply the market value adjustment to amounts being withdrawn, surrendered or transferred from a guaranteed period account only (except for dollar cost averaging, portfolio rebalancing and cross-reinvestment, withdrawals up to the annual withdrawal limit under the Lincoln SmartSecurity (Reg. TM) Advantage and regular income payments under i4LIFE (Reg. TM) Advantage). See Fixed Side of the Contract. 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. Annual Account Fee: $35* Separate Account Annual Expenses (as a percentage of average daily net assets in the subaccounts):
EEB Rider (in combination EEB Rider 5% step up with 5% step up) (without 5% step up) death benefit EGMDB ------------------ ---------------------- --------------- ------ o Mortality and expense risk charge 1.75% 1.70% 1.65% 1.50% o Administrative charge 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o Total annual charge for each subaccount 1.90% 1.85% 1.80% 1.65%
*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 Rider Charges: Lincoln Lifetime IncomeSMAdvantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.75% o Additional charge for Lincoln Lifetime IncomeSM Advantage Plus* 0.15%
*The annual percentage charge is assessed against the Guaranteed Amount (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. These changes to the Guaranteed Amount are discussed below. This charge is deducted from the contract value on a quarterly basis. See Charges and Other Deductions for further information. Lincoln SmartSecurity (Reg. TM) Advantage:
o Guaranteed maximum annual percentage charge* o Current annual percentage charge* Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Advantage - 5 Year Elective Step-Up option Step-Up option Step-Up option - Single Life (and prior version) - Joint Life --------------------------------- ----------------------------------- -------------------------------- o 0.95% 1.50% 1.50% o 0.45% 0.65% 0.80%
*The annual percentage charge is assessed against 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 for further information. 5 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.50%
*The annual percentage charge for the 4LATER (Reg. TM) Advantage is multiplied by the Income Base (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, automatic 15% Enhancements, and Resets and decreased for withdrawals. The 4LATER (Reg. TM) charge is deducted from the subaccounts on a quarterly basis. The next table describes charges that apply only when i4LIFE (Reg. TM) Advantage is in effect. The charge for any Guaranteed Income Benefit, if elected, is added to the i4LIFE (Reg. TM) Advantage charge and the total is deducted from your average daily account value. i4LIFE (Reg. TM) Advantage Payout Phase (On and After the Periodic Income Commencement Date): i4LIFE (Reg. TM) Advantage (as a daily percentage of average account value):
Enhanced Guaranteed Minimum Death Benefit (EGMDB) Account Value Death Benefit -------------------- ---------------------------- o Annual charge* 2.10% 1.90%
*During the Lifetime Income Period, the charge will be the same rate as the i4LIFE (Reg. TM) Advantage Account Value Death Benefit. Optional Rider Charges : i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
4LATERSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 2.10% with the 4LATERSM Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.60%. The next table describes the separate account annual expenses you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
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, 2007. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Maximum Minimum --------- -------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses): 6.31% 0.31% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.73% 0.28%
* 39 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, 2009. 6 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 EEB with 5% Step-Up death benefit and Lincoln Lifetime IncomeSM Advantage Plus 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 -------- --------- --------- --------- $962 $2,829 $4,631 $8,913
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 -------- --------- --------- --------- $962 $2,829 $4,631 $8,913
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 or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage including the Guaranteed Income Benefit Rider, 4LATER (Reg. TM) Advantage and Annuity Payouts. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. Summary of Common Questions What kind of contract am I buying? It is an individual variable or fixed and/or market value adjusted, if applicable, annuity contract between you and Lincoln Life. 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 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. 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, 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, you will be subject to certain requirements for your subaccount investments. You may be limited in how much you can invest in certain subaccounts. Different Investment Requirements apply to different riders. See The Contracts - Investment Requirements. What are my investment choices? 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. 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 received and the value of each annuity unit on payout days. See The Contracts. What charges do I pay under the contract? We will deduct any applicable premium tax from purchase payments or contract value 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. 7 The surrender, withdrawal or transfer of value from a fixed account guaranteed period may be subject to the market value 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. 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. What is Lincoln Lifetime IncomeSM Advantage? Lincoln Lifetime IncomeSM Advantage is a rider that you may purchase for an additional charge and which provides minimum guaranteed, periodic withdrawals for your life (Single Life Option) or for the lives of you and your spouse (Joint Life Option) regardless of the investment performance of the contract provided certain conditions are met. Withdrawals are based on the Guaranteed Amount which is equal to the initial purchase payment (or contract value if elected after contract issue). The Guaranteed Amount is not available as a separate benefit upon death or surrender and is increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the step-up to 200% of the initial Guaranteed Amount and is decreased by withdrawals in accordance with provisions described later in this prospectus. See The Contracts-Lincoln Lifetime IncomeSM Advantage. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage 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 Lincoln Lifetime IncomeSM Advantage Plus? Lincoln Lifetime IncomeSM Advantage Plus is available for an additional fee and provides an amount equal to the excess of the initial Guaranteed Amount over the current contract value on the seventh benefit year anniversary so long as no withdrawals have been taken and you adhere to certain Investment Requirements. Lincoln Lifetime IncomeSM Advantage Plus may only be purchased in addition to Lincoln Lifetime IncomeSM Advantage. What are Living Benefit Riders? Living benefit riders are optional riders available to purchase for an additional fee. These riders provide a type of minimum guarantee if you meet certain conditions. These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders at the end of this prospectus. 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. There are two options available to reset the Guaranteed Amount to the current contract value. 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 - Lincoln SmartSecurity (Reg. TM) Advantage. 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 are the Guaranteed Income Benefits? The Guaranteed Income Benefits provide a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. They are available either through 4LATER (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage or may be purchased at the time you elect i4LIFE (Reg. TM) Advantage. 4LATER (Reg. TM) Advantage is purchased prior to the time you elect i4LIFE (Reg. TM) Advantage and provides a guaranteed value, the Income Base, which can be used to establish the Guaranteed Income Benefit floor in the future. The i4LIFE (Reg. TM) Guaranteed Income Benefit or Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period. The i4LIFE (Reg. TM) Guaranteed Income Benefit does not have an Income Base; the minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. By electing one of 8 these benefits, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage Guaranteed Income Benefit. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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? Appendix A to this prospectus provides more information about accumulation unit values. 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. 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. During extended periods of low interest rates, 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. Guarantees provided within death benefit options and living benefit riders are backed by the claims-paying ability of Lincoln Life. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of financial products and solutions through financial advisors: mutual funds, managed accounts, retirement solutions, life insurance, 401(k) and 403(b) plans, savings plans, institutional investments 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. 9 Financial Statements The financial statements of the VAA and the 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 0.46%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the Contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings. The AllianceBernstein, American Century, American Funds, Delaware, Fidelity, Franklin, Janus, Lincoln, MFS and Putnam Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.35% 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. Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for the fund. You should read each fund prospectus carefully before investing. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. 10 AIM Variable Insurance Funds, advised by AIM Advisors, Inc. o Capital Appreciation Fund (Series I): Capital appreciation. o Core Equity Fund (Series I): Long-term growth. o International Growth Fund (Series I): Long-term growth. AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein VPS Global Technology Portfolio (Class B): Maximum capital appreciation. o AllianceBernstein VPS Growth and Income Portfolio (Class B): Growth and income. o AllianceBernstein VPS International Value Portfolio (Class B): Long-term growth. o AllianceBernstein VPS Large Cap Growth Portfolio (Class B): Maximum capital appreciation. o AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B): Long-term growth. American Century Investments Variable Products, advised by American Century o Inflation Protection Fund (Class II): Long-term total return. American Funds Insurance SeriesSM, advised by Capital Research and Management Company o Global Growth Fund (Class 2): Long-term growth. o Global Small Capitalization Fund (Class 2): Long-term growth. o Growth Fund (Class 2): Long-term growth. o Growth-Income Fund (Class 2): Growth and income. o International Fund (Class 2): Long-term growth. Delaware VIP Trust, advised by Delaware Management Company o Capital Reserves Series (Service Class): Current income. o Diversified Income Series (Service Class): Total return. o Emerging Markets Series (Service Class): Capital appreciation. o High Yield Series (Service Class): Capital appreciation. o REIT Series (Service Class): Total return. o Small Cap Value Series (Service Class): Capital appreciation. o Trend Series (Service Class): Capital appreciation. o U.S. Growth Series (Service Class): Capital appreciation. o Value Series (Service Class): Long-term capital appreciation. DWS Investments VIT Funds, advised by Deutsche Asset Management Inc. and subadvised by Northern Trust Investments, Inc. o DWS Equity 500 Index VIP (Class A): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) o DWS Small Cap Index VIP (Class A): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company o Contrafund (Reg. TM) Portfolio (Service Class 2): Long-term capital appreciation. o Equity-Income Portfolio (Service Class 2): Reasonable income. o Growth Portfolio (Service Class 2): Capital appreciation. o Mid Cap Portfolio (Service Class 2): Long-term growth. o VIP Overseas Portfolio (Service Class 2): Long-term growth. 11 Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund and the Franklin Small-Mid Cap Growth Securities Fund, by Templeton Global Advisors Limited for the Templeton Global Income Securities Fund and the Templeton Growth Securities Fund, and by Franklin Mutual Advisors, LLC for the Mutual Shares Securities Fund. o Franklin Income Securities Fund (Class 2): Current income. o Franklin Small-Mid Cap Growth Securities Fund (Class 2): Long-term capital growth. o Mutual Shares Securities Fund (Class 2): Capital appreciation. o Templeton Global Income Securities Fund (Class 2): Total return. o Templeton Growth Securities Fund (Class 2): Long-term growth. (Subadvised by Templeton Asset Management Ltd.) Janus Aspen Series, advised by Janus Capital Management LLC o Balanced Portfolio (Service Class): Long-term growth and current income. o Mid Cap Growth Portfolio (Service Class): Long-term growth. o Worldwide Growth Portfolio (Service Class): Long-term growth. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP Baron Growth Opportunities Fund (Service Class): Long-term growth. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital appreciation. (Subadvised by Wellington Management) o LVIP Cohen & Steers Global Real Estate Fund (Service Class): Total Return. (Subadvised by Cohen & Steers Capital Management) o LVIP Columbia Value Opportunities Fund (Service Class): Long-term capital appreciation. (Subadvised by Columbia Management Advisors, LLC) (formerly LVIP Value Opportunities Fund) o LVIP Delaware Bond Fund (Standard Class): Current income. (Subadvised by Delaware Management Company) o LVIP Delaware Growth and Income Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Social Awareness Fund (Standard Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Special Opportunities Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Janus Capital Appreciation Fund (Service Class): Long-term growth. (Subadvised by Janus Capital Management LLC) o LVIP Marsico International Growth Fund (Service Class): Long-term capital appreciation. (Subadvised by Marsico Capital Management, LLC) o LVIP MFS (Reg. TM) Value Fund (Service Class): Capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP Mid-Cap Value Fund (Service Class): Long-term capital appreciation. (Subadvised by Wellington Management) o LVIP Mondrian International Value Fund (Standard Class): Long-term capital appreciation. (Subadvised by Mondrian Investment Partners Limited) o LVIP Money Market Fund (Standard Class): Preservation of capital. (Subadvised by Delaware Management Company) o LVIP SSgA Bond Index Fund (Service Class): Current income. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. 12 o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA International Index Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA S&P 500 Index Fund (Standard Class): Capital appreciation. (Sub-advised by SSgA Funds Management, Inc (formerly LVIP S&P 500 Index Fund) o LVIP SSgA Small-Cap Index Fund (Service Class): Capital appreciation. (Sub-advised by SSgA Funds Management, Inc (formerly LVIP Small-Cap Index Fund) o LVIP T. Rowe Price Growth Stock Fund (Service Class): Long-term growth of capital. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class): Maximum capital appreciation. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP Templeton Growth Fund (Service Class): Long-term growth of capital. (Subadvised by Templeton Investment Counsel, LLC) o LVIP Turner Mid-Cap Growth Fund (Service Class): Capital appreciation. (Subadvised by Turner Investment Partners) (formerly LVIP Mid-Cap Growth Fund) o LVIP UBS Global Asset Allocation Fund (Service Class): Total return. (Subadvised by UBS Global Asset Management (Americas) Inc. (UBS Global AM) o LVIP Wilshire 2010 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2020 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2030 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2040 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Aggressive Profile Fund (Service Class): Capital appreciation; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Conservative Profile Fund (Service Class): Current income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Moderate Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Moderately Aggressive Profile Fund (Service Class): Growth and income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) *Funds offered in a fund of funds structure may have higher expenses than funds that invest directly in debt or equity securities. MFS (Reg. TM) Variable Insurance TrustSM, advised by Massachusetts Financial Services Company o Core Equity Series (Service Class): Capital appreciation. o Growth Series (Service Class): Capital appreciation. (formerly Emerging Growth Series) o Total Return Series (Service Class): Total return. o Utilities Series (Service Class): Total return. 13 Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management, Inc. o Mid-Cap Growth Portfolio (I Class): Capital appreciation. (Subadvised by Neuberger Berman, LLC) o Regency Portfolio (I Class): Long-term growth. (Subadvised by Neuberger Berman, LLC) Putnam Variable Trust, advised by Putnam Investment Management, LLC o Growth & Income Fund (Class IB): Capital growth and current income. o Health Sciences Fund (Class IB): Capital appreciation. 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. 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. 14 Charges and Other Deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, cross-reinvestment, portfolio rebalancing, and automatic withdrawal services - See Additional Services and the SAI for more information on these programs); o maintaining records; o administering annuity payouts; o furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values); o reconciling and depositing cash receipts; o providing contract confirmations; o providing toll-free inquiry services; and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts 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 lifetime payments to individuals from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will exceed the contract value; o the risk that, if the i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit or 4LATER (Reg. TM) Guaranteed Income Benefit is in effect, the required 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. 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:
EEB Rider (in combination EEB Rider 5% step up with 5% step up) (without 5% step up) death benefit EGMDB ------------------ ---------------------- --------------- ------ o Mortality and expense risk charge 1.75% 1.70% 1.65% 1.50% o Administrative charge 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o Total annual charge for each subaccount 1.90% 1.85% 1.80% 1.65%
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 Charge. While this Rider is in effect, there is a charge for the Lincoln Lifetime IncomeSM Advantage, if elected. The Rider charge is currently equal to an annual rate of 0.75% (0.1875% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 0.90%. 15 The charge is applied to the Guaranteed Amount as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. We will deduct the cost of this Rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of the Rider. This deduction will be made in proportion to the value in each subaccount of the contract on the valuation date the Rider charge is assessed. The amount we deduct will increase or decrease as the Guaranteed Amount increases or decreases, because the charge is based on the Guaranteed Amount. Refer to the Lincoln Lifetime IncomeSM Advantage Guaranteed Amount section for a discussion and example of the impact of the changes to the Guaranteed Amount. The annual Rider percentage charge may increase each time the Guaranteed Amount increases as a result of the Automatic Annual Step-up, but the charge will never exceed the guaranteed maximum annual percentage charge of 1.50%. 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. This opt out will only apply for this particular Automatic Annual Step-up and is not available if additional purchase payments would cause your charge to increase (see below). You will need to notify us each time the percentage charge increases if you do not want the Automatic Annual Step-up. An increase in the Guaranteed Amount as a result of the 5% Enhancement or 200% Step-up will not cause an increase in the annual Rider percentage charge but will increase the dollar amount of charge. Once cumulative additional purchase payments into your annuity contract after the first Benefit Year exceed $100,000, any additional purchase payment will potentially cause the charge for your Rider to change to the current charge for new purchases in effect on the next Benefit Year anniversary, but the charge will never exceed the guaranteed maximum annual charge. The new charge will become effective on the Benefit Year anniversary. 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 Guaranteed Amount is reduced to zero while the contractowner is receiving a lifetime Maximum Annual Withdrawal, no rider charge will be deducted. If you purchase Lincoln Lifetime IncomeSM Advantage Plus Option, an additional 0.15% charge will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 0.90% applied to the Guaranteed Amount. This total charge (which may change as discussed above) is in effect until the 7th Benefit Year anniversary. If you exercise your Plus Option, this entire rider and its charge will terminate. If you do not exercise the Plus Option, after the 7th Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed and the Lincoln Lifetime IncomeSM Advantage rider and charge will continue. If you make a withdrawal prior to the 7th Benefit Year anniversary, you will not be able to exercise the Plus option, but the additional 0.15% charge will remain on your contract until the 7th Benefit Year anniversary. Lincoln SmartSecurity (Reg. TM) Advantage Charge. While this Rider is in effect, there is a charge for the Lincoln SmartSecurity (Reg. TM) Advantage, if elected. The Rider charge is currently equal to an annual rate of: 1) 0.45% (0.1125% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option; or 2) 0.65% (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option (and also the prior version of Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up); or 3) 0.80% (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. Once the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option is available in your state, the prior version will not be available. 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 as adjusted. 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. In Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up (without the Single or Joint Life option), 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 - 1 Year Automatic Step-up option, the annual Rider percentage charge will not change upon each automatic step-up of the Guaranteed Amount for the 10-year period. Under both options, if you elect to step-up the Guaranteed Amount for another 10 year 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. 16 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 0.95% for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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. Rider Charge Waiver. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the later of the fifth anniversary of the effective date of the Rider or the fifth anniversary of the most recent step-up of the Guaranteed Amount, the Rider charge may be waived. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, no Rider charge waiver is available with the Single Life and Joint Life options. The earlier version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option has a waiver charge provision which may occur after the fifth Benefit Year anniversary following the last automatic step-up opportunity. Whenever the above conditions are met, on each valuation date the Rider charge is to be deducted, if the total withdrawals from the contract have been less than or equal to 10% of the sum of: (1) the Guaranteed Amount on the effective date of this Rider or on the most recent step-up date; and (2) purchase payments made after the step-up, then the quarterly Rider charge will be waived. If the withdrawals have been more than 10%, then the Rider charge will not be waived. 4LATER (Reg. TM) Advantage Charge. Prior to the periodic income commencement date (which is defined as the valuation date the initial regular income payment under i4LIFE (Reg. TM) Advantage is determined), the annual 4LATER (Reg. TM) charge is currently 0.50% of the Income Base. The Income Base (an amount equal to the initial purchase payment or contract value at the time of election), as adjusted, is a value that will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. An amount equal to the quarterly 4LATER (Reg. TM) Rider charge multiplied by the Income Base will be deducted from the subaccounts on every third month anniversary of the later of the 4LATER (Reg. TM) Rider Effective Date or the most recent reset of the Income Base. This deduction will be made in proportion to the value in each subaccount on the valuation date the 4LATER (Reg. TM) Rider charge is assessed. The amount we deduct will increase as the Income Base increases, because the charge is based on the Income Base. As described in more detail below, the only time the Income Base will change is when there are additional purchase payments, withdrawals, automatic enhancements at the end of the 3-year waiting periods or in the event of a Reset to the current Account Value. If you purchase 4LATER (Reg. TM) in the future, the percentage charge will be the charge in effect at the time you elect 4LATER (Reg. TM). Upon a reset of the Income Base, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge based on the Income Base immediately prior to the reset will be made on the valuation date of the reset. This deduction covers the cost of the 4LATER (Reg. TM) Rider from the time of the previous deduction to the date of the reset. After the reset, we will deduct the 4LATER (Reg. TM) Rider charge for the reset Income Base on a quarterly basis, beginning on the valuation date on or next following the three month anniversary of the reset. At the time of the reset, the annual charge will be the current charge in effect for new purchases of 4LATER (Reg. TM) at the time of reset, not to exceed the guaranteed maximum charge of 1.50%. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. i4LIFE (Reg. TM) Advantage Charge. i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the net asset value of the Account Value in the VAA. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.90% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 2.10% 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. After the Access Period ends, the charge will be the same rate as the cost of the i4LIFE (Reg. TM) Advantage Account Value death benefit. i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 2.60% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. 17 After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. 4LATER (Reg. TM) Guaranteed Income Benefit Charge. The 4LATER (Reg. TM) Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of .50% which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the Account Value death benefit; and 2.60% for the EGMDB. These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. On and after the periodic income commencement date, the 4LATER (Reg. TM) Rider charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of average account value. This is a change to the calculation of the 4LATER (Reg. TM) charge because after the periodic income commencement date, when the 4LATER (Reg. TM) Guaranteed Income Benefit is established, the Income Base is no longer applicable. The percentage 4LATER (Reg. TM) charge is the same immediately before and after the periodic income commencement date; however, the charge is multiplied by the Income Base (on a quarterly basis) prior to the periodic income commencement date and then multiplied by the average daily account value after the periodic income commencement date. After the periodic income commencement date, the 4LATER (Reg. TM) percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Rider annual charge will also terminate. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 2.60% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium taxes generally depend upon the law of your state of residence. The tax ranges 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 market value adjustment if applicable. See Fixed Side of the Contract. The mortality and expense risk and administrative charge of 1.40% 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. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. Additional Information The charges described previously may be reduced or eliminated for any particular contract. However, these reductions may be available only to the extent that we anticipate lower distribution and/or administrative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges, or when required by law. Lower distribution and administrative expenses may be the result of economies associated with: o the use of mass enrollment procedures, 18 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 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 91. 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. If you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum annual amount for additional purchase payments is $300. The minimum payment to the contract at any one time must be at least $100 ($25 if transmitted electronically). If a minimum purchase payment is not submitted, we will contact you to see if additional money will be sent, or if we should return the purchase payment to you. Purchase payments in total may not exceed $2 million without our approval. If you stop making purchase payments, the contract will remain in force as a paid-up contract. However, we may terminate the contract as allowed by 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. 19 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 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, and when permitted by law, it may be prudent for us to use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method. Transfers On or Before the Annuity Commencement Date 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. There is no charge for a transfer. 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. This limit does not apply to transfers made under the automatic transfer programs of dollar cost averaging, cross re-investment or portfolio rebalancing elected on forms available from us. See Additional Services and the SAI for more information on these programs. 20 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 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 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 also may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. Transfers may be delayed as permitted by the 1940 Act. See Delay of Payments. Market Timing Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our contractowners and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other contractowners or fund shareholders. In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. While we reserve the right to enforce these policies and procedures, contractowners and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual contractowners, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific contractowners who violate the excessive trading policies established by the fund. You should be aware that the purchase and redemption orders received by the funds generally are "omnibus" orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds' ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our contractowners) will not be harmed by transfer activity relating to the retirement 21 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, standard 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. We also reserve the right to implement and administer redemption fees imposed by one or more of the funds in the future. Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund's investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date You may transfer all or a portion of your investment in one subaccount to another subaccount or to the fixed side of the contract, as permitted under your contract. Those transfers will be limited to three times per contract year. You may also transfer from a variable annuity payment to a fixed annuity payment. You may not transfer from a fixed annuity payment to a variable annuity payment. 22 If you select i4LIFE (Reg. TM) Advantage your transfer rights and restrictions for the variable subaccounts and the fixed account during the Access Period are the same as stated in the section of this prospectus called Transfers On or Before the Annuity Commencement Date. During the i4LIFE (Reg. TM) Advantage Lifetime Income Period, you are subject to the rights set forth in the prior paragraph. Ownership The owner on the date of issue will be the person or entity designated in the contract specifications. If no owner is designated, the annuitant(s) will be the owner. The owner may name a joint owner. As contractowner, you have all rights under the contract. According to 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. Qualified contracts may not be assigned or transferred except as permitted by applicable law and upon written notification to us. 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. The new annuitant must be under age 91 as of the effective date of the change. This change may cause a reduction in the death benefit on the death of the annuitant. 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 at the Home office. If we receive a surrender or withdrawal request 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 market value 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. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may begin writing checks immediately. The SecureLine (Reg. TM) account is a special service that we offer in which your surrender proceeds are placed into an interest-bearing account. Instead of mailing you a check, we will send a checkbook so that you will have access to the account simply by writing a check for all or any part of the proceeds. 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 tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvestment service and portfolio rebalancing. Currently, there is no charge for these services. However, we reserve the right to impose one. 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. 23 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. Dollar cost averaging is not available on contracts owned by non-individuals (i.e. corporations, trusts). We reserve the right to discontinue 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. The cross-reinvestment service allows you to automatically transfer the account value in a designated variable subaccount that exceeds a baseline amount to another specific variable subaccount at specific intervals. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of contract value allocated to each variable account subaccount. The rebalancing may take place monthly, quarterly, semi-annually or annually. Only one of the three additional services (DCA, cross reinvestment and portfolio rebalancing) may be used at one time. For example, you cannot have DCA and cross reinvestment running simultaneously. Asset Allocation Models Your registered representative may discuss asset allocation models with you to assist you in deciding how to allocate your purchase payments among the various subaccounts and/or the fixed account. The models listed below, available on or about June 16, 2008, were designed and prepared by SSgA Funds Management, Inc., a registered investment advisory firm for use by Lincoln Financial Distributors, Inc., (LFD) the principal underwriter of the contracts. LFD provides models to broker dealers who may offer the models to their own clients. The models do not constitute investment advice and you should consult with your broker dealer representative to determine whether you should utilize a model or which model is suitable for you based upon your goals, risk tolerance and time horizon. Each model invests different percentages of contract value in some or all of the LVIPT subaccounts currently available within your annuity contract. If you select an asset allocation model, 100% of your contract value (and any additional purchase payments you make) will be allocated among certain subaccounts in accordance with the model's asset allocation strategy. You may not make transfers among the subaccounts. We will deduct any withdrawals you make from the subaccounts in the asset allocation model on a pro rata basis. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in the contract at any time. Each of the asset allocation models seeks to meet its investment objective while avoiding excessive risk. The models also strive to achieve diversification among asset classes in order to help reduce volatility and boost returns over the long-term. There can be no assurance, however, that any of the asset allocation models will achieve its investment objective. If you are seeking a more aggressive strategy, these models are probably not appropriate for you. The asset allocation models are intended to provide a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. While diversification may help reduce overall risk, it does not eliminate the risk of losses and it does not protect against losses in a declining market. In order to maintain the model's specified subaccount allocation percentages, you agree to be automatically enrolled in and you thereby authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. The models are static asset allocation models. This means that that they have fixed allocations made up of underlying funds that are offered within your contract and the percentage allocations will not change over time. Once you have selected an asset allocation model, we will not make any changes to the fund allocations within the model except for the rebalancing described above. If you desire to change your contract value or purchase payment allocation or percentages to reflect a revised or different model, you must submit new allocation instructions to us. You may terminate a model at any time. There is no charge from Lincoln for participating in a model. Certain living benefit riders may require that you allocate purchase payments in accordance with Investment Requirements that may be satisfied by choosing one of the asset allocation models. Different requirements and/or restrictions may apply under the individual rider. See The Contracts - Investment Requirements. The following models have been prepared by SSgA Funds Management, Inc., a registered investment advisor. The models are comprised of funds from the LVIP that are offered within your contract. Your registered representative will have more information on the specific investments of each model. o The SSgA Conservative Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in three equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes index funds exclusively. 24 o The SSgA Moderate Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in three equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in three equity subaccounts and 20% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in three equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes index funds exclusively. o The SSgA Structured Conservative Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in seven equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderate Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in seven equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven equity subaccounts and 20% fixed one income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in seven equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. Franklin Templeton Founding Investment Strategy: Through the Franklin Templeton Founding Investment Strategy you may allocate purchase payments and/or contract values to three underlying funds as listed below. This is not an asset allocation model. Upon selection of this program you agree to be automatically enrolled in portfolio rebalancing and authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. o FTVIPT Franklin Income Securities 34% o FTVIPT Mutual Shares Securities 33% o LVIP Templeton Growth Fund 33%
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 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 annuitant The contractowner is living 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.
25
UPON DEATH OF: AND... 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 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 if you elect i4LIFE (Reg. TM) Advantage or any annuitization option. Generally, the more expensive the death benefit the greater the protection. You should consider the following provisions carefully when designating the beneficiary, annuitant, any contingent annuitant and any joint owner, as well as before changing any of these parties. The identity of these parties under the contract may significantly affect the amount and timing of the death benefit or other amount paid upon a contractowner's or annuitant's death. You may designate a beneficiary during your lifetime and change the beneficiary by filing a written request with our 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. A death benefit payable on the death of the annuitant will not be paid if the annuitant has been changed subsequent to the effective date of this contract unless the change occurred because of the death of a prior annuitant. Enhanced Guaranteed Minimum Death Benefit (EGMDB). If the EGMDB is in effect, the death benefit paid will be the greatest of: o the contract 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 all withdrawals, partial annuitizations and premium tax incurred (withdrawals less than or equal to the Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o the highest contract value which the contract attains on any contract anniversary (including the inception date) (determined before the allocation of any purchase payments on that contract anniversary) for ages up to, and including, the deceased's age 80. The highest contract value is increased by purchase payments and is decreased by partial withdrawals, partial annuitizations, and any premium taxes incurred on or subsequent to the anniversary date on which the highest contract value is obtained. 5% Step-Up Death Benefit. This death benefit option is no longer available unless you had elected it prior to January 15, 2003. If the 5% Step-Up death benefit is in effect, the death benefit paid will be the greater of the death benefit under the EGMDB or the accumulation of all purchase payments minus the accumulation of all withdrawals. These purchase payments and withdrawals are accumulated at an annual rate of 5% from the date of the transaction to the earlier of the date of death of the deceased person or the contract anniversary immediately preceding the deceased person's 81st birthday. Each transaction is accumulated separately to a maximum of 200% of the transaction. The accumulation as of the contract anniversary immediately preceding the 81st birthday of the deceased contractowner, joint owner or annuitant will then be increased by purchase payments made on or subsequent to that contract anniversary and decreased by withdrawals on or subsequent to the contract anniversary. After a contract is issued, the contractowner may discontinue the 5% Step-Up death benefit at any time by completing the Death Benefit Discontinuance form and sending it to us. The benefit will be discontinued as of the valuation date we receive the request, and the death benefit will be the EGMDB. We will stop deducting the charge for the 5% Step-Up as of that date. See Charges and Other Deductions. If you discontinue the benefit, it cannot be reinstated. All references to withdrawals include deductions for applicable charges and premium taxes, if any. Estate Enhancement Benefit Rider (EEB Rider). The amount of death benefit payable under this Rider is the greatest of the following amounts: o The contract value as of the valuation date we approve the payment of the claim; or 26 o The sum of all purchase payments reduced by the sum of all withdrawals (withdrawals less than or equal to the Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o The highest contract value on any contract anniversary (including the inception date) prior to the 81st birthday of the deceased contractowner, joint owner (if applicable), or annuitant and prior to the death of the contractowner, joint owner or annuitant for whom a death claim is approved for payment. The highest contract value is adjusted for certain transactions. It is increased by purchase payments made on or after that contract anniversary on which the highest contract value is obtained. It is decreased by withdrawals subsequent to that contract anniversary date; or o (Only if this Rider is elected in combination with the 5% Step Up death benefit): The accumulation of all purchase payments minus the accumulation of all withdrawals at an annual rate of 5% from the date of the transaction to the earlier of the date of death of the deceased person or the contract anniversary immediately preceding the deceased person's 81st birthday. Each transaction is accumulated separately to a maximum of 200% of the transaction. The accumulation as of the contract anniversary immediately preceding the 81st birthday of the deceased contractowner, joint owner or annuitant will then be increased by purchase payments made on or subsequent to that contract anniversary and decreased by withdrawals on or subsequent to the contract anniversary. This EEB death benefit option is no longer available unless you had elected it prior to January 15, 2003; or o The current contract value as of the valuation date we approve the payment of the claim plus an amount equal to the Enhancement Rate times the lesser of: o the contract earnings; or o the covered earnings limit. Note: If there are no contract earnings, there will not be an amount provided under this item. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The Enhancement Rate is based on the age of the oldest contractowner, joint owner (if applicable), or annuitant on the date when the Rider becomes effective. If the oldest is under age 70, the rate is 40%. If the oldest is age 70 to 75, the rate is 25%. The EEB Rider is not available if the oldest contractowner, joint owner (if applicable), or annuitant is age 76 or older at the time the Rider would become effective. Contract earnings equal: o the contract value as of the date of death of the individual for whom a death claim is approved by us for payment; minus o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); minus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment; plus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. The covered earnings limit equals 200% of: o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); plus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, and prior to the contract anniversary immediately preceding the 76th birthday of the oldest of the contractowner, joint owner (if applicable) or annuitant; minus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. 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. The EEB Rider may not be available in all states. Please check with your investment representative regarding availability of this rider. Contracts purchased after the Rider becomes available in your state may only elect the Rider at the time of purchase. The EEB Rider may not be terminated unless you surrender the contract or the contract is in the annuity payout period. Accumulated Benefit Enhancement (ABE). This is no longer available unless you had elected this death benefit option prior to January 15, 2003. An Accumulated Benefit Enhancement may also be available for non-qualified i4LIFE (Reg. TM) Advantage contracts. See i4LIFE (Reg. TM) Advantage. There is no additional charge for this benefit. 27 Whenever this ABE Death Benefit is in effect, the death benefit amount will be the greater of the death benefit chosen under the contract and this ABE Death Benefit. Any death benefit will be paid in the manner defined within the contract (see the discussions on Death Benefits Before the Annuity Commencement Date and General Death Benefit Information in the prospectus). Upon the death of any contractowner, joint owner or annuitant, the ABE Death Benefit will be equal to the sum of all purchase payments made under the new contract, plus the Enhancement Amount minus all withdrawals, including any applicable charges and any premium tax incurred. However, if the death occurs in the first contract year, only 75% of the Enhancement Amount will be used to calculate the ABE Death Benefit. The Enhancement Amount is equal to the excess of the prior contract's documented death benefit(s) over the actual cash surrender value received by us. However, we will impose a limit on the prior contract's death benefit equal to the lesser of: o 140% of the prior contract's cash value; or o the prior contract's cash value plus $400,000. In addition, if the actual cash surrender value received by us is less than 95% of the documented cash value from the prior insurance company, the prior contract's death benefit will be reduced proportionately according to the reduction in cash value amounts. For the ABE Death Benefit to be effective, documentation of the death benefit and cash value from the prior insurance company must be provided to us at the time of the application. We will only accept these amounts in a format provided by the prior insurance company. Examples of this documentation include: o the prior company's periodic customer statement; o a statement on the prior company's letterhead; o or a printout from the prior company's website. This documentation cannot be more than ninety (90) days old at the time of the application. You may provide updated documentation prior to the contract date if it becomes available from your prior company. If more than one annuity contract is exchanged to us, the ABE Enhancement Amount will be calculated for each prior contract separately, and then added together to determine the total ABE Enhancement Amount. Under the new contract, upon the death of any contractowner, joint owner or annuitant who was not a contractowner or annuitant on the effective date of the new contract, the ABE Death Benefit will be equal to the contract value under the new contract as of the date the death claim is approved by us for payment (unless the change occurred because of the death of a contractowner, joint owner or annuitant). If any contractowner, joint owner or annuitant is changed due to a death and the new contractowner, joint owner or annuitant is age 76 or older when added to the contract, then the ABE Death Benefit for this new contractowner, joint owner or annuitant will be equal to the contract value as of the date the death claim is approved by us for payment. The ABE Death Benefit will terminate on the earliest of: o the valuation date the selected death benefit option of the contract is changed; or o the annuity commencement date. It is important to realize that even with the ABE Enhancement Amount, your death benefit will in many cases be less than the death benefit from your prior company. This is always true in the first year, when only 75% of the Enhancement Amount is available. General Death Benefit Information Only one of these death benefit elections may be in effect at any one time (in addition to ABE), and these elections terminate if you elect i4LIFE (Reg. TM) Advantage. 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. 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. If the EEB Rider is in effect, the Enhancement Rate for future benefits will be based on the age of the older of the surviving spouse or the annuitant at the time the EEB is paid into the contract. The contract earnings and the covered earnings limit will be reset, treating the current contract value (after crediting any death benefit amount into the contract as described above) as the initial deposit for purposes of future benefit calculations. If either the surviving spouse or the surviving annuitant is 76 or older the EEB and 5% Step-Up death benefit will be 28 reduced to the Step-Up death benefit for an annual charge of 1.80%, and the EEB Rider death benefit will be reduced to the EGMDB death benefit for an annual charge of 1.65%. 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, 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. 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 contract value is over $10,000, the proceeds will be placed into the interest-bearing account in the recipient's name as the owner of the account. The SecureLine (Reg. TM) account allows the recipient additional time to decide how to manage death benefit proceeds with the balance earning interest from the day the account is opened. SecureLine (Reg. TM) is not a method of deferring taxation. The SecureLine (Reg. TM) account is a special service that we offer in which the death benefit proceeds are placed into an interest-bearing account. Instead of mailing you (or the recipient of the death proceeds) a check, we will send a checkbook so that you (or the death proceeds recipient) will have access to the account simply by writing a check for all or any part of the proceeds. 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. Investment Requirements - Option 1 Contractowners who have elected 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit will be subject to the following requirements on variable subaccount investments. You will be subject to different Investment Requirements if you elect the Lincoln Lifetime IncomeSM Advantage rider. If you do not elect any of these benefits, the Investment Requirements will not apply to your contract. For 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, and i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit, we do not intend to enforce these Investment Requirements at this time. We will notify you at least 30 days in advance of when the Investment Requirements will be enforced. Our decision to enforce these requirements will be based on our review of the subaccount investments of the contractowners who have these riders and market conditions. No more than 35% of your contract value (includes account value if i4LIFE (Reg. TM) Advantage is in effect) can be invested in the following subaccounts ("Limited Subaccounts"): o AIM V.I. International Growth Fund o AllianceBernstein Global Technology Portfolio o AllianceBernstein International Value Portfolio o AllianceBernstein Small/Mid Cap Value Portfolio o American Funds Global Growth Fund 29 o American Funds Global Small Capitalization Fund o American Funds International Fund o Delaware VIP Emerging Markets Series o Delaware VIP REIT Series o Delaware VIP Small Cap Value Series o Delaware VIP Trend Series o DWS Small Cap Index VIP o Fidelity (Reg. TM) VIP Overseas Portfolio o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Templeton Growth Securities Fund o Janus Aspen Mid Cap Growth Portfolio o Janus Aspen Worldwide Growth Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Marsico International Growth Fund o LVIP Mondrian International Value Fund o LVIP SSgA Developed International 150 Fund o LVIP SSgA Emerging Markets 100 Fund o LVIP SSgA International Index Fund o LVIP SSgA Small/Mid Cap 200 Fund o LVIP SSgA Small-Cap Index Fund o LVIP T. Rowe Price Structured Mid-Cap Growth Fund o LVIP Templeton Growth Fund o LVIP Turner Mid-Cap Growth Fund o Neuberger Berman AMT Mid-Cap Growth Portfolio All other variable subaccounts will be referred to as "Non-Limited Subaccounts". You can select the percentages of contract value, if any, allocated to the Limited Subaccounts, but the cumulative total investment in all the Limited Subaccounts cannot exceed 35% of the total contract value. On each quarterly anniversary of the effective date of any of these benefits, if the contract value in the Limited Subaccounts exceeds 35%, Lincoln will rebalance your contract value so that the contract value in the Limited Subaccounts is 30%. If rebalancing is required, the contract value in excess of 30% will be removed from the Limited Subaccounts on a pro rata basis and invested in the remaining Non-Limited Subaccounts on a pro rata basis according to the contract value percentages in the Non-Limited Subaccounts at the time of the reallocation. If there is no contract value in the Non-Limited Subaccounts at that time, all contract value removed from the Limited Subaccounts will be placed in the LVIP Money Market subaccount. We may move subaccounts on or off the Limited Subaccount list, change the percentages of contract value allowed in the Limited Subaccounts or change the frequency of the contract value rebalancing, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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 or when you are notified that we will begin enforcing 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; 2. submit your own reallocation instructions for the contract value in excess of 35% in the Limited Subaccounts; or 3. take no action and be subject to the quarterly rebalancing as described above. Investment Requirements - Option 2 Contractowners who have elected the Lincoln Lifetime IncomeSM Advantage will be subject to the following Investment Requirements-Option 2 on the investments in their contracts. These Investment Requirements are different from the Investment Requirements-Option 1 that apply to purchases of other optional riders. Contractowners with an active Lincoln Lifetime IncomeSM Advantage who terminate Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit are also subject to Investment Requirements-Option 2. We have divided the subaccounts of your contract into two groups. We will specify the minimum or maximum percentages of your contract value that must be in each group at the time you purchase the Rider. In addition, you may allocate your contract value and purchase payments in accordance 30 with certain asset allocation models. If you terminate an asset allocation model, you must follow the Investment Requirements applicable to your rider. Some investment options are not available to you if you purchase this Rider. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. You can select the percentages of contract value to allocate to individual funds within each group, but the total investment for all funds in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion, but we will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. 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 or change the investment options that are or are not available to you, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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 the new terms of the Investment Requirements; 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. if you take no action, such changes will apply only to additional deposits or to future transfers of contract value. You will not be required to change allocations to existing subaccounts, but you will not be allowed to add money, by either an additional deposit or a contract transfer, in excess of the new percentage applicable to a fund or fund group. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% Investments cannot exceed 75% --------------------------------------------------- -------------------------------------------------------- 1. American Century VIP Inflation Protection All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Capital Reserves Series 5. Delaware VIP Diversified Series 6. FTVIPT Templeton Global Income Securities Fund 7. LVIP SSgA Bond Index Fund
To satisfy the Investment Requirements for the Lincoln Lifetime Income (Reg. TM) Advantage, you may allocate 100% of your contract value to or among the MFS VIT Total Return Fund, the FTVIPT Franklin Income Securities Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 75% can be allocated to the LVIP Wilshire Aggressive Profile Fund. If you allocate less than 100% to these funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. In addition, you can allocate 100% of your contract value to the Founding Investment Strategy (FTVIPT Franklin Income Securities Fund 34%, LVIP Templeton Growth Fund 33% and FTVIPT Mutual Shares Securities Fund 33%). The LVIP SSgA Emerging Markets 100 Fund and the fixed accounts (except for dollar cost averaging) are not available with Lincoln Lifetime Income (Reg. TM) Advantage. To satisfy the Investment Requirements of Lincoln Lifetime Income (Reg. TM) Advantage, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. On or about June 16, 2008, 100% of the contract value can be allocated to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Structured Moderately Aggressive Model, SSgA Conservative Index Model, SSgA Moderate Index Model and SSgA Moderately Aggressive Index Model. As discussed in the Lincoln Lifetime IncomeSM Advantage Plus section, if you purchase the Lincoln Lifetime IncomeSM Advantage Plus rider, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the 31 LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund (both are funds of funds) or the FTVIPT Franklin Income Securities Fund. On or about June 16, 2008, you may also allocate 100% of your contract value to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. Lincoln Lifetime IncomeSM Advantage The Lincoln Lifetime IncomeSM Advantage is a Rider that is available for purchase with your variable annuity contract if the purchase payment or contract value (if purchased after the contract is issued) is at least $50,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contract owner/annuitant (Single Life Option) or for the lives of you as contract owner/annuitant and your spouse as joint owner or primary beneficiary (Joint Life Option) regardless of the investment performance of the contract, provided that certain conditions are met. A minimum guaranteed amount (Guaranteed Amount) is used to calculate the periodic withdrawals from your contract but, is not available as a separate benefit upon death or surrender. The Guaranteed Amount is equal to the initial purchase payment (or contract value if elected after contract issue) increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the Step-up to 200% of the initial Guaranteed Amount and decreased by withdrawals in accordance with the provisions set forth below. No additional purchase payments are allowed if the contract value decreases to zero for any reason. This Rider provides annual withdrawals of 5% of the initial Guaranteed Amount called Maximum Annual Withdrawal amounts. With the Single Life option, you may receive Maximum Annual Withdrawal amounts for your lifetime. If you purchase the Joint Life option, Maximum Annual Withdrawal amounts for the lifetimes of you and your spouse will be available. Withdrawals in excess of the Maximum Annual Withdrawal amount and any withdrawals prior to age 591/2 (for the Single Life Option) or age 65 (for the Joint Life Option) may significantly reduce your Maximum Annual Withdrawal amount. Withdrawals will also negatively impact the availability of the 5% Enhancement, the 200% Step-up and the Lincoln Lifetime IncomeSM Advantage Plus. These options are discussed below in detail. An additional option, available for purchase with your Lincoln Lifetime IncomeSM Advantage provides that on the seventh Benefit Year anniversary, provided you have not made any withdrawals, you may choose to cancel your Lincoln Lifetime IncomeSM Advantage rider and receive an increase in your contract value of an amount equal to the excess of your initial Guaranteed Amount (and purchase payments made within 90 days of rider election) over your contract value. This option is called Lincoln Lifetime IncomeSM Advantage Plus and is discussed in detail below. You may consider purchasing this option if you want to guarantee at least a return of your initial purchase payment after 7 years. Lincoln Lifetime IncomeSM Advantage Plus must be purchased with the Lincoln Lifetime IncomeSM Advantage. By purchasing the Lincoln Lifetime IncomeSM Advantage Rider, you will be limited in how you can invest in the subaccounts in your contract. In addition, the fixed account is not available except for use with dollar cost averaging. See The Contracts - Investment Requirements - Option 2. If you purchase the Lincoln Lifetime IncomeSM Advantage Plus option, your only investment options until the seventh Benefit Year anniversary are the following: the LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. 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. These riders are fully discussed in this prospectus. 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 and these other riders is included later in this prospectus. Not all riders will be available at all times. We have designed the rider to protect you from outliving your contract value. If the rider terminates or you (or your spouse, if applicable) die before your contract value is reduced to zero, neither you nor your estate will receive any lifetime withdrawals from us under the rider. We limit your withdrawals to the Maximum Annual Withdrawal amount and impose Investment Requirements in order to minimize the risk that your contract value will be reduced to zero before your (or your spouse's) death. Accordingly, a significant risk against which the rider protects, i.e., that your contract value will be reduced to zero (due to poor market performance or charges) while you are still alive, may be minimal. 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. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage with any other living benefit rider. 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. 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 you elect the Rider. If you elect the Rider at the time you purchase the contract, the initial Guaranteed Amount will equal your initial purchase payment. If you elect the Rider after we issue the contract, the initial Guaranteed Amount will equal the contract value on the 32 effective date of the Rider. The maximum Guaranteed Amount is $10,000,000. This maximum takes into consideration the total Guaranteed Amounts from all Lincoln Life contracts (or contracts issued by our affiliates) in which you (or spouse if Joint Life Option) are the covered lives under either the Lincoln Lifetime IncomeSM Advantage or Lincoln SmartSecurity (Reg. TM) Advantage. Additional purchase payments automatically increase the Guaranteed Amount by the amount of the purchase payment (not to exceed the maximum Guaranteed Amount); for example, a $10,000 additional purchase payment will increase the Guaranteed Amount by $10,000. After the first anniversary of the Rider effective date, each time a purchase payment is made after the cumulative purchase payments equal or exceed $100,000, the charge for your Rider may change on the next Benefit Year anniversary. The charge will be the current charge in effect on that next Benefit Year Anniversary, for new purchases of the Rider. The charge will never exceed the guaranteed maximum annual charge. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge in this prospectus. Additional purchase payments will not be allowed if the contract value decreases to zero for any reason including market loss. The following example demonstrates the impact of additional purchase payments on the Lincoln Lifetime IncomeSM Advantage charge: Initial purchase payment $100,000 Additional purchase payment in Year 2 $ 95,000 No change to charge Additional purchase payment in Year 3 $ 75,000 Charge will be the current charge Additional purchase payment in Year 4 $ 25,000 Charge will be the current charge
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, Automatic Annual Step-ups, 5% Enhancements and the 200% Step-up are made, and the cost decreases as withdrawals are made because these transactions all adjust the Guaranteed Amount. In addition, the percentage charge may change when cumulative purchase payments exceed $100,000 and also when Automatic Annual Step-ups occur as discussed below. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. 5% Enhancement to the Guaranteed Amount. On each Benefit Year anniversary, the Guaranteed Amount, 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. Additional purchase payments must be invested in the contract at least one Benefit Year before the 5% Enhancement will be made on the portion of the Guaranteed Amount equal to that purchase payment. Any purchase payments made within the first 90 days after the effective date of the Rider will be included in the Guaranteed Amount for purposes of receiving the 5% Enhancement on the first Benefit Year anniversary. Note: The 5% Enhancement is not available in any year there is a withdrawal from contract value including a Maximum Annual Withdrawal Amount. A 5% Enhancement will occur in subsequent years after a withdrawal 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 Guaranteed Amount: Initial purchase payment = $100,000; Guaranteed Amount = $100,000 Additional purchase payment on day 30 = $15,000; Guaranteed Amount = $115,000 Additional purchase payment on day 95 = $10,000; Guaranteed Amount = $125,000 On the first Benefit Year Anniversary, the Guaranteed Amount is $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 15 years from the effective date of the Rider. The 5% Enhancement will cease upon the death of the contract owner/annuitant or upon the death of the survivor of the contractowner or spouse (if Joint Life option is in effect) or when the oldest of these individuals reaches age 86. A new 15-year 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 Guaranteed Amount, you will not receive the 5% Enhancement. The 5% Enhancement cannot increase the Guaranteed Amount above the maximum Guaranteed Amount of $10,000,000. Any withdrawal from the contract value limits the 5% Enhancement as follows: a. The 5% Enhancement will not occur on any Benefit Year anniversary in which there is a withdrawal, including a Maximum Annual Withdrawal amount, from the contract during that Benefit Year. The 5% Enhancement will occur on the following Benefit Year anniversary if no other withdrawals are made from the contract and the Rider is within the 15-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2or older or the contractowner and spouse (Joint Life Option) are age 65 or older. 33 b. If the contractowner/annuitant (Single Life Option) is under age 591/2 or the contractowner or spouse (Joint Life Option) is under age 65, and a withdrawal is made from the contract, the 5% Enhancement will not occur again until an Automatic Annual Step-Up to the contract value (as described below) occurs. An example of the impact of a withdrawal on the 5% Enhancement is included in the Withdrawals section below. If your Guaranteed Amount is increased by the 5% Enhancement on the Benefit Year anniversary, your percentage charge for the Rider will not change. However, the amount you pay for the Rider will increase since the charge for the Rider is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. Automatic Annual Step-ups of the Guaranteed Amount. The Guaranteed Amount 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 both still living and under age 86; and b. the contract value on that Benefit Year anniversary is greater than the Guaranteed Amount after the 5% Enhancement (if any) or 200% Step-up (if any, as described below). Each time the Guaranteed Amount 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 Charge. If your percentage rider charge is increased upon an Automatic Annual Step-up, 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 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. If you decline the Automatic Annual Step-up, you will receive the 200% Step-up (if you are eligible as described below) or the 5% Enhancement (if you are eligible as specified above); however, a new 15-year period for 5% Enhancements will not begin. You may not decline the Automatic Annual Step-up, if applicable, if your additional purchase payments would cause your charge to increase. See the earlier Guaranteed Amount section. Following is an example of how the Automatic Annual Step-ups and the 5% Enhancement will work (assuming no withdrawals or additional purchase payments and issue age above 591/2(Single Life) or 65 (Joint Life):
Potential for Length of 5% Guaranteed Charge to Enhancement Contract Value Amount Change Period ---------------- ------------ --------------- ------------- Initial Purchase Payment $50,000.... $50,000 $50,000 No 15 1st Benefit Year Anniversary ....... $54,000 $54,000 Yes 15 2nd Benefit Year Anniversary ....... $53,900 $56,700 No 14 3rd Benefit Year Anniversary ....... $57,000 $59,535 No 13 4th Benefit Year Anniversary ....... $64,000 $64,000 Yes 15
On the 1st Benefit Year anniversary, the Automatic Annual Step-up increased the Guaranteed Amount 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 Guaranteed Amount beyond the maximum Guaranteed Amount of $10,000,000. Step-up to 200% of the initial Guaranteed Amount. On the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 70, or the rider has been in effect for 10 years, whichever event is later, we will step-up your Guaranteed Amount to 200% of your initial Guaranteed Amount (plus any purchase payments made within 90 days of rider election), less any withdrawals, if this would increase your Guaranteed Amount to an amount higher than that provided by the 5% Enhancement or the Automatic Annual Step-up for that year, if applicable. (You will not also receive the 5% Enhancement or Automatic Annual Step-up if the 200% Step-up applies.) This Step-up will not occur if: 1) any withdrawal was made prior to age 591/2 (Single Life) or age 65 (Joint Life); 2) An Excess Withdrawal (defined below) has occurred; or 3) Cumulative withdrawals totaling more than 10% of the initial Guaranteed Amount (plus purchase payments within 90 days of rider election) have been made (even if these withdrawals were within the Maximum Annual Withdrawal amount). 34 For example, assume the initial Guaranteed Amount is $200,000. A $10,000 Maximum Annual Withdrawal was made at age 65 and at age 66. If one more $10,000 Maximum Annual Withdrawal was made at age 67, the Step-up would not be available since withdrawals cannot exceed $20,000 (10% of $200,000). This Step-up is only available one time and it will not occur if, on the applicable Benefit Year anniversary, your Guaranteed Amount exceeds 200% of your initial Guaranteed Amount (plus purchase payments within 90 days of rider election). Required minimum distributions from qualified contracts may adversely impact this benefit because you may have to withdraw more than 10% of your initial Guaranteed Amount. See the terms governing RMDs in the Maximum Annual Withdrawal Amounts section below. This Step-up will not cause a change to the percentage charge for your rider. However, the amount you pay for the rider will increase since the charge is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. The following example demonstrates the impact of this Step-up on the Guaranteed Amount: Initial purchase payment at age 60 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 70, the Guaranteed Amount is $272,339 (after applicable 5% Enhancements and two $10,000 Maximum Annual Withdrawal Amounts) and the contract value is $250,000. Since the Guaranteed Amount is less than $360,000 ($200,000 initial Guaranteed Amount reduced by the two $10,000 withdrawals times 200%), the Guaranteed Amount is increased to $360,000. The 200% Step-up cannot increase the Guaranteed Amount beyond the Maximum Guaranteed Amount of $10,000,000. Maximum Annual Withdrawal Amount. You may make periodic withdrawals up to the Maximum Annual Withdrawal 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 you are at least age 591/2 (Single Life Option) or you and your spouse are both at least age 65 (Joint Life Option) and your Maximum Annual Withdrawal amount is greater than zero. On the effective date of the Rider, the Maximum Annual Withdrawal amount is equal to 5% of the initial 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. If your contract value is reduced to zero because of market performance, withdrawals equal to the Maximum Annual Withdrawal amount will continue automatically for your life (and your spouse if applicable) under the Maximum Annual Withdrawal Amount Annuity Payment Option (discussed later). You may not withdraw the remaining Guaranteed Amount in a lump sum. Note: if any withdrawal is made, the 5% Enhancement is not available during that Benefit Year and the Lincoln Lifetime IncomeSM Advantage Plus is not available (see below). Withdrawals may also negatively impact the 200% Step-up (see above). The tax consequences of withdrawals are discussed in Federal Tax Matters section of this prospectus. All withdrawals you make, whether or not within the Maximum Annual Withdrawal amount, will decrease your contract value. The Maximum Annual Withdrawal amount will be doubled, called the Nursing Home Enhancement, during a Benefit Year when the contractowner/annuitant is age 591/2 or older or the contractowner and spouse (Joint Life option), are both age 65 or older, 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 36 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. Proof of nursing home confinement will be required each year. If you leave the nursing home, your Maximum Annual Withdrawal amount will be reduced by 50% starting after the next Benefit Year anniversary. 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 remaining references to the 5% Maximum Annual Withdrawal amount also include the Nursing Home Enhancement Maximum Annual Withdrawal amount. The Maximum Annual Withdrawal amount is increased by 5% of any additional purchase payments. For example, if the 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). 5% Enhancements, Automatic Annual Step-ups and the 200% Step-up will cause a recalculation of the eligible Maximum Annual Withdrawal amount to the greater of: a. the Maximum Annual Withdrawal amount immediately prior to the 5% Enhancement, Automatic Annual Step-up or 200% Step-up; or 35 b. 5% of the Guaranteed Amount on the Benefit Year anniversary. See the chart below for examples of the recalculation. The Maximum Annual Withdrawal amount from both Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage under all Lincoln Life contracts (or contracts issued by our affiliates) applicable to you (or your spouse if Joint Life Option) can never exceed 5% of the maximum Guaranteed Amount. Withdrawals after age 591/2 (Single Life Option) or age 65 (Joint Life Option). If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) after age 591/2 (Single Life) or age 65 (Joint Life) 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. The impact of withdrawals prior to age 591/2 or age 65 will be discussed later in this section. The following example illustrates the impact of Maximum Annual Withdrawals on the Guaranteed Amount and the recalculation of the Maximum Annual Withdrawal amount (assuming no additional purchase payments and the contractowner (Single Life) is older than 591/2 and the contractowner and spouse (Joint Life) are both older than 65):
Guaranteed Maximum Annual Contract Value Amount Withdrawal Amount ---------------- ------------ ------------------ Initial Purchase Payment $50,000.... $50,000 $50,000 $2,500 1st Benefit Year Anniversary ....... $54,000 $54,000 $2,700 2nd Benefit Year Anniversary ....... $51,000 $51,300 $2,700 3rd Benefit Year Anniversary ....... $57,000 $57,000 $2,850 4th Benefit Year Anniversary ....... $64,000 $64,000 $3,200
The initial Maximum Annual Withdrawal amount is equal to 5% of the Guaranteed Amount. Since withdrawals occurred each year (even withdrawals within the Maximum Annual Withdrawal amount), the 5% Enhancement of the Guaranteed Amount was not available. However, each year the Automatic Annual Step-up occurred (1st, 3rd and 4th anniversaries), the Maximum Annual Withdrawal amount was recalculated to 5% of the current Guaranteed Amount. Withdrawals from Individual Retirement Annuity 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 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 that Benefit Year (except as described in next paragraph). If your RMD withdrawals during a Benefit Year are less than the Maximum Annual Withdrawal amount, an additional amount up to the Maximum Annual Withdrawal Amount may be withdrawn. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the Maximum Annual Withdrawal amount, including amounts attributed to RMDs, will be treated as Excess Withdrawals (see below). 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. Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) that exceed the Maximum Annual Withdrawal amount. When Excess Withdrawals occur: 1. The Guaranteed Amount is reduced by the same proportion that the Excess Withdrawal reduces the contract value. This means that the reduction in the Guaranteed Amount could be more than a dollar-for-dollar reduction. 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount (after the pro rata reduction for the Excess Withdrawal); and 3. The 200% Step-up will never occur. The following example demonstrates the impact of an Excess Withdrawal on the Guaranteed Amount and the Maximum Annual Withdrawal amount. A $12,000 withdrawal caused a $15,182 reduction in the Guaranteed Amount. Prior to Excess Withdrawal: Contract Value = $60,000 36 Guaranteed Amount = $85,000 Maximum Annual Withdrawal amount = $5,000 (5% of the initial Guaranteed Amount of $100,000) After a $12,000 Withdrawal ($5,000 is within the Maximum Annual Withdrawal amount, $7,000 is the Excess Withdrawal): The contract value and Guaranteed Amount are reduced dollar for dollar for the Maximum Annual Withdrawal amount of $5,000: Contract Value = $55,000 Guaranteed Amount = $80,000 The contract value is reduced by the $7,000 Excess Withdrawal and the Guaranteed Amount is reduced by 12.72%, the same proportion that the Excess Withdrawal reduced the $55,000 contract value ($7,000 \d $55,000) Contract value = $48,000 Guaranteed Amount = $69,818 ($80,000 X 12.72% = $10,181; $80,000 - $10,181 = $69,818) Maximum Annual Withdrawal amount = $3,491.00 (5% of $69,818) In a declining market, withdrawals that exceed the Maximum Annual Withdrawal amount may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. Withdrawals before age 591/2/65. If any withdrawal is made prior to the time the contractowner, is age 591/2 (Single Life) or the contractowner and spouse (Joint Life) are both age 65, including withdrawals equal to Maximum Annual Withdrawal amounts, the following will occur: 1. The Guaranteed Amount will be reduced in the same proportion that the entire withdrawal reduced the contract value (this means that the reduction in the Guaranteed amount could be more than a dollar-for-dollar reduction); 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount; 3. The 5% Enhancement to the Guaranteed Amount is not available until after an Automatic Annual Step-up to the contract value occurs. This Automatic Annual Step-up will not occur until the contract value exceeds the Guaranteed Amount on a Benefit Year anniversary.See the 5% Enhancement section above), and 4. The 200% Step-up will never occur. The following is an example of the impact of a withdrawal prior to age 591/2 for single or age 65 for joint: o $100,000 purchase payment o $100,000 Guaranteed Amount o A 10% market decline results in a contract value of $90,000 o $5,000 Maximum Annual Withdrawal amount If a $5,000 withdrawal is made before age 591/2, the Guaranteed Amount will be $94,444 ($100,000 reduced by 5.56% ($5,000/ $90,000) and the new Maximum Annual Withdrawal amount is $4,722 (5% times $94,444). In a declining market, withdrawals prior to age 591/2 (or 65 if Joint Life) may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. Lincoln Lifetime IncomeSM Advantage Plus. If you have purchased Lincoln Lifetime IncomeSM Advantage Plus, ("Plus Option"), on the seventh Benefit Year anniversary, you may elect to receive an increase in your contract value equal to the excess of your initial Guaranteed Amount, (plus any purchase payments made within 90 days of the rider effective date) over your current contract value. Making this election will terminate the Plus Option as well as the Lincoln Lifetime IncomeSM Advantage and the total charge for this rider and you will have no further rights to Maximum Annual Withdrawal amounts or any other benefits under this rider. You have 30 days after the seventh Benefit Year anniversary to make this election, but you will receive no more than the difference between the contract value and the initial Guaranteed Amount (plus any purchase payments within 90 days of the rider effective date) on the seventh Benefit Year anniversary. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts, prior to the seventh Benefit Year anniversary. If you make a withdrawal prior to the seventh Benefit Year anniversary, the charge for this Plus Option (in addition to the Lincoln Lifetime IncomeSM Advantage charge) will continue until the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed from your contract and the charge for your Lincoln Lifetime IncomeSM Advantage will continue. If you do not elect to exercise the Plus Option, after the seventh Benefit Year anniversary, your Lincoln Lifetime IncomeSM Advantage and its charge will continue and the Plus Option 0.15% charge will be removed from your contract. The following example illustrates the Plus Option upon the seventh Benefit Year anniversary: Initial purchase payment of $100,000; Initial Guaranteed Amount of $100,000. 37 On the seventh Benefit Year anniversary, if the current contract value is $90,000; the contractowner may choose to have $10,000 placed in the contract and the Plus Option (including the right to continue the Lincoln Lifetime IncomeSM Advantage) will terminate at that time. If you decide to purchase the Plus Option, your only investment options until the seventh Benefit Year anniversary are the: LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. You may not transfer contract value out of these funds to any other funds before the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, you may invest in other subaccounts in your contract, subject to the Investment Requirements. Maximum Annual Withdrawal Amount Annuity Payout Option. If you are required to annuitize your Maximum Annual Withdrawal Amount, because you have reached the Maturity Date of the Contract, the Maximum Annual Withdrawal Amount Annuity Payout Option is available. The Maximum Annual Withdrawal Amount Annuity Payment Option is a fixed annuitization in which the contractowner (and spouse if applicable) will receive annual annuity payments equal to the Maximum Annual Withdrawal amount for life (this option is different from other annuity payment options discussed in your prospectus, 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 Maximum Annual Withdrawal amount (including the Nursing Home Enhancement if you qualify) for your life or the life of you and your spouse for the Joint Life option. If the contract value is zero and you have a remaining Maximum Annual Withdrawal amount, you will receive the Maximum Annual Withdrawal Amount Annuity Payment Option. If you are receiving the Maximum Annual Withdrawal Amount Annuity Payout Option, you may be eligible for a 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 Maximum Annual Withdrawal Amount Annuity Payout Option must not be the Account Value Death Benefit. The final payment is equal to the sum of all purchase payments, decreased by withdrawals in the same proportion as the withdrawals reduce the contract value; withdrawals less than or equal to the Maximum Annual Withdrawal amount and payments under the Maximum Annual Withdrawal Annuity Payout Option will reduce the sum of the purchase payments dollar for dollar. If your death benefit option in effect immediately prior to the Maximum Annual Withdrawal Amount Annuity Payout Option provided for deduction for withdrawals on a dollar for dollar basis, then any withdrawals that occurred prior to the election of the Lincoln Lifetime Income (Reg. TM) Advantage will reduce the sum of all purchase payments on a dollar for dollar basis. Death Prior to the Annuity Commencement Date. The Lincoln Lifetime IncomeSM Advantage has no provision for a payout of the Guaranteed Amount 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 in the Death Benefit section of this prospectus) will be in effect. Election of the Lincoln Lifetime IncomeSM Advantage 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 will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. 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 Rider if available under the terms and charge in effect at the time of the new purchase. There is no carryover of the Guaranteed Amount. Upon the first death under the Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount will continue for the life of the surviving spouse. The 5% Enhancement, 200% Step-up, Lincoln Lifetime IncomeSM Advantage Plus and Automatic Annual Step-up will continue if applicable as discussed above. Upon the death of the surviving spouse, the Lincoln Lifetime IncomeSM Advantage will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. As an alternative, after the first death, the surviving spouse 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. The surviving spouse must be under age 65. In deciding whether to make this change, the surviving spouse should consider: 1) if the change will cause the Guaranteed Amount and the Maximum Annual Withdrawal amount to decrease and 2) if the Single Life Rider option for new issues will provide an earlier age (591/2) to receive Maximum Annual Withdrawal amounts. Impact of Divorce on Joint Life Option. In the event of a divorce, the contractowner may terminate the Joint Life Option and purchase a Single Life Option, if available, (if the contractowner is under age 65) at the current Rider charge and the terms in effect for new sales of the Single Life Option. 38 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. General Provisions. Termination. After the seventh anniversary of the effective date of the Rider, the contractowner may terminate the Rider by notifying us in writing. Lincoln Lifetime IncomeSM Advantage will automatically terminate: o Upon exercise of the Lincoln Lifetime IncomeSM Advantage Plus option to receive an increase in the contract value equal to the excess of your initial Guaranteed Amount over the contract value; o on the annuity commencement date (except payments under the Maximum Annual Withdrawal Amount Annuity Payment Option will continue if applicable); o if the contractowner or annuitant is changed (except if the surviving spouse under the Joint Life option 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 death under the Single Life option or the death of the surviving spouse under the Joint Life option; o when the Maximum Annual Withdrawal amount is reduced 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 re-elect any Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, 4LATER (Reg. TM) Advantage or any other living benefits we may offer in the future. The one-year wait does not apply to the election of a new rider after the exercise (and resulting termination) of the Lincoln Lifetime IncomeSM Advantage Plus. 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 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 has the opportunity to provide a higher Guaranteed Amount because of the 5% Enhancement, Automatic Annual Step-up or 200% Step-up and this benefit also provides the potential for lifetime withdrawals from an earlier age for the Single Life Option only (59 1/2 rather than age 65 with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-Up). However, the percentage charge for the Lincoln Lifetime IncomeSM Advantage is higher for the Single Life (lower for the Joint Life) and has the potential to increase on every Benefit Year Anniversary if the increase in contract value exceeds the 5% Enhancement. Another factor to consider is that immediate withdrawals from your contract, under the Lincoln Lifetime IncomeSM Advantage, will adversely impact the 5% Enhancement and 200% Step-up. In addition, if the withdrawal is made before age 591/2 (Single Life) or age 65 (Joint Life), the 5% Enhancement is further limited and the 200% Step-up is not available. The Lincoln SmartSecurity (Reg. TM) Advantage provides that Maximum Annual Withdrawal amounts can continue to a beneficiary to the extent of any remaining Guaranteed Amount while the Lincoln Lifetime IncomeSM Advantage does not offer this feature. The Investment Requirements and Termination provisions are different between these two riders. i4LIFE (Reg. TM) Advantage Option. i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable income payments for life, the ability to make withdrawals during a defined period of time (the Access Period) and a death benefit during the Access Period. A minimum payout floor, called the Guaranteed Income Benefit, is also available for purchase at the time you elect i4LIFE (Reg. TM) Advantage. 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 Maximum Annual Withdrawal amounts under Lincoln Lifetime IncomeSM Advantage. You cannot have both i4LIFE (Reg. TM)Advantage and Lincoln Lifetime IncomeSM Advantage in effect on your contract at the same time. Contractowners with an active Lincoln Lifetime IncomeSM Advantage may decide to drop Lincoln Lifetime IncomeSM Advantage and purchase i4LIFE (Reg. TM) Advantage if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. If this decision is made, the contractowner can use any remaining Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage at the terms in effect for owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit must be elected before the Annuity Commencement Date and by age 99 for nonqualified contracts or age 85 for qualified contracts. See i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit sections of your prospectus. The charges for these benefits will be the current charges in effect for the i4LIFE (Reg. TM) Advantage and Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit at the time of election of these benefits. If you use your Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. In addition, Option 2 of the Investment Requirements applicable to Lincoln Lifetime IncomeSM Advantage will also apply to i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit Below is an example of how the Guaranteed Amount from the Lincoln Lifetime IncomeSM Advantage is used to establish the Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. 39 Prior to i4LIFE (Reg. TM) Advantage election: Contract Value = $100,000 Guaranteed Amount = $100,000 After i4LIFE (Reg. TM)Advantage election: Regular Income Payment = $6,700 per year = Contract Value divided by the i4LIFE (Reg. TM) Advantage annuity factor Guaranteed Income Benefit = $5,020 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. 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. 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, withdrawals less than or equal to the Maximum Annual Withdrawal amount, after age 591/2 for the Single Life Option or age 65 for Joint Life Option, will reduce the sum of all purchase payments option of the death benefit on a dollar for dollar basis. This applies to the sum of all purchase payments alternative of the Enhanced Guaranteed Minimum Death Benefit or the Estate Enhancement Benefit, whichever is in effect. See Death Benefits in your prospectus. Any Excess Withdrawals and all withdrawals prior to age 591/2 for Single Life or age 65 for Joint Life 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. The following example demonstrates how a withdrawal will reduce the death benefit if both the Enhanced Guaranteed Minimum Death Benefit (EGMDB) and the Lincoln Lifetime IncomeSM Advantage 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 Maximum Annual Withdrawal Amount $ 5,000 Enhanced Guaranteed Minimum Death Benefit (EGMDB) values before withdrawal is the greatest of a), b), or c) described in detail in the EGMDB section of this prospectus: a) Contract value $80,000 b) Sum of purchase payments $100,000 c) Highest anniversary contract value $150,000 Withdrawal of $9,000 will impact the death benefit calculations as follows: a) $80,000 - $9,000 = $71,000 (Reduction $9,000) b) $100,000 - $5,000 = $95,000 (dollar for dollar reduction of Maximum Annual Withdrawal amount) $95,000 - $5,067 = $89,933 [$95,000 times ($4,000/$75,000) = $5,067] Pro rata 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 reduces the death benefit option pro rata. Total reduction = $16,875. Item c) provides the largest death benefit of $133,125. Availability. The Lincoln Lifetime IncomeSM Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts, for existing contractowners, on or about May 19, 2008. 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 on or after the purchase of i4LIFE (Reg. TM) Advantage or on or after the Annuity Commencement Date and must wait at least 12 months after terminating 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage or any other living benefits we may offer in the future. The 12 month wait will be waived until the later of July 31, 2008 or 60 days after the Lincoln Lifetime IncomeSM Advantage is available for sale in your state. If you decide to drop a rider to add Lincoln Lifetime IncomeSM Advantage, your Guaranteed Amount will equal the current contract value on the effective date of the change. Before you make this change, you should consider that no guarantees or fee waiver provisions carry over from the previous rider. The Lincoln Lifetime IncomeSM Advantage terminates after the death of a covered life and the Guaranteed Amount is not available to a benefiicary. You will be subject to additional Investment Requirements. See the comparison to Lincoln SmartSecurity (Reg. TM) Advantage for other factors to consider before making a change. 40 There is no guarantee that the Lincoln Lifetime IncomeSM Advantage 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. In addition, certain features of the Rider may not be available in some states. Check with your investment representative regarding availability. 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. Two different options are available to step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up). You must choose one of these two options: Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up when you purchase the benefit. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up, the contractowner has the option to step-up the Guaranteed Amount after five years. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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 may 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 its 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, which provides minimum guaranteed, periodic withdrawals for life. See The Contracts - Lincoln Lifetime IncomeSM Advantage - 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 $5,000,000 under Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and $10,000,000 for Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. This maximum takes into consideration the combined Guaranteed Amount 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) under either the Lincoln SmartSecuritySM Advantage or the Lincoln Lifetime IncomeSM Advantage. 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. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option we may restrict purchase payments to your annuity contract in the future. We will notify you if we restrict additional purchase payments. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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. 41 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 option, 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 interest adjustments), the Rider charge and account fee plus any purchase payments made on that date is greater than the Guaranteed Amount immediately preceding the valuation date. After the tenth Benefit Year anniversary, you may initiate another ten-year period of automatic step-ups by electing (in writing) to step-up the Guaranteed Amount to the greater of the Contract Value or the current Guaranteed Amount if: a. each contractowner and annuitant is under age 81; and b. the contractowner or joint owner is still living. If you choose, we will administer this election for you automatically, so that a new ten-year period of step-ups will begin at the end of each prior ten-year step-up period. Following is an example of how the step-ups work in the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, (assuming no withdrawals or additional purchase payments):
Contract Value Guaranteed Amount o Initial Deposit $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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the fifth anniversary of the Rider, you may elect (in writing) to step-up the Guaranteed Amount to an amount equal to the contract value on the effective date of the step-up. Additional step-ups are permitted, but you must wait at least 5 years between each step-up. Under both the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up options, 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: o 7% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and o 5% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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 7% or 5% (depending on your option) 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: 42 a. the Maximum Annual Withdrawal amount immediately prior to the step-up; or b. 7% or 5% (depending on your option) of the new (stepped-up) Guaranteed Amount. If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) are within the Maximum Annual Withdrawal amount, then: 1. the withdrawal will reduce the Guaranteed Amount by the amount of the withdrawal on a dollar-for-dollar basis, and 2. the Maximum Annual Withdrawal amount will remain the same. Withdrawals within the Maximum Annual Withdrawal amount are not subject to the market value adjustment on the amount withdrawn from the fixed account, if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option is in effect, withdrawals from IRA contracts will be treated as within the Maximum Annual Withdrawal amount (even if they exceed the 5% Maximum Annual Withdrawal amount) only if the withdrawals are taken in the form of systematic monthly or quarterly installments, as calculated by Lincoln, of the amount needed to satisfy the required minimum distribution rules under Internal Revenue Code Section 401(a)(9) for this contract value. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters. When cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) exceed the Maximum Annual Withdrawal amount: 1. The Guaranteed Amount is reduced to the lesser of: o the contract value immediately following the withdrawal, or o the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal. 2. The Maximum Annual Withdrawal amount will be the least of: o the Maximum Annual Withdrawal amount immediately prior to the withdrawal; or o the greater of: o 7% or 5% (depending on your option) of the reduced Guaranteed Amount immediately following the withdrawal (as specified above when withdrawals exceed the Maximum Annual Withdrawal amount); or o 7% or 5% (depending on your option) 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 option 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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option for IRA contracts, the annual amount available for withdrawal within the Maximum Annual Withdrawal amount may not be sufficient to satisfy your required minimum distributions under the Internal Revenue Code. This is particularly true for individuals over age 84. Therefore, you may have to make withdrawals that exceed the Maximum Annual Withdrawal amount. Withdrawals over the Maximum Annual Withdrawal amount may quickly and substantially decrease your Guaranteed Amount and Maximum Annual Withdrawal amount, especially in a declining market. You 43 should consult your tax advisor to determine if there are ways to limit the risks associated with these withdrawals. Such methods may involve the timing of withdrawals or foregoing step-ups of the Guaranteed Amount. Withdrawals in excess of the Maximum Annual Withdrawal amount will be subject to an market value 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. (Available only with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single or Joint Life options and not the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or the prior version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option). Payment of the Maximum Annual Withdrawal amount will be guaranteed for your (contractowner) lifetime (if you purchase the Single Life option) or for the lifetimes of you (contractowner) and your spouse (if the Joint Life option is purchased), as long as: 1) No withdrawals are made before you (and your spouse if a Joint Life) are age 65; and 2) An excess withdrawal (described above) has not reduced the Maximum Annual Withdrawal amount to zero. If the lifetime withdrawal is not in effect, the Maximum Annual Withdrawal amount will last only until the Guaranteed Amount equals zero. If any withdrawal is made prior to the time you (or both spouses) are age 65, the Maximum Annual Withdrawal amount will not last for the lifetime(s), except in the two situations described below: 1) If a step-up of the Guaranteed Amount after age 65 causes the Maximum Annual Withdrawal amount to equal or increase from the immediately prior Maximum Annual Withdrawal amount. This typically occurs if the contract value equals or exceeds the highest, prior Guaranteed Amount. If this happens, the new Maximum Annual Withdrawal amount will automatically be available for the specified lifetime(s); or 2) The contractowner makes a one-time election to reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount. This reset will occur on the first valuation date following the Benefit Year anniversary and will be based on the Guaranteed Amount as of that valuation date. This will reduce your Maximum Annual Withdrawal amount. A contractowner would only choose this if the above situation did not occur. To reset the Maximum Annual Withdrawal amount, the following must occur: a. the contractowner (and spouse if applicable) is age 65; b. the contract is currently within a ten-year automatic step-up period described above (or else a contractowner submits a step-up request to start a new ten-year automatic step-up period) (the contractowner must be eligible to elect a step-up; i.e., all contractowners and the annuitant must be alive and under age 81); and c. you have submitted this request to us in writing at least 30 days prior to the end of the Benefit Year. As an example of these two situations, if you purchased the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life with $100,000, your initial Guaranteed Amount is $100,000 and your initial Maximum Annual Withdrawal amount is $5,000. If you make a $5,000 withdrawal at age 62, your Guaranteed Amount will decrease to $95,000. Since you did not satisfy the age 65 requirement, you do not have a lifetime Maximum Annual Withdrawal amount. If a step-up of the Guaranteed Amount after age 65 (either automatic or owner-elected) causes the Guaranteed Amount to equal or exceed $100,000, then the Maximum Annual Withdrawal amount of $5,000 (or greater) will become a lifetime payout. This is the first situation described above. However, if the Guaranteed Amount has not been reset to equal or exceed the highest prior Guaranteed Amount, then you can choose the second situation described above if you are age 65 and the contract is within a ten-year automatic step-up period. This will reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount; 5% of $95,000 is $4,750. This is your new Maximum Annual Withdrawal amount which can be paid for your lifetime unless excess withdrawals are made. The tax consequences of withdrawals and annuity payments are discussed in Federal Tax Matters. 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 7% or 5% (depending on your option) Maximum Annual Withdrawal amount, including the lifetime Maximum Annual Withdrawals if in effect (this option is different from other annuity 44 payment options discussed in your prospectus, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. Payments will continue until the Guaranteed Amount equals zero and may continue until death if the lifetime Maximum Annual Withdrawal is in effect. This may result in a partial, final payment. You would consider this option only if your contract value is less than the Guaranteed Amount (and you don't believe the contract value will ever exceed the Guaranteed Amount) and you do not wish to keep your annuity contract in force other than to pay out the Guaranteed Amount. You will have no other contract features other than the right to receive annuity payments equal to the Maximum Annual Withdrawal amount until the Guaranteed Amount equals zero. If the contract value is zero and you have a remaining Guaranteed Amount, you may not withdraw the remaining Guaranteed Amount in a lump sum, but must elect the Guaranteed Amount Annuity Payment Option. Death Prior to the Annuity Commencement Date. There is no provision for a lump sum payout of the Guaranteed Amount upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit will be paid other than any applicable Maximum Annual Withdrawal amounts. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the Single Life under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Single Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will end. If the contract is continued as discussed below, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero. In the alternative, the surviving spouse can choose to become the new Single Life, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. The surviving spouse will need to be 65 before taking withdrawals to qualify for a lifetime payout. In deciding whether to make this change, the surviving spouse should consider: 1) the change a reset would cause to the Guaranteed Amount and the Maximum Annual Withdrawal amount ; 2) whether it is important to have Maximum Annual Withdrawal amounts for life versus the remainder of the prior Guaranteed Amount and 3) the cost of the Single Life option. Upon the first death under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will continue for the life of the surviving spouse. Upon the death of the surviving spouse, the lifetime payout of the Maximum Annual Withdrawal amount will end. However, if the spouse's beneficiary elects to take the annuity death benefit in installments, 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 option, will apply to the spouse as the new contractowner. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, the new contractowner is eligible to elect to step-up the Guaranteed Amount prior to the next available step-up date; however, all other conditions for the step-up apply and any subsequent step-up by the new contractowner must meet all conditions for a step-up. If a non-spouse beneficiary elects to receive the death benefit in installments (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 option 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. 45 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 re-elect any Lincoln SmartSecurity (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage options. i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to drop Lincoln SmartSecurity (Reg. TM) Advantage 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. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. All contractowners and the annuitant of the contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option and contractowners of qualified annuity contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option must be under age 81 at the time this Rider is elected. You cannot elect the Rider on or after the purchase of i4LIFE (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage or on or after the Annuity Commencement Date. There is no guarantee that the Lincoln SmartSecurity (Reg. TM) Advantage will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. The availability of this Rider will depend upon your state's approval of this Rider. Check with your investment representative regarding availability. i4LIFE (Reg. TM) Advantage i4LIFE (Reg. TM) Advantage (the Variable Annuity Payout Option Rider in your contract) is an optional annuity payout rider you may purchase at an additional cost and is separate and distinct from other annuity payout options offered under your contract and described later in this prospectus. You may also purchase either the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit or the 4LATER Guaranteed Income Benefit (described below) for an additional charge. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is a payout option that provides you with variable, periodic regular income payments for life. These payouts are made during an Access Period, where you have access to the Account Value. After the Access Period ends, payouts continue for the rest of your life, during the Lifetime Income Period. i4LIFE (Reg. TM) is different from other annuity payout options provided by Lincoln because with i4LIFE (Reg. TM) Advantage, you have the ability to make additional withdrawals or surrender the contract during the Access Period. You may also purchase the Guaranteed Income Benefit which provides a minimum payout floor for your regular income payments. The initial regular income payment is calculated from the Account Value on the periodic income commencement date, a date no more than 14 days prior to the date you select to begin receiving the regular income payments. This option is available on non-qualified annuities, IRAs and Roth IRAs (check with your registered representative regarding availability with SEP markets). This option, when available in your state, 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 an annuity payout option is elected by sending a written request to our Home Office. If you purchased 4LATER (Reg. TM) Advantage, you must wait at least one year before you can purchase i4LIFE (Reg. TM) Advantage. When you elect i4LIFE (Reg. TM) Advantage, you must choose the annuitant, secondary life, if applicable, and make several choices about your regular income payments. The annuitant and secondary life may not be changed after i4LIFE (Reg. TM) Advantage is elected. For qualified contracts the secondary life must be the spouse. See i4LIFE (Reg. TM) Advantage Death Benefits regarding the impact of a change to the annuitant prior to the i4LIFE (Reg. TM) Advantage election. i4LIFE (Reg. TM) Advantage for IRA annuity contracts is only available if the annuitant and secondary life, if applicable, is age 591/2 or older at the time the option is elected. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions 46 for required minimum distributions. Additional purchase payments may be made during the Access Period for an IRA annuity contract, unless the 4LATERSM Advantage Guaranteed Income Benefit or i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit has been elected. Additional purchase payments will not be accepted once i4LIFE (Reg. TM) Advantage becomes effective for a non-qualified annuity contract. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The contracts - Transfers on or before the annuity commencement date. When you elect i4LIFE (Reg. TM) Advantage you must select a death benefit option. Once i4LIFE (Reg. TM) Advantage begins, any prior death benefit election will terminate and the i4LIFE (Reg. TM) Advantage death benefit will be in effect. The amount paid under the new death benefit may be less than the amount that would have been paid under the death benefit provided before i4LIFE (Reg. TM) Advantage began. See The Contracts - i4LIFE (Reg. TM) Advantage death benefits. Access Period. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period, which begins on the periodic income commencement date. The Access Period is a defined period of time during which we pay variable, periodic regular income payments and provide a death benefit, and during which you may surrender the contract and make withdrawals from your Account Value (defined below). At the end of the Access Period, the remaining Account Value is used to make regular income payments for the rest of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently to age 115 for non-qualified contracts; to age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. 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. Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value will be increased/decreased by any investment gains/losses including interest credited on the fixed account, and will be reduced by regular income payments made and 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 is living. 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 applicable market value adjustments. See Charges and other deductions. For information regarding income tax consequences of regular income payments, see Federal tax matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (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 47 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 annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and the Guaranteed Income Benefit if applicable) will terminate. Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed investment return and the frequency of the recalculation do not change. The initial regular income payment during the Lifetime Income Period is determined by dividing the Account Value on the last valuation date of the Access Period by 1000 and multiplying the result by an annuity factor revised to reflect that the Access Period has ended. The annuity factor is based upon: o the age 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 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. 48 i4LIFE (Reg. TM) Advantage Death Benefits i4LIFE (Reg. TM) Advantage Account Value Death Benefit. The i4LIFE (Reg. TM) Advantage Account Value death benefit is available during the Access Period. This death benefit is equal to the Account Value as of the valuation date on which we approve the payment of the death claim. You may not change this death benefit once it is elected. i4LIFE (Reg. TM) Advantage 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, if any. Regular income payments, including withdrawals to provide the Guaranteed Income Benefit, and other withdrawals, if any, reduce the death benefit on a dollar for dollar basis. References to purchase payments and withdrawals include purchase payments and withdrawals made prior to the election of i4LIFE (Reg. TM) Advantage; 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 on a dollar for dollar basis. If your contract has the ABE Enhancement Amount (if elected at the time of application) (see discussion under Accumulated Benefit Enhancement ABE) specified in your contract benefit data pages as applicable on the date of death, this Enhancement Amount will be added to the sum of the purchase payments, but will be reduced by the regular income payments and withdrawals on either a dollar for dollar basis or in the same proportion that the regular income payment or withdrawal reduced the contract value or Account Value, depending on the terms of your contract. 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. All references to withdrawals include deductions for applicable charges and premium taxes, if any. Contracts with the i4LIFE (Reg. TM) Advantage EGMDB may elect to change to the i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our 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 i4LIFE (Reg. TM) Advantage Account Value death benefit. For non-qualified contracts, upon the death of the contractowner, joint owner or annuitant, the contractowner (or beneficiary) may elect to terminate the contract and receive full payment of the death benefit or may elect to continue the contract and receive regular income payments. Upon the death of the secondary life, who is not also an owner, only the surrender value is paid. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. 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. 49 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. Accumulated Benefit Enhancement (ABESM) (Non-qualified contracts only). This benefit is no longer available to contract purchasers after November 1, 2005. We provide to eligible contractowners of non-qualified i4LIFE (Reg. TM) Advantage contracts only an ABE Enhancement Amount, if requested at the time of application, at no additional charge. You are eligible to receive the ABE Enhancement Amount if: o you are purchasing i4LIFE (Reg. TM) Advantage with the EGMDB death benefit; o you are utilizing the proceeds of a variable annuity contract of an insurer not affiliated with us to purchase the contract. Prior contracts with loans or collateral assignments are not eligible for this benefit; o the cash surrender value of the prior contract(s) is at least $50,000 at the time of the surrender (amounts above $2,000,000 will require our approval); o all contractowners, joint owners and annuitants must be under the age of 76 as of the contract date (as shown in your contract) to select this benefit; or o the contractowners, joint owners and annuitants of this contract must have been owner(s) or annuitants of the prior contract(s). Upon the death of any contractowner, joint owner or annuitant, the ABE Enhancement Amount will be payable in accordance with the terms of the i4LIFE (Reg. TM) Advantage EGMDB death benefit. However, if the death occurs in the first contract year, only 75% of the Enhancement Amount is available. The ABE Enhancement Amount is equal to the excess of the prior contract's documented death benefit(s) over the actual cash surrender value received by us. However, we will impose a limit on the prior contract's death benefit equal to the lesser of: o 140% of the prior contract's cash value; or o the prior contract's cash value plus $400,000. In addition, if the actual cash surrender value we receive is less than 95% of the documented cash value from the prior insurance company, the prior contract's death benefit will be reduced proportionately according to the reduction in cash value amounts. For the ABE Enhancement Amount to be effective, documentation of the death benefit and cash value from the prior insurance company must be provided to us at the time of the application. We will only accept these amounts in a format provided by the prior insurance company. Examples of this documentation include: the prior company's periodic customer statement, a statement on the prior company's letterhead, or a printout from the prior company's website. This documentation cannot be more than ninety (90) days old at the time of the application. You may provide updated documentation prior to the contract date if it becomes available from your prior company. If more than one annuity contract is exchanged to a contract with us, the ABE Enhancement Amount will be calculated for each prior contract separately, and then added together to determine the total ABE Enhancement Amount. Upon the death of any contractowner or joint owner who was not a contractowner on the effective date of the i4LIFE (Reg. TM) Advantage EGMDB death benefit, the ABE Enhancement Amount will be equal to zero (unless the change occurred because of the death of a contractowner or joint owner). If any contractowner or joint owner is changed due to a death and the new contractowner or joint owner is age 76 or older when added to the contract, then the ABE Enhancement Amount for this new contractowner or joint owner will be equal to zero. The ABE Enhancement Amount will terminate on the valuation date the i4LIFE (Reg. TM) Advantage EGMDB death benefit option of the contract is changed or terminated. It is important to realize that even with the ABE Enhancement Amount, your death benefit will in many cases be less than the death benefit from your prior company. This is always true in the first year, when only 75% of the ABE Enhancement Amount is available. Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage There is a Guaranteed Income Benefit 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 i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit charge. 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 prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit. Refer to the 4LATER (Reg. TM) section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider may limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements - Option 1. 50 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 for new elections 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 who decides to drop Lincoln Lifetime IncomeSM Advantage 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 rider. i4LIFE (Reg. TM) Guaranteed Income Benefit, if available, is purchased when you elect i4LIFE (Reg. TM) Advantage or anytime during the Access Period. If you intend to use the Guaranteed Amount from either the Lincoln SmartSecurity (Reg. TM) Advantage or the Lincoln Lifetime IncomeSM Advantage riders to establish the Guaranteed Income Benefit, you must elect the Guaranteed Income Benefit at the time you elect i4LIFE (Reg. TM) Advantage. The Guaranteed Income Benefit is initially equal to 75% of the regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) in effect at the time the Guaranteed Income Benefit is elected. Contractowners who purchased the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage can use the remaining Guaranteed Amount (if greater than the contract value) at the time the Guaranteed Income Benefit is determined, to increase the Guaranteed Income Benefit. The Guaranteed Income Benefit will be increased by the ratio of the remaining Guaranteed Amount to the contract value at the time the initial i4LIFE (Reg. TM) Advantage payment is calculated. In other words, the Guaranteed Income Benefit will equal 75% of the initial regular income payment times the remaining Guaranteed Amount divided by the contract value, if the Guaranteed Amount is greater than the contract value. 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 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. This withdrawal 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 withdrawals 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. If your Account Value equals zero, no death benefit will be paid. 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. 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. 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. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment affects the i4LIFE (Reg. TM) Account Value: Guaranteed Income Benefit = $5,692; i4LIFE regular income payment = $5,280 i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment -$5,280 Additional withdrawal for Guaranteed Income Benefit -$412 i4LIFE (Reg. TM) Account Value after payouts $74,308
In the current version of the Guaranteed Income Benefit option ("Version 2") the Guaranteed Income Benefit will automatically step-up every three years to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary during a 15-year step-up period. At the end of a 15-year step-up period, you may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that we administer this election for you. At the time of a reset of the 15 year period, the Guaranteed Income Benefit charge may increase subject to the guaranteed maximum charge of 1.50%. (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charges.) After we administer this election, you have 30 days to notify us if you wish to reverse the election. If you have an older version of the Guaranteed Income Benefit ("Version 1"), your Guaranteed Income Benefit will not step-up on an anniversary, but will remain level. This version is no longer available for sale. 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 General i4LIFE (Reg. TM) Provisions for an example. 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. 51 o The minimum Access Period required for this benefit is 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) thereby reducing your regular income payment, your i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will also be reduced. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be reduced in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will terminate. Refer to the Example in the 4LATER (Reg. TM) Guaranteed Income Benefit section. 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 periodic 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 periodic 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. If you used your Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. 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. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit. Contractowners with the Lincoln Lifetime IncomeSM Advantage rider who purchase the Guaranteed Income Benefit are subject to the following guarantees which are set forth in the Lincoln Lifetime IncomeSM Advantage rider: a) Maximum charge for the Guaranteed Income Benefit b) guaranteed annuity factors. General i4LIFE (Reg. TM) Provisions Withdrawals. You may request a withdrawal at any time prior to or during the Access Period. We reduce the Account Value by the amount of the withdrawal, and all subsequent regular income payments and Guaranteed Income Benefit payments, if applicable, will be reduced proportionately. Withdrawals may have tax consequences. See Federal Tax Matters. The market value 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 $ 750 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 = $750 X 10% = $75 Guaranteed Income Benefit after Withdrawal = $750 - $75 = $675 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. The market value 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 will receive the EGMDB option. Upon termination, 52 we will stop assessing the charge for i4LIFE (Reg. TM) Advantage and begin assessing the mortality and expense risk charge and administrative charge associated with the new death benefit option. Your contract value upon termination will be equal to the Account Value on the valuation date we terminate i4LIFE (Reg. TM) Advantage. For non-qualified contracts, you may not terminate i4LIFE (Reg. TM) Advantage once you have elected it. 4LATER (Reg. TM) Advantage 4LATER (Reg. TM) Advantage is a rider that is available to protect against market loss by providing you with a method to receive a minimum payout from your annuity. The rider provides an Income Base (described below) prior to the time you begin taking payouts from your annuity. If you elect 4LATER (Reg. TM) Advantage, you must elect i4LIFE (Reg. TM) with the 4LATER (Reg. TM) Guaranteed Income Benefit to receive a benefit from 4LATER (Reg. TM) Advantage. Election of these riders may limit how much you can invest in certain subaccounts. See The Contracts-Investment Requirements. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Advantage charge. 4LATER (Reg. TM) Advantage Before Payouts Begin The following discussion applies to 4LATER (Reg. TM) Advantage during the accumulation phase of your annuity, referred to as 4LATER (Reg. TM). This is prior to the time any payouts begin under i4LIFE (Reg. TM) Advantage with the 4LATER (Reg. TM) Guaranteed Income Benefit. Income Base. The Income Base is a value established when you purchase 4LATER (Reg. TM) and will only be used to calculate the minimum payouts available under your contract at a later date. The Income Base is not available for withdrawals or as a death benefit. If you elect 4LATER (Reg. TM) at the time you purchase the contract, the Income Base initially equals the purchase payments. If you elect 4LATER (Reg. TM) after we issue the contract, the Income Base will initially equal the contract value on the 4LATER (Reg. TM) Effective Date. Additional purchase payments automatically increase the Income Base by the amount of the purchase payments. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. As described below, during the accumulation phase, the Income Base will be automatically enhanced by 15% (adjusted for additional purchase payments and withdrawals as described in the Future Income Base section below) at the end of each Waiting Period. In addition, after the Initial Waiting Period, you may elect to reset your Income Base to the current contract value if your contract value has grown beyond the 15% enhancement. You may elect this reset on your own or you may choose to have Lincoln Life automatically reset the Income Base for you at the end of each Waiting Period. These reset options are discussed below. Then, when you are ready to elect i4LIFE (Reg. TM) Advantage and establish the 4LATER (Reg. TM) Guaranteed Income Benefit, the Income Base (if higher than the contract value) is used in the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit calculation. Waiting Period. The Waiting Period is each consecutive 3-year period which begins on the 4LATER (Reg. TM) Effective Date, or on the date of any reset of the Income Base to the contract value. At the end of each completed Waiting Period, the Income Base is increased by 15% (as adjusted for purchase payments and withdrawals) to equal the Future Income Base as discussed below. The Waiting Period is also the amount of time that must pass before the Income Base can be reset to the current contract value. A new Waiting Period begins after each reset and must be completed before the next 15% enhancement or another reset occurs. Future Income Base. 4LATER (Reg. TM) provides a 15% automatic enhancement to the Income Base after a 3-year Waiting Period. This enhancement will continue every 3 years until i4LIFE (Reg. TM) Advantage is elected, you terminate 4LATER (Reg. TM) or you reach the Maximum Income Base. See Maximum Income Base. During the Waiting Period, the Future Income Base is established to provide the value of this 15% enhancement on the Income Base. After each 3-year Waiting Period is satisfied, the Income Base is increased to equal the value of the Future Income Base. The 4LATER (Reg. TM) charge will then be assessed on this newly adjusted Income Base, but the percentage charge will not change. Any purchase payment made after the 4LATER (Reg. TM) Effective Date, but within 90 days of the contract effective date, will increase the Future Income Base by the amount of the purchase payment, plus 15% of that purchase payment. Example: Initial Purchase Payment $100,000 Purchase Payment 60 days later $ 10,000 -------- Income Base $110,000 Future Income Base (during the 1st Waiting Period) $126,500 ($110,000 x 115%) Income Base (after 1st Waiting Period) $126,500 New Future Income Base (during 2nd Waiting Period) $145,475 ($126,500 x 115%)
Any purchase payments made after the 4LATER (Reg. TM) Effective Date and more than 90 days after the contract effective date will increase the Future Income Base by the amount of the purchase payment plus 15% of that purchase payment on a pro-rata basis for the number of full years remaining in the current Waiting Period. 53 Example: Income Base $100,000 Purchase Payment in Year 2 $ 10,000 New Income Base $110,000 -------- Future Income Base (during 1st Waiting Period-Year 2) $125,500 ($100,000 x 115%) + ($10,000 x 100%) + (10,000 x 15% x 1/3) Income Base (after 1st Waiting Period) $125,500 New Future Income Base (during 2nd Waiting Period) $144,325 (125,500 x 115%)
Withdrawals reduce the Future Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. During any subsequent Waiting Periods, if you elect to reset the Income Base to the contract value, the Future Income Base will equal 115% of the contract value on the date of the reset and a new Waiting Period will begin. See Resets of the Income Base to the current contract value below. In all situations, the Future Income Base is subject to the Maximum Income Base described below. The Future Income Base is never available to the contractowner to establish a 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, but is the value the Income Base will become at the end of the Waiting Period. Maximum Income Base. The Maximum Income Base is equal to 200% of the Income Base on the 4LATER (Reg. TM) Effective Date. The Maximum Income Base will be increased by 200% of any additional purchase payments. In all circumstances, the Maximum Income Base can never exceed $10,000,000. This maximum takes into consideration the combined Income Bases for all Lincoln Life contracts (or contracts issued by our affiliates) owned by you or on which you are the annuitant. After a reset to the current contract value, the Maximum Income Base will equal 200% of the contract value on the valuation date of the reset not to exceed $10,000,000. Each withdrawal will reduce the Maximum Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. Example: Income Base $100,000 Maximum Income Base $200,000 Purchase Payment in Year 2 $ 10,000 Increase to Maximum Income Base $ 20,000 New Income Base $110,000 New Maximum Income Base $220,000 Future Income Base after Purchase $125,500 Maximum Income Base $220,000 Payment Income Base (after 1st Waiting $125,500 Period) Future Income Base (during 2nd $144,325 Maximum Income Base $220,000 Waiting Period) Contract Value in Year 4 $112,000 Withdrawal of 10% $ 11,200 After Withdrawal (10% adjustment) ----------------------------------------- Contract Value $100,800 Income Base $112,950 Future Income Base $129,892 Maximum Income Base $198,000
Resets of the Income Base to the current contract value ("Resets"). You may elect to reset the Income Base to the current contract value at any time after the initial Waiting Period following: (a) the 4LATER (Reg. TM) Effective Date or (b) any prior reset of the Income Base. Resets are subject to a maximum of $10,000,000 and the annuitant must be under age 81. You might consider resetting the Income Base if your contract value has increased above the Income Base (including the 15% automatic Enhancements) and you want to lock-in this increased amount to use when setting the Guaranteed Income Benefit. If the Income Base is reset to the contract value, the 15% automatic Enhancement will not apply until the end of the next Waiting Period. This reset may be elected by sending a written request to our Home office or by specifying at the time of purchase that you would like us to administer this reset election for you. If you want us to administer this reset for you, at the end of each 3-year Waiting Period, if the contract value is higher than the Income Base (after the Income Base has been reset to the Future Income Base), we will implement this election and the Income Base will be equal to the contract value on that date. We will notify you that a reset has occurred. This will continue until you elect i4LIFE (Reg. TM) Advantage, the annuitant reaches age 81, or you reach the Maximum Income Base. If we 54 administer this reset election for you, you have 30 days after the election to notify us if you wish to reverse this election and have your Income Base increased to the Future Income Base instead. You may wish to reverse this election if you are not interested in the increased charge. If the contract value is less than the Income Base on any reset date, we will not administer this reset. We will not attempt to administer another reset until the end of the next 3-year Waiting Period; however, you have the option to request a reset during this period by sending a written request to our Home office. At the time of each reset (whether you elect the reset or we administer the reset for you), the annual charge will change to the current charge in effect at the time of the reset, not to exceed the guaranteed maximum charge. At the time of reset, a new Waiting Period will begin. Subsequent resets may be elected at the end of each new Waiting Period. The reset will be effective on the next valuation date after notice of the reset is approved by us. We reserve the right to restrict resets to Benefit Year anniversaries. The Benefit Year is the 12-month period starting with the 4LATER (Reg. TM) Effective Date and starting with each anniversary of the 4LATER (Reg. TM) Effective Date after that. If the contractowner elects to reset the Income Base, the Benefit Year will begin on the effective date of the reset and each anniversary of the effective date of the reset after that. Eligibility. To purchase 4LATER (Reg. TM) Advantage, the annuitant must be age 80 or younger. If you plan to elect i4LIFE (Reg. TM) Advantage within three years of the issue date of 4LATER (Reg. TM) Advantage, you will not receive the benefit of the Future Income Base. 4LATER (Reg. TM) Rider Effective Date. If 4LATER (Reg. TM) is elected at contract issue, then it will be effective on the contract's effective date. If 4LATER (Reg. TM) is elected after the contract is issued (by sending a written request to our Home office), then it will be effective on the next valuation date following approval by us. 4LATER (Reg. TM) Guaranteed Income Benefit When you are ready to elect i4LIFE (Reg. TM) Advantage regular income payments, the greater of the Income Base accumulated under 4LATER (Reg. TM) or the contract value will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. The 4LATER (Reg. TM) Guaranteed Income Benefit is a minimum payout floor for your i4LIFE (Reg. TM) Advantage regular income payments. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit charge. The Guaranteed Income Benefit will be determined by dividing the greater of the Income Base or contract value (or Guaranteed Amount if applicable) on the periodic income commencement date, by 1000 and multiplying the result by the rate per $1000 from the Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: 4LATER (Reg. TM) Guaranteed Income $ 5,692 i4LIFE (Reg. TM) regular income payment $ 5,280 Benefit
i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment - $ 5,280 Additional payment for 4LATER (Reg. TM) Guaranteed Income Benefit - $ 412 ---------------------------------------------------------------------------- ------- i4LIFE (Reg. TM) Account Value after payment $74,308
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may 55 terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that Lincoln Life administer this election for you. At the time of a reset of the 15 year period, the charge for the 4LATER (Reg. TM) Guaranteed Income Benefit will become the current charge up to the guaranteed maximum charge of 1.50% (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charge). After we administer this election, you have 30 days to notify us if you wish to reverse the election (because you do not wish to incur the additional cost). Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. When you make your 4LATER (Reg. TM) Guaranteed Income Benefit and i4LIFE (Reg. TM) Advantage elections, you must also choose an assumed investment return of 4% to calculate your i4LIFE (Reg. TM) Advantage regular income payments. Once you have elected 4LATER (Reg. TM), the assumed investment return rate will not change; however, we may change the required assumed investment return rate in the future for new purchasers only. The following is an example of what happens when you extend the Access Period: Assume: i4LIFE (Reg. TM) Advantage remaining Access Period = 10 years Current i4LIFE (Reg. TM) Advantage regular income payment = $6375 Current 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 Extend Access Period 5 years: i4LIFE (Reg. TM) Advantage regular income payment after extension = $5355 Percentage change in i4LIFE (Reg. TM) Advantage regular income payment = $5355 \d $6375 = 84% New 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 x 84% = $4781 General Provisions of 4LATER (Reg. TM) Advantage Termination. After the later of the third anniversary of the 4LATER (Reg. TM) Rider Effective Date or the most recent Reset, the 4LATER (Reg. TM) Rider may be terminated upon written notice to us. Prior to the periodic income commencement date, 4LATER (Reg. TM) will automatically terminate upon any of the following events: o termination of the contract to which the 4LATER (Reg. TM) Rider is attached; o the change of or the death of the annuitant (except if the surviving spouse assumes ownership of the contract and the role of the annuitant upon death of the contractowner); or o the change of contractowner (except if the surviving spouse assumes ownership of the contract and the role of annuitant upon the death of the contractowner), including the assignment of the contract. After the periodic income commencement date, the 4LATER (Reg. TM) Rider will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency. 56 A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the 4LATER (Reg. TM) Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. If you terminate 4LATER (Reg. TM) prior to the periodic income commencement date, you must wait one year before you can re-elect 4LATER (Reg. TM) or purchase the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. If you terminate the 4LATER (Reg. TM) Rider on or after the periodic income commencement date, you cannot re-elect it. You may be able to elect the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, after one year. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. The election of one of these benefits, if available, will be treated as a new purchase, subject to the terms and charges in effect at the time of election. Availability. The availability of 4LATER (Reg. TM) will depend upon your state's approval of the 4LATER (Reg. TM) Rider. Check with your registered representative regarding availability. You cannot elect 4LATER (Reg. TM) after an annuity payout option or i4LIFE (Reg. TM) Advantage has been elected, and it cannot be elected on contracts that currently have Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage and elect 4LATER (Reg. TM) will not carry their Guaranteed Amount over into the new 4LATER (Reg. TM). The 4LATER (Reg. TM) Income Base will be established based on the contractowner's contract value on the Effective Date of 4LATER (Reg. TM). Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will have to wait one year before they can elect 4LATER (Reg. TM). See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. 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 may elect the Maximum Annual Withdrawal 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 Maximum Annual Withdrawal Amount Annuity Payout option or the Guaranteed Amount Annuity Payout option. Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if the annuitant dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Payouts Guaranteed for Designated Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option provides a periodic payout during the joint lifetime of the annuitant and a joint annuitant. When one of the joint annuitants dies, the survivor receives two-thirds of the periodic payout 57 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. 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. 58 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 Insurance Department as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed. In reliance on certain exemptions, exclusions and rules, we have not registered interests in the general account as a security under the Securities Act of 1933 and have not registered the general account as an investment company under the 1940 Act. Accordingly, neither the general account nor any interests in it are regulated under the 1933 Act or the 1940 Act. We have been advised that the staff of the SEC has not made a review of the disclosures which are included in this prospectus which relate to our general account and to the fixed account under the contract. These disclosures, however, may be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. We guarantee an effective interest rate of not less than 3.00% 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 market value adjustment (see Market Value Adjustment and Charges and Other Deductions). The market value adjustment will NOT reduce the amount available for a surrender, withdrawal or transfer below the value it would have had if 3.00% (or the guaranteed minimum interest rate for your contract) interest had been credited to the fixed subaccount. ANY INTEREST IN EXCESS OF 3.00% (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, 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. 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 market value adjustment. Each guaranteed period purchase payment will be treated separately for purposes of determining any applicable market value 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 60 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. Market Value Adjustment Any surrender, withdrawal or transfer of a fixed subaccount guaranteed period amount before the end of the guaranteed period (other than dollar cost averaging, cross-reinvestment, portfolio rebalancing transfers, regular income payments under i4LIFE (Reg. TM) Advantage or withdrawals within the Annual Withdrawal Limit in Lincoln SmartSecurity (Reg. TM) Advantage) will be subject to the market value adjustment. A surrender, withdrawal or transfer effective upon the expiration date of the guaranteed period will not be subject to the market value adjustment. The market value adjustment will be applied to the amount being surrendered, withdrawn or transferred. The market value adjustment will be applied after the deduction of any applicable account fees and before any applicable transfer charges. In general, the market value 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 market value adjustment will generally result in a higher payment at the time of the surrender, withdrawal or transfer. Similarly, 59 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 market value 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 market value adjustment is calculated by multiplying the transaction amount by: (1+A)n -1 ---------- (1+B )n
where: A = an Index Rate (based on the Treasury Constant Maturity Series published by the Federal Reserve) for a security with time to maturity equal to the subaccount's guaranteed period, determined at the beginning of the guaranteed period. B = an Index Rate (based on the Treasury Constant Maturity Series published by the Federal Reserve) for a security with time to maturity equal to the subaccount's guaranteed period, determined at the time of surrender or transfer, plus a 0.50% adjustment (unless otherwise limited by applicable state law). If Index Rates "A" and "B" are within .25% of each other when the index rate is determined, no such percentage adjusted to "B" will be made, unless required by 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 0.50% 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 market value 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 iterpolation is used for periods to maturity not quoted. See the SAI for examples of the application of the market value 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. 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. 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 60 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 ("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 ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us. While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. The following paragraphs describe how payments are made by us and The Principal Underwriter to various parties. Compensation Paid to LFA. The maximum commission the Principal Underwriter pays to LFA is 2.00% of purchase payments, plus up to 0.25% quarterly based on contract value. LFA 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 LFA is 4.00% of annuitized value and/or ongoing annual compensation of up to 1.00% of annuity value or statutory reserves. Lincoln Life also pays for the operating and other expenses of LFA, including the following sales expenses: sales representative training allowances; compensation and bonuses for LFA's management team; advertising expenses; and all other expenses of distributing the contracts. LFA pays its sales representatives a portion of the commissions received for their sales of contracts. LFA 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 LFA. Non-cash compensation items may include conferences, seminars, trips, entertainment, merchandise and other similar items. In addition, LFA sales representatives who meet certain productivity, persistency and length of service standards and/or their managers may be eligible for additional compensation. Sales of the contracts may help LFA sales representatives and/or their managers qualify for such benefits. LFA 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 LFA, is 2.50% 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 4.00% of annuitized value and/or ongoing annual compensation of up to 1.00% 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 61 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 2007 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. Contracts, endorsements and riders may vary as required by state law. This prospectus provides a general description of the contract. Questions about your contract should be directed to us at 1-888-868-2583. Federal Tax Matters Introduction The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules to your individual situation. Nonqualified Annuities This part of the discussion describes some of the Federal income tax rules applicable to nonqualified annuities. A nonqualified annuity is a contract not issued in connection with a qualified retirement plan, such as an IRA or a section 403(b) plan, receiving special tax treatment under the tax code. We may not offer nonqualified annuities for all of our annuity products. Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decendent; 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 62 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 not issued 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 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, and if your Guaranteed Amount 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 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 in the same manner as a withdrawal during the deferral period. 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: 63 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). Special Rules If You Own More Than One Annuity Contract In certain circumstances, you must combine some or all of the nonqualified annuity contracts you own in order to determine the amount of an annuity payout, a surrender, or a withdrawal that you must include in income. For example, if you purchase two or more deferred annuity contracts from the same life insurance company (or its affiliates) during any calendar year, the tax code treats all such contracts as one contract. Treating two or more contracts as one contract could affect the amount of a surrender, a withdrawal or an annuity payout that you must include in income and the amount that might be subject to the penalty tax described previously. Loans and Assignments Except for certain qualified contracts, the tax code treats any amount received as a loan under your contract, and any assignment or pledge (or agreement to assign or pledge) of any portion of your contract value, as a withdrawal of such amount or portion. Gifting A Contract If you transfer ownership of your contract, 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 charge and charges for other optional riders, 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) 64 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. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o 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 has issued new regulations concerning required minimum distributions. The regulations 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. 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 65 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 Plan Act permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distributions after 2007). There are special rules that apply to rollovers, direct rollovers and transfers (including rollovers or transfers of after-tax amounts). If the applicable rules are not followed, you may incur adverse Federal income tax consequences, including paying taxes which you might not otherwise have had to pay. Before we send a rollover distribution, we will provide a notice explaining tax withholding requirements (see Federal Income Tax Withholding). We are not required to send you such notice for your IRA. You should always consult your tax adviser before you move or attempt to move any funds. 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 Separate Account 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 66 underlying fund determines whether any requirement for a minimum number of shares be present at such a meeting to satisfy a quorum requirement has been met. Voting instructions to abstain on any item to be voted on will be applied on a pro-rata basis to reduce the number of votes eligible to be cast. Whenever a shareholders meeting is called, we will provide or make available to each person having a voting interest in a subaccount proxy voting material, reports and other materials relating to the funds. Since the funds engage in shared funding, other persons or entities besides Lincoln 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 Home office at PO Box 7866, 1300 South Clinton Street, Fort Wayne, IN 46802-7866. 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 market value 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 only the purchase payment(s). IRA purchasers will receive purchase payments only. 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 Mellon Bank, N.A., 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 A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further information about the VAA, Lincoln Life and the contracts offered. Statements in this prospectus about the content of contracts and other legal instruments are summaries. For the complete text of those contracts and instruments, please refer to those documents as filed with the SEC. 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.LFG.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 VAA, or the principal underwriter. 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. 67 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 Advertising 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 Access 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. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 68 (This page intentionally left blank) 69 (This page intentionally left blank) 70 Appendix A - Condensed Financial Information Accumulation Unit Values The following information relates to accumulation unit values and accumulation units for funds in the periods ended December 31. It should be read along with the VAA's financial statement and notes which are included in the SAI.
with EEB and Step-Up with EEB ----------------------------------------- ---------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of -------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- -------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AIM V.I. Capital Appreciation 2006.. N/A N/A N/A 10.598 10.437 1 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- ------ ------ ---- AIM V.I. Core Equity 2006.. N/A N/A N/A 10.034 10.818 2 2007.. N/A N/A N/A 10.818 11.481 2 ---- -- ---- --- ------ ------ ---- AIM V.I. International Growth Fund 2000.. 2001.. 10.000 10.614(1) 1 10.000 9.947(2) 2 2002.. 10.614 8.782 1** 9.947 8.234 2 2003.. 8.782 11.120 1** 8.234 10.433 1** 2004.. 11.120 13.530 1** 10.433 12.700 1** 2005.. 13.530 15.656 1** 12.700 14.702 1 2006.. 15.656 19.698 1** 14.702 18.507 1 2007.. 19.698 22.173 1* 18.507 20.842 1 ---- ------ -------- ---- ------ -------- ---- AllianceBernstein VPS Global Technology 2000.. 2001.. 10.000 12.865(1) 1** 10.000 11.546(2) 1 2002.. N/A N/A N/A 11.546 6.595 1** 2003.. N/A N/A N/A 6.595 9.309 0 2004.. N/A N/A N/A 9.309 9.603 1** 2005.. N/A N/A N/A 9.603 9.771 1** 2006.. N/A N/A N/A 9.771 10.396 1** 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- AllianceBernstein VPS Growth and Income 2000.. 2001.. 10.000 11.312(1) 1 10.000 10.342(2) 30 2002.. 11.312 8.627 10 10.342 7.892 19 2003.. N/A N/A N/A 7.892 10.241 13 2004.. N/A N/A N/A 10.241 11.181 10 2005.. N/A N/A N/A 11.181 11.481 6 2006.. N/A N/A N/A 11.481 13.185 7 2007.. N/A N/A N/A 13.185 13.573 6 ---- ------ -------- ---- ------ -------- ---- AllianceBernstein VPS International Value 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- AllianceBernstein VPS Large Cap Growth 2000.. 2001.. 10.000 11.944(1) 1** 10.000 10.999(2) 11 2002.. 11.944 8.104 2 10.999 7.467 11 2003.. N/A N/A N/A 7.467 9.043 6 2004.. N/A N/A N/A 9.043 9.619 5 2005.. N/A N/A N/A 9.619 10.844 5 2006.. N/A N/A N/A 10.844 10.577 3 2007.. N/A N/A N/A 10.577 11.797 2 ---- ------ -------- ---- ------ -------- ---- AllianceBernstein VPS Small/Mid Cap Value 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A 19.563 20.694 1 2007.. N/A N/A N/A 20.694 20.626 1 ---- ------ -------- ---- ------ -------- ---- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AIM V.I. Capital Appreciation 2006.. 4.994 4.920 30 5.038 4.968 25 2007.. 4.920 5.413 28 4.968 5.474 22 ---- ----- ----- -- ----- ----- -- AIM V.I. Core Equity 2006.. 6.933 7.478 59 6.994 7.551 112 2007.. 7.478 7.940 53 7.551 8.030 97 ---- ----- ----- -- ----- ----- --- AIM V.I. International Growth Fund 2000.. 10.000 8.037 10 10.000 8.044 14 2001.. 8.037 6.036 18 8.044 6.050 90 2002.. 6.036 4.999 16 6.050 5.018 62 2003.. 4.999 6.337 17 5.018 6.370 78 2004.. 6.337 7.718 14 6.370 7.770 46 2005.. 7.718 8.939 12 7.770 9.014 40 2006.. 8.939 11.258 11 9.014 11.369 39 2007.. 11.258 12.685 11 11.369 12.830 35 ---- ------ ------ -- ------ ------ --- AllianceBernstein VPS Global Technology 2000.. 10.000 6.639 14 10.000 6.644 57 2001.. 6.639 4.861 63 6.644 4.871 176 2002.. 4.861 2.778 62 4.871 2.788 166 2003.. 2.778 3.923 45 2.788 3.944 149 2004.. 3.923 4.049 30 3.944 4.076 65 2005.. 4.049 4.122 25 4.076 4.156 52 2006.. 4.122 4.388 24 4.156 4.431 51 2007.. 4.388 5.167 19 4.431 5.226 59 ---- ------ ------ -- ------ ------ --- AllianceBernstein VPS Growth and Income 2000.. 10.000 10.467 15 10.000 10.473 71 2001.. 10.467 10.296 142 10.473 10.317 462 2002.. 10.296 7.861 209 10.317 7.889 574 2003.. 7.861 10.205 123 7.889 10.257 386 2004.. 10.205 11.148 108 10.257 11.221 333 2005.. 11.148 11.452 92 11.221 11.545 284 2006.. 11.452 13.158 80 11.545 13.285 240 2007.. 13.158 13.552 55 13.285 13.703 187 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS International Value 2006.. 10.242 11.832 1** 10.431 11.842 2 2007.. 11.832 12.269 1 11.842 12.297 7 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS Large Cap Growth 2000.. 10.000 7.726 20 10.000 7.732 42 2001.. 7.726 6.268 138 7.732 6.282 335 2002.. 6.268 4.257 167 6.282 4.273 306 2003.. 4.257 5.159 132 4.273 5.186 229 2004.. 5.159 5.489 112 5.186 5.527 193 2005.. 5.489 6.192 84 5.527 6.243 156 2006.. 6.192 6.042 80 6.243 6.101 113 2007.. 6.042 6.743 71 6.101 6.819 92 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 2003.. N/A N/A N/A 10.936 15.156 2 2004.. 15.104 17.664 1** 15.156 17.751 2 2005.. 17.664 18.499 3 17.751 18.619 3 2006.. 18.499 20.750 3 18.619 20.915 5 2007.. 20.750 20.691 1 20.915 20.887 4 ---- ------ ------ ---- ------ ------ ---
A-1
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) American Century Investments VP Inflation Protection Fund 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 10.392 10.360 8 2006.. N/A N/A N/A 10.360 10.330 5 2007.. N/A N/A N/A 10.330 11.105 5 ---- -- ---- --- ------ ------ ---- American Funds Global Growth Fund 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 11.252 12.601 1 2006.. N/A N/A N/A 12.601 14.897 1 2007.. N/A N/A N/A 14.897 16.795 1 ---- -- ---- --- ------ ------ ---- American Funds Global Small Capitalization Fund 2000.. 2001.. 10.000 12.494(1) 1** 10.000 12.496(1) 1** 2002.. 12.494 9.922 8 12.496 9.929 1 2003.. N/A N/A N/A 9.929 14.965 1 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 17.758 21.853 1 2006.. N/A N/A N/A 21.853 26.612 1 2007.. N/A N/A N/A 26.612 31.723 1 ---- ------ -------- ---- ------ -------- ---- American Funds Growth Fund 2000.. 2001.. 10.000 12.305(1) 3 10.000 10.811(2) 15 2002.. 12.305 9.121 48 10.811 8.018 26 2003.. 9.121 12.243 7 8.018 10.768 27 2004.. 12.243 13.514 7 10.768 11.892 22 2005.. 13.514 15.407 6 11.892 13.564 18 2006.. 15.407 16.662 6 13.564 14.676 18 2007.. 16.662 18.367 8 14.676 16.186 17 ---- ------ -------- ---- ------ -------- ---- American Funds Growth-Income Fund 2000.. 2001.. 10.000 11.308(1) 2 10.000 10.527(2) 32 2002.. 11.308 9.059 141 10.527 8.438 42 2003.. 9.059 11.772 17 8.438 10.970 74 2004.. 11.772 12.748 17 10.970 11.886 71 2005.. 12.748 13.238 18 11.886 12.348 37 2006.. 13.238 14.963 17 12.348 13.965 33 2007.. 14.963 15.422 13 13.965 14.400 23 ---- ------ -------- ---- ------ -------- ---- American Funds International Fund 2000.. 2001.. 10.000 10.834(1) 2 10.000 10.216(1) 11 2002.. 10.834 9.053 11 10.216 8.540 13 2003.. 9.053 11.978 2 8.540 11.306 8 2004.. 11.978 14.023 2 11.306 13.243 8 2005.. 14.023 16.718 2 13.243 15.796 19 2006.. 16.718 19.517 2 15.796 18.449 20 2007.. 19.517 22.984 2 18.449 21.737 22 ---- ------ -------- ---- ------ -------- ---- Delaware VIP Capital Reserves 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Delaware VIP Diversified Income Series 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 10.858 10.597 14 2006.. N/A N/A N/A 10.597 11.190 12 2007.. N/A N/A N/A 11.190 11.799 18 ---- ------ -------- ---- ------ -------- ---- Delaware VIP Emerging Markets Series(4) 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 25.923 32.082 1** 2006.. N/A N/A N/A 32.082 39.938 1** 2007.. N/A N/A N/A 39.938 54.305 1* ---- ------ -------- ---- ------ -------- ---- with Step-Up with EGMDB ---------------------------------------- ---------------------------------------- Accumulation unit value Accumulation unit value -------------------------- Number of -------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------------- ------------- ----------- -------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) American Century Investments VP Inflation Protection Fund 2004.. 9.948 10.395 4 N/A N/A N/A 2005.. 10.395 10.368 8 10.404 10.393 5 2006.. 10.368 10.344 9 10.393 10.384 8 2007.. 10.344 11.125 1 10.384 11.185 13 ---- ------ ------ - ------ ------ ---- American Funds Global Growth Fund 2004.. N/A N/A N/A 10.216 11.266 1** 2005.. 11.256 12.611 1** 11.266 12.641 4 2006.. 12.611 14.916 2 12.641 14.975 11 2007.. 14.916 16.826 1 14.975 16.917 14 ---- ------ ------ ---- ------ ------ ---- American Funds Global Small Capitalization Fund 2000.. 10.000 8.238 2 10.000 8.244 57 2001.. 8.238 7.051 31 8.244 7.067 90 2002.. 7.051 5.606 50 7.067 5.627 136 2003.. 5.606 8.453 37 5.627 8.497 104 2004.. 8.453 10.036 33 8.497 10.104 163 2005.. 10.036 12.356 30 10.104 12.458 156 2006.. 12.356 15.055 20 12.458 15.201 145 2007.. 15.055 17.955 17 15.201 18.157 128 ---- ------ ------ ---- ------ ------ ---- American Funds Growth Fund 2000.. 10.000 8.968 25 10.000 8.973 386 2001.. 8.968 7.209 358 8.973 7.224 1,347 2002.. 7.209 5.349 559 7.224 5.368 1,812 2003.. 5.349 7.187 528 5.368 7.224 1,591 2004.. 7.187 7.941 511 7.224 7.993 1,345 2005.. 7.941 9.062 500 7.993 9.136 1,196 2006.. 9.062 9.810 377 9.136 9.904 956 2007.. 9.810 10.824 300 9.904 10.945 769 ---- ------ ------ ---- ------ ------ ----- American Funds Growth-Income Fund 2000.. 10.000 10.430 9 10.000 10.436 200 2001.. 10.430 10.506 620 10.436 10.528 970 2002.. 10.506 8.426 773 10.528 8.456 1,792 2003.. 8.426 10.959 802 8.456 11.015 1,459 2004.. 10.959 11.880 766 11.015 11.959 1,306 2005.. 11.880 12.349 732 11.959 12.449 1,140 2006.. 12.349 13.972 618 12.449 14.107 952 2007.. 13.972 14.415 545 14.107 14.576 808 ---- ------ ------ ---- ------ ------ ----- American Funds International Fund 2000.. 10.000 7.824 15 10.000 7.829 141 2001.. 7.824 6.156(1) 135 7.829 6.170(1) 552 2002.. 6.156 5.149 227 6.170 5.168 815 2003.. 5.149 6.819 216 5.168 6.855 717 2004.. 6.819 7.991 199 6.855 8.045 636 2005.. 7.991 9.537 181 8.045 9.615 556 2006.. 9.537 11.144 182 9.615 11.253 460 2007.. 11.144 13.137 143 11.253 13.285 369 ---- ------ -------- ---- ------ -------- ----- Delaware VIP Capital Reserves 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ----- Delaware VIP Diversified Income Series 2004.. N/A N/A N/A 10.207 10.872 1 2005.. 10.862 10.605 3 10.872 10.631 9 2006.. 10.605 11.204 3 10.631 11.248 7 2007.. 11.204 11.820 1* 11.248 11.884 18 ---- ------ -------- ---- ------ -------- ----- Delaware VIP Emerging Markets Series(4) 2004.. N/A N/A N/A 14.457 19.360 3 2005.. 18.945 24.015 2 19.360 24.206 7 2006.. 24.015 29.911 1** 24.206 30.194 13 2007.. 29.911 40.690 1* 30.194 41.137 12 ---- ------ -------- ---- ------ -------- -----
A-2
with EEB and Step-Up with EEB ----------------------------------------- ---------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of -------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- -------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP High Yield Series 2000.. 2001.. 10.000 10.302(1) 1 10.000 9.943(2) 13 2002.. 10.302 10.275 14 9.943 9.922 9 2003.. 10.275 12.966 3 9.922 12.527 14 2004.. 12.966 14.506 3 12.527 14.022 13 2005.. 14.506 14.709 3 14.022 14.225 7 2006.. 14.709 16.192 3 14.225 15.667 6 2007.. 16.192 16.292 3 15.667 15.771 6 ---- ------ -------- -- ------ -------- -- Delaware VIP REIT Series 2000.. 2001.. 10.000 10.697(1) 1** 10.000 10.378(2) 3 2002.. 10.697 10.954 32 10.378 10.634 10 2003.. 10.954 14.373 5 10.634 13.960 13 2004.. 14.373 18.487 4 13.960 17.964 14 2005.. 18.487 19.383 4 17.964 18.844 10 2006.. 19.383 25.166 4 18.844 24.479 9 2007.. 25.166 21.191 2 24.479 20.623 8 ---- ------ -------- -- ------ -------- -- Delaware VIP Small Cap Value Series 2000.. 2001.. 10.000 11.788(1) 1** 10.000 10.978(2) 6 2002.. 11.788 10.904 32 10.978 10.160 15 2003.. 10.904 15.157 1 10.160 14.129 14 2004.. 15.157 18.018 1 14.129 16.805 15 2005.. 18.018 19.297 1 16.805 18.007 12 2006.. 19.297 21.941 1 18.007 20.485 12 2007.. 21.941 20.056 1 20.485 18.734 11 ---- ------ -------- -- ------ -------- -- Delaware VIP Trend Series 2000.. 2001.. 10.000 12.780(1) 1 10.000 12.207(3) 4 2002.. 12.780 10.023 7 12.207 9.579 10 2003.. 10.023 13.256 2 9.579 12.675 10 2004.. 13.256 14.609 2 12.675 13.975 10 2005.. 14.609 15.138 2 13.975 14.489 10 2006.. 15.138 15.943 2 14.489 15.267 9 2007.. 15.943 17.279 2 15.267 16.555 9 ---- ------ -------- -- ------ -------- -- Delaware VIP US Growth Series 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- Delaware VIP Value Series 2000.. 2001.. 10.000 11.090(1) 1** 10.000 10.312(1) 2 2002.. 11.090 8.834 3 10.312 8.219 1 2003.. 8.834 11.105 1 N/A N/A N/A 2004.. 11.105 12.485 1 N/A N/A N/A 2005.. 12.485 12.959 1 11.627 12.075 5 2006.. 12.959 15.741 1 12.075 14.674 3 2007.. 15.741 14.982 1 14.674 13.974 3 ---- ------ -------- ---- ------ -------- --- DWS VIP Equity 500 Index 2000.. 2001.. 10.000 11.273(1) 1 10.000 11.275(1) 11 2002.. 11.273 8.592 1 11.275 8.598 1 2003.. N/A N/A N/A 8.598 10.818 0 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP High Yield Series 2000.. 10.000 8.951 3 10.000 8.959 38 2001.. 8.951 8.406 68 8.959 8.426 149 2002.. 8.406 8.392 78 8.426 8.425 224 2003.. 8.392 10.601 74 8.425 10.658 175 2004.. 10.601 11.872 54 10.658 11.953 123 2005.. 11.872 12.050 37 11.953 12.151 100 2006.. 12.050 13.278 25 12.151 13.409 90 2007.. 13.278 13.373 24 13.409 13.526 84 ---- ------ ------ -- ------ ------ --- Delaware VIP REIT Series 2000.. 10.000 10.698 4 10.000 10.704 19 2001.. 10.698 11.418 60 10.704 11.442 112 2002.. 11.418 11.705 93 11.442 11.748 138 2003.. 11.705 15.374 85 11.748 15.453 110 2004.. 15.374 19.794 80 15.453 19.926 98 2005.. 19.794 20.775 73 19.926 20.944 80 2006.. 20.775 27.000 30 20.944 27.260 66 2007.. 27.000 22.758 24 27.260 23.012 51 ---- ------ ------ -- ------ ------ --- Delaware VIP Small Cap Value Series 2000.. 10.000 11.835 4 10.000 11.840 7 2001.. 11.835 12.981 81 11.840 13.006 114 2002.. 12.981 12.019 136 13.006 12.061 242 2003.. 12.019 16.723 108 12.061 16.806 166 2004.. 16.723 19.901 95 16.806 20.029 146 2005.. 19.901 21.334 88 20.029 21.504 127 2006.. 21.334 24.282 55 21.504 24.512 117 2007.. 24.282 22.218 43 24.512 22.462 84 ---- ------ ------ --- ------ ------ --- Delaware VIP Trend Series 2000.. 10.000 7.756 20 10.000 7.762 116 2001.. 7.756 6.440 88 7.762 6.455 333 2002.. 6.440 5.056 162 6.455 5.075 494 2003.. 5.056 6.694 107 5.075 6.729 314 2004.. 6.694 7.384 97 6.729 7.434 253 2005.. 7.384 7.660 86 7.434 7.723 204 2006.. 7.660 8.075 83 7.723 8.154 154 2007.. 8.075 8.760 61 8.154 8.859 105 ---- ------ ------ --- ------ ------ --- Delaware VIP US Growth Series 2003.. 9.326 9.803 1 8.101 9.830 1 2004.. 9.803 9.920 1 9.830 9.962 2 2005.. 9.920 11.147 1 9.962 11.211 2 2006.. 11.147 11.173 1 11.211 11.254 4 2007.. 11.173 12.332 1 11.254 12.440 9 ---- ------ ------ --- ------ ------ --- Delaware VIP Value Series 2000.. 10.000 11.551 1** 10.000 11.556 5 2001.. 11.551 10.886 12 11.556 10.908 58 2002.. 10.886 8.681 9 10.908 8.712 85 2003.. 8.681 10.922 6 8.712 10.978 54 2004.. 10.922 12.292 8 10.978 12.373 56 2005.. 12.292 12.772 6 12.373 12.876 43 2006.. 12.772 15.530 3 12.876 15.678 23 2007.. 15.530 14.796 3 15.678 14.960 26 ---- ------ ------ --- ------ ------ --- DWS VIP Equity 500 Index 2000.. 10.000 8.982 2 10.000 8.987 21 2001.. 8.982 7.747 34 8.987 7.763 198 2002.. 7.747 5.911 37 7.763 5.932 257 2003.. 5.911 7.440 28 5.932 7.478 172 2004.. 7.440 8.081 31 7.478 8.135 151 2005.. 8.081 8.308 29 8.135 8.376 98 2006.. 8.308 9.426 24 8.376 9.517 91 2007.. 9.426 9.749 21 9.517 9.857 79 ---- ------ ------ --- ------ ------ ---
A-3
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) DWS VIP Small Cap Index 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --------- -- ---- --- Fidelity VIP Contrafund Portfolio 2003.. N/A N/A N/A 9.702 12.210 3 2004.. N/A N/A N/A 12.210 13.803 3 2005.. N/A N/A N/A 13.803 15.808 5 2006.. N/A N/A N/A 15.808 17.292 6 2007.. N/A N/A N/A 17.292 19.912 8 ---- -- ---- --------- ------ ------ --- Fidelity VIP Equity-Income Portfolio 2000.. 2001.. 10.000 11.088(1) 1 10.000 10.285(2) 6 2002.. 11.088 9.013 4 10.285 8.364 12 2003.. 9.013 11.499 1 8.364 10.677 5 2004.. 11.499 12.550 1 10.677 11.659 7 2005.. 12.550 13.000 1 11.659 12.082 2 2006.. 13.000 15.297 1 12.082 14.225 2 2007.. 15.297 15.200 1 14.225 14.142 2 ---- ------ -------- ---- ------ -------- --- Fidelity VIP Growth Portfolio 2000.. 2001.. 10.000 11.764(1) 1 10.000 10.687(2) 6 2002.. 11.764 8.045 5 10.687 7.312 3 2003.. N/A N/A N/A 7.312 9.514 1 2004.. N/A N/A N/A 9.514 9.632 1 2005.. N/A N/A N/A 9.632 9.975 1 2006.. N/A N/A N/A 9.975 10.436 1 2007.. N/A N/A N/A 10.436 12.976 1* ---- ------ -------- ---- ------ -------- --- Fidelity VIP Mid Cap 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A 15.151 14.431 1 ---- ------ -------- ---- ------ -------- --- Fidelity VIP Overseas Portfolio 2000.. 2001.. 10.000 10.892(1) 1** 10.000 10.895(1) 1** 2002.. 10.892 8.500 1** N/A N/A N/A 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A 11.948 13.290 1 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- FTVIPT Franklin Income Securities 2006.. N/A N/A N/A N/A N/A N/A 2007.. 11.682 11.407 4 N/A N/A N/A ---- ------ -------- ---- ------ -------- --- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2000.. 2001.. 10.000 12.288(1) 1** 10.000 12.289(1) 2 2002.. 12.288 8.598 5 12.289 8.603 3 2003.. 8.598 11.578 0 8.603 11.592 0 2004.. N/A N/A N/A 11.592 12.685 1 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A 16.378 15.204 1* ---- ------ -------- ---- ------ -------- --- FTVIPT Mutual Shares Securities 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A 11.267 11.430 2 ---- ------ -------- ---- ------ -------- --- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) DWS VIP Small Cap Index 2003.. 9.445 13.583 5 9.463 13.631 1 2004.. 13.583 15.710 5 13.631 15.788 4 2005.. 15.710 16.087 5 15.788 16.192 4 2006.. 16.087 18.564 3 16.192 18.713 4 2007.. 18.564 17.886 2 18.713 18.057 3 ---- ------ ------ - ------ ------ - Fidelity VIP Contrafund Portfolio 2003.. 9.708 12.223 13 9.726 12.264 4 2004.. 12.223 13.825 9 12.264 13.892 12 2005.. 13.825 15.841 21 13.892 15.941 22 2006.. 15.841 17.337 23 15.941 17.473 20 2007.. 17.337 19.974 14 17.473 20.161 26 ---- ------ ------ -- ------ ------ -- Fidelity VIP Equity-Income Portfolio 2000.. 10.000 10.854 1** 10.000 10.860 27 2001.. 10.854 10.103 51 10.860 10.124 143 2002.. 10.103 8.221 70 10.124 8.250 181 2003.. 8.221 10.499 41 8.250 10.552 138 2004.. 10.499 11.470 44 10.552 11.545 113 2005.. 11.470 11.892 39 11.545 11.989 91 2006.. 11.892 14.008 15 11.989 14.143 93 2007.. 14.008 13.933 14 14.143 14.088 71 ---- ------ ------ -- ------ ------ --- Fidelity VIP Growth Portfolio 2000.. 10.000 8.354 7 10.000 8.360 41 2001.. 8.354 6.739 23 8.360 6.754 99 2002.. 6.739 4.613 20 6.754 4.630 148 2003.. 4.613 6.006 13 4.630 6.037 84 2004.. 6.006 6.083 14 6.037 6.123 74 2005.. 6.083 6.303 13 6.123 6.355 63 2006.. 6.303 6.597 12 6.355 6.661 48 2007.. 6.597 8.207 12 6.661 8.299 32 ---- ------ ------ -- ------ ------ --- Fidelity VIP Mid Cap 2005.. 10.095 11.554 1** 10.237 11.564 2 2006.. 11.554 12.756 1* 11.564 12.786 3 2007.. 12.756 14.450 1* 12.786 14.506 4 ---- ------ ------ -- ------ ------ --- Fidelity VIP Overseas Portfolio 2000.. 10.000 8.595 1 10.000 8.601 6 2001.. 8.595 6.655 8 8.601 6.670 27 2002.. 6.655 5.199 7 6.670 5.218 36 2003.. 5.199 7.304 3 5.218 7.342 57 2004.. 7.304 8.129 5 7.342 8.184 26 2005.. 8.129 9.483 6 8.184 9.562 24 2006.. 9.483 10.969 3 9.562 11.077 20 2007.. 10.969 12.611 3 11.077 12.754 13 ---- ------ ------ -- ------ ------ --- FTVIPT Franklin Income Securities 2006.. 10.009 11.212 5 10.543 11.222 8 2007.. 11.212 11.425 5 11.222 11.453 32 ---- ------ ------ -- ------ ------ --- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2000.. 10.000 8.035 3 10.000 8.042 27 2001.. 8.035 6.689 19 8.042 6.704 150 2002.. 6.689 4.685 40 6.704 4.702 270 2003.. 4.685 6.315 30 4.702 6.348 163 2004.. 6.315 6.914 29 6.348 6.961 125 2005.. 6.914 7.116 26 6.961 7.175 93 2006.. 7.116 7.597 51 7.175 7.671 74 2007.. 7.597 8.300 22 7.671 8.394 54 ---- ------ ------ -- ------ ------ --- FTVIPT Mutual Shares Securities 2006.. N/A N/A N/A 10.449 11.267 1 2007.. 11.981 11.440 2 11.267 11.467 15 ---- ------ ------ ---- ------ ------ ---
A-4
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Templeton Global Income Securities 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- FTVIPT Templeton Growth Securities Fund 2000.. 2001.. 10.000 11.163(1) 1** 10.000 11.165(1) 1** 2002.. 11.163 8.928 8 11.165 8.933 3 2003.. N/A N/A N/A 8.933 11.588 1 2004.. N/A N/A N/A 11.588 13.198 3 2005.. N/A N/A N/A 13.198 14.105 3 2006.. N/A N/A N/A 14.105 16.866 3 2007.. N/A N/A N/A 16.866 16.945 2 ---- ------ -------- ---- ------ -------- ---- Janus Aspen Balanced Portfolio 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Janus Aspen Mid-Cap Growth Portfolio 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Janus Aspen Worldwide Growth Portfolio 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Lincoln VIP Core Fund(6) 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Lincoln VIP Growth Fund(7) 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Lincoln VIP Growth Opportunities(8) 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Lincoln VIP Money Market Fund 2000.. 2001.. 10.000 10.017(1) 1** 10.000 10.019(1) 1** 2002.. 10.017 9.967 39 10.019 9.976 23 2003.. 9.967 9.846 1 9.976 9.860 2 2004.. 9.846 9.746 1 9.860 9.764 1 2005.. N/A N/A N/A 9.764 9.852 1 2006.. N/A N/A N/A 9.852 10.124 1** 2007.. 10.266 10.397 3 10.124 10.432 4 ---- ------ -------- ---- ------ -------- ---- Lincoln VIPT Baron Growth Opportunities(9) 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- Lincoln VIPT Capital Growth 2007.. N/A N/A N/A 11.001 10.688 1 ---- ------ -------- ---- ------ -------- ---- Lincoln VIPT Cohen & Steers Global Real Estate 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Templeton Global Income Securities 2005.. N/A N/A N/A 9.944 9.873 1** 2006.. 10.202 10.926 1** 9.873 10.952 2 2007.. 10.926 11.912 1* 10.952 11.958 12 ---- ------ ------ ---- ------ ------ -- FTVIPT Templeton Growth Securities Fund 2000.. 10.000 10.197 4 10.000 10.204 3 2001.. 10.197 9.884 19 10.204 9.905 44 2002.. 9.884 7.912 35 9.905 7.941 49 2003.. 7.912 10.269 19 7.941 10.322 40 2004.. 10.269 11.702 19 10.322 11.780 40 2005.. 11.702 12.512 18 11.780 12.614 45 2006.. 12.512 14.969 16 12.614 15.114 41 2007.. 14.969 15.047 15 15.114 15.215 41 ---- ------ ------ ---- ------ ------ -- Janus Aspen Balanced Portfolio 2003.. 9.770 10.912 1 9.786 10.947 3 2004.. 10.912 11.606 3 10.947 11.660 5 2005.. 11.606 12.272 3 11.660 12.348 4 2006.. 12.272 13.309 2 12.348 13.411 4 2007.. 13.309 14.416 2 13.411 14.549 2 ---- ------ ------ ---- ------ ------ -- Janus Aspen Mid-Cap Growth Portfolio 2003.. N/A N/A N/A 8.047 10.668 1 2004.. 10.632 12.581 1** 10.668 12.642 1 2005.. 12.581 13.842 1** 12.642 13.930 3 2006.. 13.842 15.404 1** 13.930 15.525 2 2007.. 15.404 18.419 1 15.525 18.592 4 ---- ------ ------ ---- ------ ------ -- Janus Aspen Worldwide Growth Portfolio 2003.. 8.396 10.199 2 N/A N/A N/A 2004.. 10.199 10.470 2 N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ---- Lincoln VIP Core Fund(6) 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ---- Lincoln VIP Growth Fund(7) 2005.. N/A N/A N/A 10.307 10.833 3 2006.. N/A N/A N/A 10.833 11.314 3 ---- ------ ------ ---- ------ ------ ---- Lincoln VIP Growth Opportunities(8) 2005.. N/A N/A N/A 10.923 11.440 1** 2006.. N/A N/A N/A 11.440 12.366 1 ---- ------ ------ ---- ------ ------ ---- Lincoln VIP Money Market Fund 2000.. 10.000 10.206 14 10.000 10.212 171 2001.. 10.206 10.427 227 10.212 10.448 2,634 2002.. 10.427 10.385 195 10.448 10.422 6,301 2003.. 10.385 10.269 133 10.422 10.321 1,526 2004.. 10.269 10.175 90 10.321 10.241 276 2005.. 10.175 10.272 81 10.241 10.355 258 2006.. 10.272 10.561 79 10.355 10.662 214 2007.. 10.561 10.888 81 10.662 11.009 171 ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Baron Growth Opportunities(9) 2006.. N/A N/A N/A 9.635 10.616 1** 2007.. N/A N/A N/A 10.616 10.800 3 ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Capital Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Cohen & Steers Global Real Estate 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ -----
A-5
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT Delaware Bond 2000.. 2001.. 10.000 10.113(1) 6 10.000 10.093(1) 24 2002.. 10.113 10.931 116 10.093 10.915 38 2003.. 10.931 11.506 9 10.915 11.495 35 2004.. 11.506 11.888 9 11.495 11.883 36 2005.. 11.888 11.972 10 11.883 11.973 44 2006.. 11.972 12.301 9 11.973 12.307 42 2007.. 12.301 12.726 7 12.307 12.740 46 ---- ------ --------- --- ------ --------- -- Lincoln VIPT Delaware Growth and Income 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Delaware Social Awareness(5) 2000.. 2001.. 10.000 11.526(1) 1** 10.000 11.529(1) 1** 2002.. N/A N/A N/A N/A N/A N/A 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Delaware Special Opportunities 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Janus Capital Appreciation 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A 12.182 12.549 1 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Marsico International Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT MFS Value 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Mid-Cap Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Mid-Cap Value 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Mondrian International Value 2003.. 9.644 13.400 2 9.651 13.417 2 2004.. 13.400 15.901 1 13.417 15.928 2 2005.. 15.901 17.559 1 15.928 17.598 4 2006.. 17.559 22.398 1 17.598 22.459 4 2007.. 22.398 24.501 1 22.459 24.580 4 ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT S&P 500 Index 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Small Cap Index 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT T. Rowe Price Growth Stock 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- Lincoln VIPT Templeton Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ --------- ---- ------ --------- ---- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT Delaware Bond 2000.. 10.000 10.600 2 10.000 10.606 46 2001.. 10.600 11.364 263 10.606 11.387 635 2002.. 11.364 12.295 402 11.387 12.338 1,126 2003.. 12.295 12.955 276 12.338 13.020 576 2004.. 12.955 13.399 235 13.020 13.486 571 2005.. 13.399 13.507 237 13.486 13.616 487 2006.. 13.507 13.892 158 13.616 14.024 400 2007.. 13.892 14.387 161 14.024 14.546 285 ---- ------ ------ --- ------ ------ ----- Lincoln VIPT Delaware Growth and Income 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Delaware Social Awareness(5) 2000.. 10.000 8.787 1** 10.000 8.792 10 2001.. 8.787 7.794 12 8.792 7.811 22 2002.. 7.794 5.895 10 7.811 5.917 20 2003.. 9.972 11.986 6 9.273 12.027 13 2004.. 11.986 13.267 10 12.027 13.333 17 2005.. 13.267 14.598 9 13.333 14.692 12 2006.. 14.598 16.102 9 14.692 16.231 11 2007.. 16.102 16.284 6 16.231 16.439 10 ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Delawa Specia Opport 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Janus Capital Appreciation 2003.. N/A N/A N/A N/A N/A N/A 2004.. 11.987 12.559 1** 12.186 12.587 1** 2005.. 12.559 12.822 1** 12.587 12.869 1** 2006.. 12.822 13.777 1** 12.869 13.849 1** 2007.. 13.777 16.253 1* 13.849 16.362 1* ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Marsic Intern Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincol VIPT MFS Value 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Mid-Ca Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Mid-Ca Value 2007.. 9.496 8.627 1* 10.191 8.635 1 ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT Mondrian International Value 2003.. 9.659 13.434 3 9.675 13.477 9 2004.. 13.434 15.957 6 13.477 16.032 8 2005.. 15.957 17.639 6 16.032 17.748 11 2006.. 17.639 22.523 6 17.748 22.695 10 2007.. 22.523 24.662 3 22.695 24.889 10 ---- ------ ------ ---- ------ ------ ----- Lincol VIPT S&P 500 Index 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Small Cap Index 2007.. N/A N/A N/A 10.227 9.144 1* ---- ------ ------ ---- ------ ------ ----- Lincol VIPT T. Rowe Price Growth Stock 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A 12.722 13.739 1 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ ----- Lincol VIPT Temple Growth 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ ---- ------ ------ -----
A-6
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT UBS Global Asset Allocation 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Value Opportunities 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire 2010 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire 2020 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire 2030 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire 2040 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire Aggressive Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire Conservative Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire Moderate Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- MFS VIT Core Equity 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- -- ---- --- -- ---- --- MFS VIT Emerging Growth Series 2000.. 2001.. 10.000 12.125(1) 1** 10.000 11.039(2) 4 2002.. 12.125 7.869 1 11.039 7.168 1** 2003.. N/A N/A N/A 7.168 9.143 0 2004.. N/A N/A N/A 9.143 10.117 1 2005.. N/A N/A N/A 10.117 10.818 1** 2006.. N/A N/A N/A 10.818 11.428 1** 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- ---- MFS VIT Total Return Series 2000.. 2001.. 10.000 10.629(1) 1 10.000 10.630(1) 8 2002.. 10.629 9.871 29 10.630 9.877 18 2003.. 9.871 11.235 3 9.877 11.248 12 2004.. 11.235 12.240 3 11.248 12.259 13 2005.. 12.240 12.321 3 12.259 12.347 14 2006.. 12.321 13.495 3 12.347 13.530 11 2007.. 13.495 13.762 2 13.530 13.805 11 ---- ------ -------- ---- ------ -------- ---- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT UBS Global Asset Allocation 2003.. N/A N/A N/A 10.500 11.342 0 2004.. 11.494 12.607 1 11.342 12.637 2 2005.. 12.607 13.191 1 12.637 13.242 4 2006.. 13.191 14.798 1 13.242 14.878 4 2007.. 14.798 15.423 1 14.878 15.529 7 ---- ------ ------ --- ------ ------ - Lincol VIPT Value Opport 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2010 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2020 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2030 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2040 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Aggressive Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Conservative Profile 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. 11.497 11.585 1 11.138 11.630 1* ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderate Profile 2005.. N/A N/A N/A 10.008 10.469 8 2006.. N/A N/A N/A 10.469 11.510 8 2007.. N/A N/A N/A 11.510 12.340 6 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005.. 10.000 10.637 5 N/A N/A N/A 2006.. 10.637 11.895 5 N/A N/A N/A 2007.. 11.895 12.797 9 13.213 12.847 3 ---- ------ ------ --- ------ ------ --- MFS VIT Core Equity 2003.. 8.192 10.227 4 N/A N/A N/A 2004.. 10.227 11.259 4 10.263 11.315 1** 2005.. 11.259 11.220 4 11.315 11.293 1 2006.. 11.220 12.508 4 N/A N/A N/A 2007.. 12.508 13.621 4 N/A N/A N/A ---- ------ ------ --- ------ ------ --- MFS VIT Emerging Growth Series 2000.. 10.000 8.165 12 10.000 8.170 27 2001.. 8.165 5.323 38 8.170 5.334 121 2002.. 5.323 3.458 35 5.334 3.471 140 2003.. 3.458 4.413 32 3.471 4.436 131 2004.. 4.413 4.886 29 4.436 4.918 68 2005.. 4.886 5.227 26 4.918 5.269 43 2006.. 5.227 5.524 17 5.269 5.578 36 2007.. 5.524 6.558 15 5.578 6.632 29 ---- ------ ------ --- ------ ------ ---- MFS VIT Total Return Series 2000.. 10.000 11.123 1 10.000 11.128 29 2001.. 11.123 10.927 90 11.128 10.948 358 2002.. 10.927 10.158 212 10.948 10.193 550 2003.. 10.158 11.573 153 10.193 11.631 379 2004.. 11.573 12.620 138 11.631 12.702 344 2005.. 12.620 12.717 127 12.702 12.819 319 2006.. 12.717 13.942 110 12.819 14.075 237 2007.. 13.942 14.232 95 14.075 14.389 191 ---- ------ ------ --- ------ ------ ----
A-7
with EEB and Step-Up with EEB ---------------------------------------- ---------------------------------------- Accumulation unit value Accumulation unit value -------------------------- Number of -------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------------- ------------- ----------- -------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Utilities Series 2000.. 2001.. 10.000 9.842(1) 1** 10.000 9.355(2) 18 2002.. N/A N/A N/A 9.355 7.080 3 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- Neuberger Berman AMT Mid-Cap Growth Portfolio 2003.. 8.316 10.450 2 8.320 10.461 4 2004.. 10.450 11.926 2 10.461 11.944 4 2005.. 11.926 13.309 2 11.944 13.336 4 2006.. 13.309 14.978 2 13.336 15.016 4 2007.. 14.978 18.006 2 15.016 18.061 3 ---- ------ -------- ---- ------ -------- --- Neuberger Berman AMT Regency Portfolio 2003.. 9.419 13.045 2 9.783 13.047 2 2004.. 13.045 15.662 2 13.047 15.672 2 2005.. 15.662 17.211 1 15.672 17.231 2 2006.. 17.211 18.773 1 17.231 18.803 2 2007.. 18.773 19.028 1 18.803 19.068 2 ---- ------ -------- ---- ------ -------- --- Putnam VT Growth and Income Fund 2003.. N/A N/A N/A 8.986 10.801 3 2004.. N/A N/A N/A 10.801 11.782 2 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- Putnam VT Health Sciences Fund 2003.. N/A N/A N/A N/A N/A N/A 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A N/A N/A N/A ---- ------ -------- ---- ------ -------- --- with Step-Up with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Utilities Series 2000.. 10.000 9.892 7 10.000 9.898 59 2001.. 9.892 7.340 88 9.898 7.356 288 2002.. 7.340 5.558 61 7.356 5.579 202 2003.. 5.558 7.401 45 5.579 7.439 155 2004.. 7.401 9.439 33 7.439 9.502 148 2005.. 9.439 10.807 32 9.502 10.895 134 2006.. 10.807 13.900 18 10.895 14.035 96 2007.. 13.900 17.415 15 14.035 17.610 79 ---- ------ ------ -- ------ ------ --- Neuberger Berman AMT Mid-Cap Growth Portfolio 2003.. 8.326 10.473 14 8.343 10.510 9 2004.. 10.473 11.964 15 10.510 12.024 10 2005.. 11.964 13.365 15 12.024 13.453 11 2006.. 13.365 15.056 11 13.453 15.177 11 2007.. 15.056 18.119 11 15.177 18.292 11 ---- ------ ------ -- ------ ------ --- Neuberger Berman AMT Regency Portfolio 2003.. 9.387 13.075 2 9.809 13.107 8 2004.. 13.075 15.713 3 13.107 15.776 10 2005.. 15.713 17.285 3 15.776 17.380 8 2006.. 17.285 18.872 3 17.380 19.005 7 2007.. 18.872 19.148 3 19.005 19.311 7 ---- ------ ------ -- ------ ------ --- Putnam VT Growth and Income Fund 2003.. N/A N/A N/A 8.654 10.844 1 2004.. N/A N/A N/A N/A N/A N/A 2005.. N/A N/A N/A 11.851 12.267 1 2006.. N/A N/A N/A 12.267 13.986 2 2007.. N/A N/A N/A 13.986 12.926 1 ---- ------ ------ --- ------ ------ --- Putnam VT Health Sciences Fund 2003.. 8.264 9.610 1 8.279 9.641 1 2004.. N/A N/A N/A 9.641 10.159 1 2005.. N/A N/A N/A 10.159 11.311 1 2006.. N/A N/A N/A 11.311 11.437 1 2007.. N/A N/A N/A 11.437 11.182 5 ---- ------ ------ --- ------ ------ ---
* These values do not reflect a full year's experience because they are calculated for the period from the beginning of investment activity of the subaccounts (July 31, 2000) through December 31, 2000. ** All numbers less than 500 were rounded up to one. (1) Commenced business on 9/19/01 with an initial unit value of $10. (2) Commenced business on 9/10/01 with an initial unit value of $10. (3) Commenced business on 9/17/01 with an initial unit value of $10. (4) Effective following the close of business on May 19, 2003 shares of the American Funds International Fund were substituted for shares of the Delaware VIP Emerging Markets Series. In 2004, the Delaware VIP Emerging Markets Series subaccount was added to the product. (5) Effective following the close of business on May 19, 2003, shares of the Lincoln VIP Social Awareness were substituted for shares of the Delaware VIP Social Awareness Series. The values in the table for periods prior to the substitution reflect investment in the Delaware VIP Social Awareness Series. (6)Effective April 30, 2007, the Lincoln Core Fund was reorganized into the LVIP S&P 500 Index Fund, a series of Lincoln Variable Insurance Products Trust. (7) Effective April 30, 2007, the Lincoln Growth Fund, was reorganized into the LVIP Janus Capital Appreciation Fund, a series of Lincoln Variable Insurance Products Trust. (8) Effective June 11, 2007, the Lincoln Growth Opportunities Fund was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. (9)Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund. A-8 (This page intentionally left blank) 9 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.
1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) LINCOLN LIFETIME INCOME(SM) ADVANTAGE GUARANTEED INCOME LINCOLN BENEFIT LINCOLN LIFETIME SMART INCOME(SM) 3) i4LIFE(R) SECURITY(R) ADVANTAGE ADVANTAGE LINCOLN ADVANTAGE (WITH OR GUARANTEED SMART 1-YR. WITHOUT INCOME SECURITY(R) AUTOMATIC LINCOLN BENEFIT ADVANTAGE STEP-UP LIFETIME (VERSION 2) 5-YR. (PRIOR INCOME(SM) (PRIOR ELECTIVE VERSIONS ADVANTAGE i4LIFE(R) 4LATER(R) VERSIONS STEP-UP MAY VARY) PLUS) ADVANTAGE ADVANTAGE MAY VARY) ------------------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to Designed to Designed to Designed to Designed to Designed to use guarantee that at guarantee that if guarantee that if provide an guarantee today a the Income Base least the entire you make your you make your income program future minimum established under amount of your first withdrawal first withdrawal that combines payout floor for 4LATER(R) purchase payments on or after the on or after the variable lifetime i4LIFE(R) Advantage (if will be returned date you reach date you reach income payments Advantage regular 4LATER(R) to you through age 65, you are age 59 1/2 (age and a death income payments, Advantage periodic guaranteed 65 under Joint benefit with the regardless of Guaranteed Income withdrawals, income Life), you are ability to make investment Benefit is regardless of the for your life guaranteed income withdrawals performance, by elected) or the investment (and your for your life during a defined providing an Guaranteed Amount performance of spouse's, under (and your period. Income Base under LINCOLN the contract. Joint Life spouse's, under . during the Lifetime version), even Joint Life accumulation INCOME(SM) after the entire version). period that can Advantage (if amount of . be used to LINCOLN LIFETIME purchase payments LINCOLN LIFETIME establish in the INCOME(SM) has been returned INCOME(SM) future a Advantage to you through Advantage Plus is Guaranteed Income Guaranteed Income periodic designed to Benefit with Benefit is withdrawals. If guarantee that i4LIFE(R) elected) or the lifetime contract value Advantage. Account Value* withdrawals are will not be less . established under not in effect, than the initial i4LIFE(R) you may make purchase payment Advantage (if periodic (or contract i4LIFE(R) withdrawals of value on rider Advantage the Guaranteed date) at the end Guaranteed Income Amount. of a 7-year Benefit is period IF you elected) to make no provide a minimum withdrawals and payout floor for cancel the i4LIFE(R) LINCOLN LIFETIME Advantage regular INCOME(SM) income payments, Advantage at that regardless of time. investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage 2. Current Fee 0.45% of 0.65% (Single 0.75% of Varies based on 0.50% of Income 0.50% added to Guaranteed Amount Life) or 0.80% Guaranteed Amount product and death Base the i4LIFE(R) (Joint Life) of benefit option Advantage charge Guaranteed (0.90% with Amount LINCOLN LIFETIME (assessed as a % (assessed as a % INCOME(SM) of account value, of account value, Advantage Plus) and only during and only during annuity payout annuity payout phase) phase) 3. Guaranteed 0.95% of 1.50% of 1.50% of Same as current 1.50% of Income 1.50% added to Maximum Fee Guaranteed Amount Guaranteed Amount Guaranteed Amount fee Base the i4LIFE(R) Advantage charge (assessed as a % of account value, and only during annuity payout phase)
4. Withdrawals Yes-7% annually Yes-5% annually Yes-5% annually Yes, during Yes, only after No Permitted Access Period you elect Withdrawals i4LIFE(R) negate LINCOLN Advantage Lifetime INCOME(SM) Advantage Plus 5. Payments for Life No Yes (if Yes (if Yes (if If elect Yes (if conditions are conditions are conditions are i4LIFE(R) conditions are met) met) met) Advantage met) 6. Potential Increases Purchase Payments Purchase Payments Purchase Payments N/A Purchase Payments Automatic 3-Year to Guaranteed Step-Ups Amount, Income Optional 5-Year Automatic Annual 5% Enhancements 15% Enhancements Base, or Step-Ups Step-Ups (every 3 years) (if conditions Guaranteed Income Automatic Annual are met) Benefit (as (if conditions (if conditions Step-Ups Resets to applicable) are met) are met) contract value 200% Step-Up (if conditions (if conditions are met) are met) 7. Investment Option 1 Option 1 Option 2 None Option 1 Option 1 Requirements Option 2 for LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit 8. Ability to Make Yes Yes, after the Yes--may impact No (non-qualified Yes No Additional first rider the charge contracts) Purchase anniversary, if Payments if cumulative Yes, during Contract Value is payments are over Access Period, greater than zero $100,000 and unless 4LATER(R) prior Home Office Advantage approval is Guaranteed provided Income Benefit or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) 9. Spousal Yes Yes No No Yes (prior to No Continuation Periodic Income Commencement Date) 10. Ability to Cancel Yes, after 5 Yes, after 5 Yes, after 7 No (non-qualified Yes, after 3 Yes, after 3 Rider years following years following Years contracts) years following years following the later of the later of the later of the later of rider effective rider effective Yes, at any time rider effective rider effective date or date or (qualified date or most date or most contractowner- contractowner- contracts) recent Reset recent Reset (if elected step-up elected step-up 4LATER(R) Advantage Guaranteed Income Benefit or LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit is elected) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) 11. Nursing Home No No Yes No No No Benefit 12. May Elect Other No No No Limited to No (prior to the Limited to Living Benefit Guaranteed Income Periodic Income i4LIFE(R) Riders Benefit Commencement Advantage Date)
Lincoln ChoicePlusSM Access 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 Access prospectus of Lincoln Life Variable Annuity Account N dated April 30, 2008. You may obtain a copy of the Lincoln ChoicePlusSM Access prospectus on request and without charge. Please write Lincoln Life Customer Service, The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, 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 Advertising B-5 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is April 30, 2008. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm The financial statements of the VAA and the consolidated financial statements of Lincoln Life appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, 2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as set forth in their reports, also appearing in this SAI and in the Registration Statement. The financial statements audited by Ernst & Young LLP have been included herein in reliance on their 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 Mellon Bank, N.A., 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, our affiliate. 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. Lincoln Life (prior to May 1, 2007) and LFD (on or after May 1, 2007) acting as Principal Underwriter paid, $115,249,891, $162,288,944 and $223,104,195 to LFA and Selling Firms in 2005, 2006 and 2007, 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%
Formula (1 + Index A)n ------------------------------ -1 (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment 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 INTEREST ADJUSTMENT 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% 15-year Access Period 30-Year Access Period Regular Income Payment .............. $ 10,813.44 $10,004.94
A 10% withdrawal from the account value will reduce the regular income payments by 10% to $9,732.10 with the 15-year access period and $9,004.45 with the 30-year access period. At the end of the 15-year access period, the remaining account value of $135,003.88 (assuming no withdrawals) will be used to continue the $10,813.44 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. Advertising The Lincoln National Life Insurance Company (Lincoln Life) is ranked and rated by independent financial rating services, including Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The purpose of these ratings is to reflect the financial strength or claims-paying ability of Lincoln Life. The ratings are not intended to reflect the investment experience or financial strength of the VAA. B-5 We may advertise these ratings from time to time. In addition, 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. More About the S&P 500 Index. Investors look to indexes as a standard of market performance. Indexes are model portfolios, that is, 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 seeks to approximate as closely as possible, before fees and expenses, the total return of the S&P 500 Index. To accomplish this objective the fund's sub-adviser, SSgA Funds Management, Inc. ("SFM"), attempts to buy and sell all of the index's securities in the same proportion as they are reflected in the S&P 500 Index, although the fund reserves the right not to invest in every security in the S&P 500 Index if it is not practical to do so under the circumstances. SFM does not seek to beat the S&P 500 Index and does not seek temporary defensive positions when markets appear to be overvalued. SFM makes no attempt to apply economic, financial or market analysis when managing the fund. Including a security among the fund's holdings implies no opinion as to its attractiveness as an investment. The fund may invest in stock index futures and options on stock index futures as a substitute for a comparable market position in the underlying securities. A stock index future obligates one party to deliver (and the other party to take), effectively, an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. Instead, the buyer and seller settle the difference in cash between the contract price and the market price on the agreed upon date. The buyer pays the difference if the actual price is lower than the contract price and the seller pays the difference if the actual price is higher. There can be no assurance that a liquid market will exist at the time when the fund seeks to close out a futures contract or a futures option position. Lack of a liquid market may prevent liquidation of an unfavorable position. The 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, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts. 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 $2,000 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. 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 market value 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 B-6 program. 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. Cross Reinvestment Program/Earnings Sweep Program - Under this option, account value in a designated variable subaccount of the contract that exceeds a certain baseline amount is automatically transferred to another specific variable subaccount(s) of the contract at specific intervals. You may elect to participate in the cross reinvestment program at the time of application or at any time before the annuity commencement date by sending a written request to us or by telephone if we have your telephone authorization on file. You designate the holding account, the receiving account(s), and the baseline amount. Cross reinvestment will continue until we receive authorization to terminate the program. The minimum holding account value required to establish cross-reinvestment is $10,000. A transfer under this program is not considered a transfer for purposes of limiting the number of transfers that may be made. We reserve the right to discontinue this service at any time. 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. Once the portfolio rebalancing option is activated, any variable subaccount transfers executed outside of the portfolio rebalancing program will terminate the portfolio rebalancing program. Any subsequent purchase payment or withdrawal that modifies the account balance within each variable subaccount may also cause termination of the portfolio rebalancing program. Any such termination will be confirmed to 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 Financial statements of the VAA and the consolidated financial statements of Lincoln Life appear on the following pages. B-7 Prospectus 2 Lincoln ChoicePlus IISM Access 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 46802-7866 www.LFG.com 1-888-868-2583 This prospectus describes the individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). It is primarily for use with nonqualified plans and qualified retirement plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a variable or fixed amount, if available, or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. In the alternative, you generally may choose to receive a death benefit upon the death of the annuitant. The minimum initial purchase payment for the contract is $10,000. Additional purchase payments may be made to the contract and must be at least $100 per payment ($25 if transmitted electronically), and at least $300 annually. Except as noted below, you choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. If your purchase payments are in the fixed account, we guarantee 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. 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: AIM Variable Insurance Funds (Series II): AIM V.I. Capital Appreciation Fund* AIM V.I. Core Equity Fund* AIM V.I. International Growth Fund* AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Technology Portfolio AllianceBernstein VPS Growth and Income Portfolio AllianceBernstein VPS International Value Portfolio AllianceBernstein VPS Large Cap Growth Portfolio* AllianceBernstein VPS Small/Mid Cap Value Portfolio American Century Investments Variable Products (Class II): American Century Investments VP Inflation Protection Fund American Funds Insurance SeriesSM (Class 2): American Funds Global Growth Fund American Funds Global Small Capitalization Fund American Funds Growth Fund American Funds Growth-Income Fund American Funds International Fund 1 Delaware VIP Trust (Service Class): Delaware VIP Capital Reserves Series Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP High Yield Series Delaware VIP REIT Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP U.S. Growth Series Delaware VIP Value Series DWS Investments VIT Funds (Class A): DWS Equity 500 Index VIP DWS Small Cap Index VIP Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund Portfolio Fidelity (Reg. TM) VIP Equity-Income Portfolio* Fidelity (Reg. TM) VIP Growth Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Fidelity (Reg. TM) VIP Overseas Portfolio Franklin Templeton Variable Insurance Products Trust (Class 2): FTVIPT Franklin Income Securities Fund FTVIPT Franklin Small-Mid Cap Growth Securities Fund FTVIPT Mutual Shares Securities Fund FTVIPT Templeton Global Income Securities Fund FTVIPT Templeton Growth Securities Fund Janus Aspen Series (Service Class): Janus Aspen Balanced Portfolio* Janus Aspen Mid Cap Growth Portfolio* Janus Aspen Worldwide Growth Portfolio* Lincoln Variable Insurance Products Trust (Standard Class): LVIP Delaware Bond Fund LVIP Delaware Social Awareness Fund LVIP Janus Capital Appreciation Fund LVIP Mondrian International Value Fund LVIP Money Market Fund LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP UBS Global Asset Allocation Fund Lincoln Variable Insurance Products Trust (Service Class): LVIP Baron Growth Opportunities Fund LVIP Capital Growth Fund LVIP Cohen & Steers Global Real Estate Fund LVIP Columbia Value Opportunities Fund (formerly Value Opportunities Fund) LVIP Delaware Growth and Income Fund LVIP Delaware Special Opportunities Fund LVIP FI Equity-Income Fund* LVIP Marsico International Growth Fund LVIP MFS Value Fund LVIP Mid-Cap Value Fund LVIP SSgA Bond Index Fund* LVIP SSgA Developed International 150 Fund* LVIP SSgA Emerging Markets 100 Fund* LVIP SSgA International Index Fund* LVIP SSgA Large Cap 100 Fund* LVIP SSgA Small/Mid Cap 200 Fund* LVIP SSgA S&P 500 Index Fund** (formerly S&P 500 Index Fund) LVIP SSgA Small-Cap Index Fund (formerly Small-Cap Index Fund) LVIP T. Rowe Price Growth Stock Fund LVIP Templeton Growth Fund LVIP Turner Mid-Cap Growth Fund (formerly Mid-Cap Growth Fund) LVIP Wilshire 2010 Profile Fund LVIP Wilshire 2020 Profile Fund LVIP Wilshire 2030 Profile Fund LVIP Wilshire 2040 Profile Fund LVIP Wilshire Aggressive Profile Fund LVIP Wilshire Conservative Profile Fund LVIP Wilshire Moderate Profile Fund LVIP Wilshire Moderately Aggressive Profile Fund MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Core Equity Series* MFS (Reg. TM) VIT Growth Series* (formerly Emerging Growth Series) MFS (Reg. TM) VIT Total Return Series MFS (Reg. TM) VIT Utilities Series Neuberger Berman Advisers Management Trust (I Class): Neuberger Berman AMT Mid-Cap Growth Portfolio Neuberger Berman AMT Regency Portfolio Putnam Variable Trust (Class IB): Putnam VT Growth & Income Fund* Putnam VT Health Sciences Fund* *Not all funds are available in all contracts. Refer to Description of Funds for specific information regarding the availability of funds. **"S&P 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing the product. (Please see the Statement of Additional Information which sets forth additional disclaimers and limitations of liability on behalf of S&P.) This prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectuses for the funds that accompany this prospectus, and keep all prospectuses for future reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI is incorporated by reference into this prospectus and is legally part of this prospectus. For a free copy of the SAI, write: The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, or call 1-888-868-2583. The SAI and other 2 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. April 30, 2008 3 Table of Contents
Item Page Special Terms 5 Expense Tables 6 Summary of Common Questions 8 The Lincoln National Life Insurance Company 10 Variable Annuity Account (VAA) 10 Investments of the Variable Annuity Account 11 Charges and Other Deductions 16 The Contracts 20 Purchase Payments 21 Transfers On or Before the Annuity Commencement Date 22 Surrenders and Withdrawals 24 Death Benefit 26 Investment Requirements - Option 1 31 Investment Requirements - Option 2 32 Lincoln Lifetime IncomeSM Advantage 33 Lincoln SmartSecurity (Reg. TM) Advantage 43 i4LIFE (Reg. TM) Advantage 48 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 53 4LATER (Reg. TM) Advantage 55 Annuity Payouts 60 Fixed Side of the Contract 61 Distribution of the Contracts 64 Federal Tax Matters 65 Additional Information 69 Voting Rights 69 Return Privilege 70 Other Information 70 Legal Proceedings 70 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 71 Appendix A - Condensed Financial Information A-1
4 Special Terms In this prospectus, the following terms have the indicated meanings: 4LATER (Reg. TM) Advantage or 4LATER (Reg. TM) - An option that provides an Income Base during the accumulation period, which can be used to establish a Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage in the future. Account or variable annuity account (VAA) - The segregated investment account, Account N, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date. 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. Guaranteed Income Benefits - Options that each provide a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. 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 - Provides minimum guaranteed lifetime periodic withdrawals that may increase. The Lincoln Lifetime IncomeSM Advantage Plus may provide an amount equal to the excess of the initial Guaranteed Amount over the current contract value. Lincoln SmartSecurity (Reg. TM) Advantage - Provides minimum guaranteed periodic withdrawals (for life, if the 1 Year Automatic Step-Up option is chosen), 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 Smart Security (Reg. TM) Advantage, Lincoln Lifetime Income AdvantageSM, 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit). 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 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 the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: We may apply the interest adjustment to amounts being withdrawn, surrendered or transferred from a guaranteed period account only (except for dollar cost averaging, portfolio rebalancing and cross-reinvestment, withdrawals up to the annual withdrawal limit under the Lincoln SmartSecurity (Reg. TM) Advantage and regular income payments under i4LIFE (Reg. TM) Advantage). See Fixed Side of the Contract. 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. Annual Account Fee: $35* Separate Account Annual Expenses (as a percentage of average daily net assets in the subaccounts):
Estate Enhancement Benefit Rider (EEB) in combination with 5% Step Up --------------------- o Mortality and expense risk charge 1.75% o Administrative charge 0.15% ---- o Total annual charge for each subaccount 1.90% Estate Enhancement Benefit Rider (EEB) Enhanced Guaranteed Guarantee of without 5% 5% Step Up Minimum Death Principal death Step Up death benefit Benefit (EGMDB) benefit (GOP) --------------------- --------------- --------------------- ---------------- o 1.70% 1.65% 1.50% 1.40% o 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o 1.85% 1.80% 1.65% 1.55%
*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 Rider Charges: Lincoln Lifetime IncomeSMAdvantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.75% o Additional charge for Lincoln Lifetime IncomeSM Advantage Plus* 0.15%
*The annual percentage charge is assessed against the Guaranteed Amount (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. These changes to the Guaranteed Amount are discussed below. This charge is deducted from the contract value on a quarterly basis. See Charges and Other Deductions for further information. Lincoln SmartSecurity (Reg. TM) Advantage:
o Guaranteed maximum annual percentage charge* o Current annual percentage charge* Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Advantage - 5 Year Elective Step-Up option Step-Up option Step-Up option - Single Life (and prior version) - Joint Life --------------------------------- ----------------------------------- -------------------------------- o 0.95% 1.50% 1.50% o 0.45% 0.65% 0.80%
*The annual percentage charge is assessed against 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 for further information. 6 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.50%
*The annual percentage charge for the 4LATER (Reg. TM) Advantage is multiplied by the Income Base (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, automatic 15% Enhancements, and Resets and decreased for withdrawals. The 4LATER (Reg. TM) charge is deducted from the subaccounts on a quarterly basis. The next table describes charges that apply only when i4LIFE (Reg. TM) Advantage is in effect. The charge for any Guaranteed Income Benefit, if elected, is added to the i4LIFE (Reg. TM) Advantage charge and the total is deducted from your average daily account value. i4LIFE (Reg. TM) Advantage Payout Phase (On and After the Periodic Income Commencement Date): i4LIFE (Reg. TM) Advantage (as a daily percentage of average account value):
Enhanced Guaranteed Guarantee of Minimum Death Principal Death Benefit (EGMDB) Benefit Account Value Death Benefit --------------------- ---------------- ---------------------------- o Annual charge* 2.10% 1.95% 1.90%
*During the Lifetime Income Period, the charge will be the same rate as the i4LIFE (Reg. TM) Advantage Account Value Death Benefit. Optional Rider Charges : i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
4LATERSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 2.10% with the 4LATERSM Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.60%. The next table describes the separate account annual expenses you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
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, 2007. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Maximum Minimum --------- -------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses): 6.31% 0.31% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.73% 0.28%
* 40 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, 2009. 7 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 EEB with 5% Step-Up death benefit and Lincoln Lifetime IncomeSM Advantage Plus 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 -------- --------- --------- --------- $961 $2,827 $4,628 $8,908
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 -------- --------- --------- --------- $961 $2,827 $4,628 $8,908
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 or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage including the Guaranteed Income Benefit Rider, 4LATER (Reg. TM) Advantage and Annuity Payouts. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. Summary of Common Questions What kind of contract am I buying? It is an individual variable or fixed and/or interest adjusted, if applicable, annuity contract between you and Lincoln Life. 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 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. 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, 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, you will be subject to certain requirements for your subaccount investments. You may be limited in how much you can invest in certain subaccounts. Different Investment Requirements apply to different riders. See The Contracts - Investment Requirements. What are my investment choices? 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. 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 received and the value of each annuity unit on payout days. See The Contracts. What charges do I pay under the contract? We will deduct any applicable premium tax from purchase payments or contract value 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. 8 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. 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. What is Lincoln Lifetime IncomeSM Advantage? Lincoln Lifetime IncomeSM Advantage is a rider that you may purchase for an additional charge and which provides minimum guaranteed, periodic withdrawals for your life (Single Life Option) or for the lives of you and your spouse (Joint Life Option) regardless of the investment performance of the contract provided certain conditions are met. Withdrawals are based on the Guaranteed Amount which is equal to the initial purchase payment (or contract value if elected after contract issue). The Guaranteed Amount is not available as a separate benefit upon death or surrender and is increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the step-up to 200% of the initial Guaranteed Amount and is decreased by withdrawals in accordance with provisions described later in this prospectus. See The Contracts-Lincoln Lifetime IncomeSM Advantage. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage 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 Lincoln Lifetime IncomeSM Advantage Plus? Lincoln Lifetime IncomeSM Advantage Plus is available for an additional fee and provides an amount equal to the excess of the initial Guaranteed Amount over the current contract value on the seventh benefit year anniversary so long as no withdrawals have been taken and you adhere to certain Investment Requirements. Lincoln Lifetime IncomeSM Advantage Plus may only be purchased in addition to Lincoln Lifetime IncomeSM Advantage. What are Living Benefit Riders? Living benefit riders are optional riders available to purchase for an additional fee. These riders provide a type of minimum guarantee if you meet certain conditions. These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders at the end of this prospectus. 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. There are two options available to reset the Guaranteed Amount to the current contract value. 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 - Lincoln SmartSecurity (Reg. TM) Advantage. 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 are the Guaranteed Income Benefits? The Guaranteed Income Benefits provide a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. They are available either through 4LATER (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage or may be purchased at the time you elect i4LIFE (Reg. TM) Advantage. 4LATER (Reg. TM) Advantage is purchased prior to the time you elect i4LIFE (Reg. TM) Advantage and provides a guaranteed value, the Income Base, which can be used to establish the Guaranteed Income Benefit floor in the future. The i4LIFE (Reg. TM) Guaranteed Income Benefit or Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period. The i4LIFE (Reg. TM) Guaranteed Income Benefit does not have an Income Base; the minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. By electing one of 9 these benefits, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage Guaranteed Income Benefit. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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? Appendix A to this prospectus provides more information about accumulation unit values. 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. 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. During extended periods of low interest rates, 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. Guarantees provided within death benefit options and living benefit riders are backed by the claims-paying ability of Lincoln Life. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of financial products and solutions through financial advisors: mutual funds, managed accounts, retirement solutions, life insurance, 401(k) and 403(b) plans, savings plans, institutional investments 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. 10 Financial Statements The financial statements of the VAA and the 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 0.46%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the Contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings. The AIM, AllianceBernstein, American Century, American Funds, Delaware, Fidelity, Franklin Templeton, Janus, Lincoln, MFS and Putnam Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.35% 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. Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for the fund. You should read each fund prospectus carefully before investing. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. 11 AIM Variable Insurance Funds, advised by AIM Advisors, Inc. o Capital Appreciation Fund (Series II): Capital appreciation. This fund is not offered in contracts issued on or after May 24, 2004. o Core Equity Fund (Series II): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. o International Growth Fund (Series II): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein Global Technology Portfolio (Class B): Maximum capital appreciation. o AllianceBernstein Growth and Income Portfolio (Class B): Growth and income. o AllianceBernstein International Value Portfolio (Class B): Long-term growth. o AllianceBernstein Large Cap Growth Portfolio (Class B): Maximum capital appreciation. This fund is not offered in contracts issued on or after June 6, 2005. o AllianceBernstein Small/Mid Cap Value Portfolio (Class B): Long-term growth. American Century Investments Variable Products, advised by American Century o Inflation Protection Fund (Class II): Long-term total return. American Funds Insurance SeriesSM, advised by Capital Research and Management Company o Global Growth Fund (Class 2): Long-term growth. o Global Small Capitalization Fund (Class 2): Long-term growth. o Growth Fund (Class 2): Long-term growth. o Growth-Income Fund (Class 2): Growth and income. o International Fund (Class 2): Long-term growth. Delaware VIP Trust, advised by Delaware Management Company o Capital Reserves Series (Service Class): Current income. o Diversified Income Series (Service Class): Total return. o Emerging Markets Series (Service Class): Capital appreciation. o High Yield Series (Service Class): Total return. o REIT Series (Service Class): Total return. o Small Cap Value Series (Service Class): Capital appreciation. o Trend Series (Service Class): Capital appreciation. o U.S. Growth Series (Service Class): Capital appreciation. o Value Series (Service Class): Capital appreciation. DWS Investments VIT Funds, advised by Deutsche Asset Management Inc. and subadvised by Northern Trust Investments, Inc. o DWS Equity 500 Index VIP (Class A): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) o DWS Small Cap Index VIP (Class A): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company o Contrafund (Reg. TM) Portfolio (Service Class 2): Long-term capital appreciation. o Equity-Income Portfolio (Service Class 2): Reasonable income. This fund is not offered in contracts issued on or after June 6, 2005. o Growth Portfolio (Service Class 2): Capital appreciation. o Mid Cap Portfolio (Service Class 2): Long-term growth. o Overseas Portfolio (Service Class 2): Long-term growth. 12 Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund and the Franklin Small-Mid Cap Growth Securities Fund, by Templeton Global Advisors Limited for the Templeton Global Income Securities Fund and the Templeton Growth Securities Fund, and by Franklin Mutual Advisors, LLC for the Mutual Shares Securities Fund. o Franklin Income Securities Fund (Class 2): Current income. o Franklin Small-Mid Cap Growth Securities Fund (Class 2): Long-term capital growth. o Mutual Shares Securities Fund (Class 2): Capital appreciation. o Templeton Global Income Securities Fund (Class 2): High current income. o Templeton Growth Securities Fund (Class 2): Long-term capital growth. (Subadvised by Templeton Asset Management Ltd.) Janus Aspen Series, advised by Janus Capital Management LLC o Balanced Portfolio (Service Class): Long-term growth and current income. This fund is not offered in contracts issued on or after June 6, 2005. o Mid Cap Growth Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after June 6, 2005. o Worldwide Growth Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP Baron Growth Opportunities Fund (Service Class): Long-term Growth. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital appreciation. (Subadvised by Wellington Management Company, LLP) o LVIP Cohen & Steers Global Real Estate Fund (Service Class): Total Return. (Subadvised by Cohen & Steers Capital Management) o LVIP Columbia Value Opportunities Fund (Service Class): Long-term capital appreciation. (formerly LVIP Value Opportunities Fund) (Subadvised by Columbia Management Advisors, LLC) o LVIP Delaware Bond Fund (Standard Class): Current income. (Subadvised by Delaware Management Company) o LVIP Delaware Growth and Income Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Social Awareness Fund (Standard Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Special Opportunities Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP FI Equity-Income Fund (Service Class): Income. (Subadvised by Pyramis Global Advisors LLC) This fund is not offered in contracts issued before June 6, 2005. o LVIP Janus Capital Appreciation Fund (Standard Class): Long-term growth. (Subadvised by Janus Capital Management LLC) o LVIP Marsico International Growth Fund (Service Class): Long-term capital appreciation. (Subadvised by Marsico Capital Management, LLC) o LVIP MFS (Reg. TM) Value Fund (Service Class): Capital appreciation. (Subadvised by Massachusetts Financial Services Company) o LVIP Mid-Cap Value Fund (Service Class): Long-term capital appreciation. (Subadvised by Wellington Management) o LVIP Mondrian International Value Fund (Standard Class): Long-term capital appreciation. (Subadvised by Mondrian Investment Partners, Limited) o LVIP Money Market Fund (Standard Class): Current income/Preservation of capital. (Subadvised by Delaware Management Company) 13 o LVIP SSgA Bond Index Fund (Service Class): Current income. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA International Index Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA S&P 500 Index Fund (Service Class): Capital appreciation. (formerly S&P 500 Index Fund) (Subadvised by SSgA Funds Management, Inc.) o LVIP SSgA Small-Cap Index Fund (Service Class): Capital appreciation. (formerly Small-Cap Index Fund) (Subadvised by SSgA Funds Management, Inc.) o LVIP T. Rowe Price Growth Stock Fund (Service Class): Long-term growth of capital. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Standard Class): Maximum capital appreciation. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP Templeton Growth Fund (Service Class): Long-term growth of capital. (Subadvised by Templeton Investment Counsel, LLC) o LVIP Turner Mid-Cap Growth Fund (Service Class): Capital appreciation. (formerly Mid-Cap Growth Fund) (Subadvised by Turner Investment Partners) o LVIP UBS Global Asset Allocation Fund (Standard Class): Total return. (Subadvised by UBS Global Asset Management (Americas) Inc. (UBS Global AM) o LVIP Wilshire 2010 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2020 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2030 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2040 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Aggressive Profile Fund (Service Class): Capital appreciation; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Conservative Profile Fund (Service Class): Current income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Moderate Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Moderately Aggressive Profile Fund (Service Class): Growth and income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) *Funds offered in a fund of funds structure may have higher expenses than funds that invest directly in debt or equity securities. 14 MFS (Reg. TM) Variable Insurance TrustSM, advised by Massachusetts Financial Services Company o Core Equity Series (Service Class): Capital appreciation. This fund is not offered in contracts issued on or after June 6, 2005. o Growth Series (Service Class): Capital appreciation. (formerly Emerging Growth Series) This fund will be available in all contracts on or about June 16, 2008. o Total Return Series (Service Class): Total return. o Utilities Series (Service Class): Total return. Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management, Inc. o Mid-Cap Growth Portfolio (I Class): Capital appreciation. (Subadvised by Neuberger Berman, LLC) o Regency Portfolio (I Class): Long-term growth. (Subadvised by Neuberger Berman, LLC) Putnam Variable Trust, advised by Putnam Investment Management, LLC o Growth & Income Fund (Class IB): Capital growth and current income. This fund is not offered in contracts issued on or after May 24, 2004. o Health Sciences Fund (Class IB): Capital appreciation. This fund is not offered in contracts issued on or after May 24, 2004. 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. 15 We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. Charges and Other Deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, cross-reinvestment, portfolio rebalancing, and automatic withdrawal services - See Additional Services and the SAI for more information on these programs); o maintaining records; o administering annuity payouts; o furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values); o reconciling and depositing cash receipts; o providing contract confirmations; o providing toll-free inquiry services; and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts 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 lifetime payments to individuals from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will exceed the contract value; o the risk that, if the i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit or 4LATER (Reg. TM) Guaranteed Income Benefit is in effect, the required 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. 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:
Estate Enhancement Benefit Rider (EEB) in combination with 5% Step Up --------------------- o Mortality and expense risk charge 1.75% o Administrative charge 0.15% ---- o Total annual charge for each subaccount 1.90% Estate Enhancement Benefit Rider (EEB) Enhanced Guaranteed Guarantee of without 5% 5% Step Up Minimum Death Principal death Step Up death benefit Benefit (EGMDB) benefit (GOP) --------------------- --------------- --------------------- ---------------- o 1.70% 1.65% 1.50% 1.40% o 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o 1.85% 1.80% 1.65% 1.55%
16 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 Charge. While this Rider is in effect, there is a charge for the Lincoln Lifetime IncomeSM Advantage, if elected. The Rider charge is currently equal to an annual rate of 0.75% (0.1875% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 0.90%. The charge is applied to the Guaranteed Amount as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. We will deduct the cost of this Rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of the Rider. This deduction will be made in proportion to the value in each subaccount of the contract on the valuation date the Rider charge is assessed. The amount we deduct will increase or decrease as the Guaranteed Amount increases or decreases, because the charge is based on the Guaranteed Amount. Refer to the Lincoln Lifetime IncomeSM Advantage Guaranteed Amount section for a discussion and example of the impact of the changes to the Guaranteed Amount. The annual Rider percentage charge may increase each time the Guaranteed Amount increases as a result of the Automatic Annual Step-up, but the charge will never exceed the guaranteed maximum annual percentage charge of 1.50%. 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. This opt out will only apply for this particular Automatic Annual Step-up and is not available if additional purchase payments would cause your charge to increase (see below). You will need to notify us each time the percentage charge increases if you do not want the Automatic Annual Step-up. An increase in the Guaranteed Amount as a result of the 5% Enhancement or 200% Step-up will not cause an increase in the annual Rider percentage charge but will increase the dollar amount of charge. Once cumulative additional purchase payments into your annuity contract after the first Benefit Year exceed $100,000, any additional purchase payment will potentially cause the charge for your Rider to change to the current charge for new purchases in effect on the next Benefit Year anniversary, but the charge will never exceed the guaranteed maximum annual charge. The new charge will become effective on the Benefit Year anniversary. 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 Guaranteed Amount is reduced to zero while the contractowner is receiving a lifetime Maximum Annual Withdrawal, no rider charge will be deducted. If you purchase Lincoln Lifetime IncomeSM Advantage Plus Option, an additional 0.15% charge will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 0.90% applied to the Guaranteed Amount. This total charge (which may change as discussed above) is in effect until the 7th Benefit Year anniversary. If you exercise your Plus Option, this entire rider and its charge will terminate. If you do not exercise the Plus Option, after the 7th Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed and the Lincoln Lifetime IncomeSM Advantage rider and charge will continue. If you make a withdrawal prior to the 7th Benefit Year anniversary, you will not be able to exercise the Plus option, but the additional 0.15% charge will remain on your contract until the 7th Benefit Year anniversary. Lincoln SmartSecurity (Reg. TM) Advantage Charge. While this Rider is in effect, there is a charge for the Lincoln SmartSecurity (Reg. TM) Advantage, if elected. The Rider charge is currently equal to an annual rate of: 1) 0.45% (0.1125% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option; or 2) 0.65% (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option (and also the prior version of Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up); or 3) 0.80% (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. Once the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option is available in your state, the prior version will not be available. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. 17 The charge is applied to the Guaranteed Amount as adjusted. 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. In Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up (without the Single or Joint Life option), 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 - 1 Year Automatic Step-up option, the annual Rider percentage charge will not change upon each automatic step-up of the Guaranteed Amount for the 10-year period. Under both options, if you elect to step-up the Guaranteed Amount for another 10 year 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 0.95% for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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. Rider Charge Waiver. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the later of the fifth anniversary of the effective date of the Rider or the fifth anniversary of the most recent step-up of the Guaranteed Amount, the Rider charge may be waived. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, no Rider charge waiver is available with the Single Life and Joint Life options. The earlier version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option has a waiver charge provision which may occur after the fifth Benefit Year anniversary following the last automatic step-up opportunity. Whenever the above conditions are met, on each valuation date the Rider charge is to be deducted, if the total withdrawals from the contract have been less than or equal to 10% of the sum of: (1) the Guaranteed Amount on the effective date of this Rider or on the most recent step-up date; and (2) purchase payments made after the step-up, then the quarterly Rider charge will be waived. If the withdrawals have been more than 10%, then the Rider charge will not be waived. 4LATER (Reg. TM) Advantage Charge. Prior to the periodic income commencement date (which is defined as the valuation date the initial regular income payment under i4LIFE (Reg. TM) Advantage is determined), the annual 4LATER (Reg. TM) charge is currently 0.50% of the Income Base. The Income Base (an amount equal to the initial purchase payment or contract value at the time of election), as adjusted, is a value that will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. An amount equal to the quarterly 4LATER (Reg. TM) Rider charge multiplied by the Income Base will be deducted from the subaccounts on every third month anniversary of the later of the 4LATER (Reg. TM) Rider Effective Date or the most recent reset of the Income Base. This deduction will be made in proportion to the value in each subaccount on the valuation date the 4LATER (Reg. TM) Rider charge is assessed. The amount we deduct will increase as the Income Base increases, because the charge is based on the Income Base. As described in more detail below, the only time the Income Base will change is when there are additional purchase payments, withdrawals, automatic enhancements at the end of the 3-year waiting periods or in the event of a Reset to the current Account Value. If you purchase 4LATER (Reg. TM) in the future, the percentage charge will be the charge in effect at the time you elect 4LATER (Reg. TM). Upon a reset of the Income Base, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge based on the Income Base immediately prior to the reset will be made on the valuation date of the reset. This deduction covers the cost of the 4LATER (Reg. TM) Rider from the time of the previous deduction to the date of the reset. After the reset, we will deduct the 4LATER (Reg. TM) Rider charge for the reset Income Base on a quarterly basis, beginning on the valuation date on or next following the three month anniversary of the reset. At the time of the reset, the annual charge will be the current charge in effect for new purchases of 4LATER (Reg. TM) at the time of reset, not to exceed the guaranteed maximum charge of 1.50%. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. i4LIFE (Reg. TM) Advantage Charge. i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the net asset value of the Account Value in the VAA. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.90% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 1.95% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.10% for 18 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. After the Access Period ends, the charge will be the same rate as the cost of the i4LIFE (Reg. TM) Advantage Account Value death benefit. i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.45% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.60% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. 4LATER (Reg. TM) Guaranteed Income Benefit Charge. The 4LATER (Reg. TM) Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of .50% which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the Account Value death benefit; 2.45% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.60% for the EGMDB. These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. On and after the periodic income commencement date, the 4LATER (Reg. TM) Rider charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of average account value. This is a change to the calculation of the 4LATER (Reg. TM) charge because after the periodic income commencement date, when the 4LATER (Reg. TM) Guaranteed Income Benefit is established, the Income Base is no longer applicable. The percentage 4LATER (Reg. TM) charge is the same immediately before and after the periodic income commencement date; however, the charge is multiplied by the Income Base (on a quarterly basis) prior to the periodic income commencement date and then multiplied by the average daily account value after the periodic income commencement date. After the periodic income commencement date, the 4LATER (Reg. TM) percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Rider annual charge will also terminate. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.40% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.45% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.60% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium taxes generally depend upon the law of your state of residence. The tax ranges from zero to 3.5%. 19 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 1.40% 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. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. Additional Information The charges described previously may be reduced or eliminated for any particular contract. However, these reductions may be available only to the extent that we anticipate lower distribution and/or administrative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges, or when required by law. Lower distribution and administrative expenses may be the result of economies associated with: o the use of mass enrollment procedures, o the performance of administrative or sales functions by the employer, o the use by an employer of automated techniques in submitting deposits or information related to deposits on behalf of its employees, or o any other circumstances which reduce distribution or administrative expenses. The exact amount of charges and fees applicable to a particular contract will be stated in that contract. The Contracts 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 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. If you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. 20 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. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum annual amount for additional purchase payments is $300. The minimum payment to the contract at any one time must be at least $100 ($25 if transmitted electronically). If a minimum purchase payment is not submitted, we will contact you to see if additional money will be sent, or if we should return the purchase payment to you. Purchase payments in total may not exceed $2 million without our approval. If you stop making purchase payments, the contract will remain in force as a paid-up contract. However, we may terminate the contract as allowed by 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 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. 21 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, and when permitted by law, it may be prudent for us to use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method. Transfers On or Before the Annuity Commencement Date 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. There is no charge for a transfer. 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. This limit does not apply to transfers made under the automatic transfer programs of dollar cost averaging, cross re-investment or portfolio rebalancing elected on forms available from us. See Additional Services and the SAI for more information on these programs. The minimum amount which may be transferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total balance of the subaccount. A transfer request may be made to our 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 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 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 also may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. 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. 22 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, standard 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. We also reserve the right to implement and administer redemption fees imposed by one or more of the funds in the future. 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 23 policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date You may transfer all or a portion of your investment in one subaccount to another subaccount or to the fixed side of the contract, as permitted under your contract. Those transfers will be limited to three times per contract year. You may also transfer from a variable annuity payment to a fixed annuity payment. You may not transfer from a fixed annuity payment to a variable annuity payment. If you select i4LIFE (Reg. TM) Advantage your transfer rights and restrictions for the variable subaccounts and the fixed account during the Access Period are the same as stated in the section of this prospectus called Transfers On or Before the Annuity Commencement Date. During the i4LIFE (Reg. TM) Advantage Lifetime Income Period, you are subject to the rights set forth in the prior paragraph. Ownership The owner on the date of issue will be the person or entity designated in the contract specifications. If no owner is designated, the annuitant(s) will be the owner. The owner may name a joint owner. As contractowner, you have all rights under the contract. According to 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. Qualified contracts may not be assigned or transferred except as permitted by applicable law and upon written notification to us. 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. 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 benefit on the death of the annuitant. 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 at the Home office. If we receive a surrender or withdrawal request 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. 24 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. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may begin writing checks immediately. The SecureLine (Reg. TM) account is a special service that we offer in which your surrender proceeds are placed into an interest-bearing account. Instead of mailing you a check, we will send a checkbook so that you will have access to the account simply by writing a check for all or any part of the proceeds. 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 tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvestment service and portfolio rebalancing. Currently, there is no charge for these services. However, we reserve the right to impose one. 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. Dollar cost averaging is not available on contracts owned by non-individuals (i.e. corporations, trusts). We reserve the right to discontinue 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. The cross-reinvestment service allows you to automatically transfer the account value in a designated variable subaccount that exceeds a baseline amount to another specific variable subaccount at specific intervals. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of contract value allocated to each variable account subaccount. The rebalancing may take place monthly, quarterly, semi-annually or annually. Only one of the three additional services (DCA, cross reinvestment and portfolio rebalancing) may be used at one time. For example, you cannot have DCA and cross reinvestment running simultaneously. Asset Allocation Models Your registered representative may discuss asset allocation models with you to assist you in deciding how to allocate your purchase payments among the various subaccounts and/or the fixed account. The models listed below, available on or about June 16, 2008, were designed and prepared by SSgA Funds Management, Inc., a registered investment advisory firm for use by Lincoln Financial Distributors, Inc., (LFD) the principal underwriter of the contracts. LFD provides models to broker dealers who may offer the models to their own clients. The models do not constitute investment advice and you should consult with your broker dealer representative to determine whether you should utilize a model or which model is suitable for you based upon your goals, risk tolerance and time horizon. Each model invests different percentages of contract value in some or all of the LVIPT subaccounts currently available within your annuity contract. If you select an asset allocation model, 100% of your contract value (and any additional purchase payments you make) will be allocated among certain subaccounts in accordance with the model's asset allocation strategy. You may not make transfers among the subaccounts. We will deduct any withdrawals you make from the subaccounts in the asset allocation model on a pro rata basis. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in the contract at any time. Each of the asset allocation models seeks to meet its investment objective while avoiding excessive risk. The models also strive to achieve diversification among asset classes in order to help reduce volatility and boost returns over the long-term. There can be no assurance, however, that any of the asset allocation models will achieve its investment objective. If you are seeking a more aggressive strategy, these models are probably not appropriate for you. The asset allocation models are intended to provide a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. While diversification may help reduce overall risk, it does not eliminate the risk of losses and it does not protect against losses in a declining market. In order to maintain the model's specified subaccount allocation percentages, you agree to be automatically enrolled in and you thereby authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. 25 The models are static asset allocation models. This means that that they have fixed allocations made up of underlying funds that are offered within your contract and the percentage allocations will not change over time. Once you have selected an asset allocation model, we will not make any changes to the fund allocations within the model except for the rebalancing described above. If you desire to change your contract value or purchase payment allocation or percentages to reflect a revised or different model, you must submit new allocation instructions to us. You may terminate a model at any time. There is no charge from Lincoln for participating in a model. Certain living benefit riders may require that you allocate purchase payments in accordance with Investment Requirements that may be satisfied by choosing one of the asset allocation models. Different requirements and/or restrictions may apply under the individual rider. See The Contracts - Investment Requirements. The following models have been prepared by SSgA Funds Management, Inc., a registered investment advisor. The models are comprised of funds from the LVIP that are offered within your contract. Your registered representative will have more information on the specific investments of each model. o The SSgA Conservative Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in three equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes index funds exclusively. o The SSgA Moderate Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in three equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in three equity subaccounts and 20% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in three equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes index funds exclusively. o The SSgA Structured Conservative Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in seven equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderate Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in seven equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven equity subaccounts and 20% fixed one income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in seven equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. Franklin Templeton Founding Investment Strategy: Through the Franklin Templeton Founding Investment Strategy you may allocate purchase payments and/or contract values to three underlying funds as listed below. This is not an asset allocation model. Upon selection of this program you agree to be automatically enrolled in portfolio rebalancing and authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. o FTVIPT Franklin Income Securities 34% o FTVIPT Mutual Shares Securities 33% o LVIP Templeton Growth Fund 33%
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 to the annuity commencement date. Refer to your contract for the specific provisions applicable upon death. 26
UPON DEATH OF: AND... contractowner There is a surviving joint owner contractowner There is no surviving joint owner contractowner There is no surviving joint owner and the beneficiary predeceases the contractowner annuitant The contractowner is living annuitant The contractowner is living annuitant** The contractowner is a trust or other non-natural person UPON DEATH OF: AND... DEATH BENEFIT PROCEEDS PASS TO: contractowner The annuitant is living or deceased joint owner contractowner The annuitant is living or deceased designated beneficiary contractowner The annuitant is living or deceased contractowner's estate annuitant There is no contingent annuitant The youngest contractowner becomes the contingent annuitant and the contract continues. The contractowner may waive* this continuation and receive the death benefit proceeds. annuitant The contingent annuitant is living contingent annuitant becomes the annuitant and the contract continues annuitant** No contingent annuitant allowed designated beneficiary with non-natural contractowner
* Notification from the contractowner to select the death benefit proceeds must be received within 75 days of the death of the annuitant. ** Death of annuitant is treated like death of the contractowner. 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 if you elect i4LIFE (Reg. TM) Advantage or any annuitization option. Generally, the more expensive the death benefit the greater the protection. You should consider the following provisions carefully when designating the beneficiary, annuitant, any contingent annuitant and any joint owner, as well as before changing any of these parties. The identity of these parties under the contract may significantly affect the amount and timing of the death benefit or other amount paid upon a contractowner's or annuitant's death. You may designate a beneficiary during your lifetime and change the beneficiary by filing a written request with our 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. Check with your representative regarding state availability. 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 Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage). For contracts purchased prior to the time a state approves the above Guarantee of Principal Death Benefit calculation, the sum of all purchase payments will be reduced by the sum of all withdrawals. 27 In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable withdrawal charges (an interest adjustment 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 Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o the highest contract value which the contract attains on any contract anniversary (including the inception date) (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the death of the contractowner, joint owner or annuitant for whom the death claim is approved for payment. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduced the contract value. For contracts purchased prior to June 2, 2003 (or later, depending on your state) withdrawals will be deducted on a dollar for dollar basis. In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. For contracts purchased after June 2, 2003 (or later in some states), the contractowner may discontinue the EGMDB at any time by completing the Enhanced Guaranteed Minimum 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. 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. 5% Step-Up Death Benefit. This death benefit option is no longer available unless you had elected it prior to January 15, 2003. If the 5% Step-Up death benefit is in effect, the death benefit paid will be the greater of the death benefit under the EGMDB or the accumulation of all purchase payments minus the accumulation of all withdrawals. These purchase payments and withdrawals are accumulated at an annual rate of 5% from the date of the transaction to the earlier of the date of death of the deceased person or the contract anniversary immediately preceding the deceased person's 81st birthday. Each transaction is accumulated separately to a maximum of 200% of the transaction. The accumulation as of the contract anniversary immediately preceding the 81st birthday of the deceased contractowner, joint owner or annuitant will then be increased by purchase payments made on or subsequent to that contract anniversary and decreased by withdrawals on or subsequent to the contract anniversary. After a contract is issued, the contractowner may discontinue the 5% Step-Up death benefit at any time by completing the Death Benefit Discontinuance form and sending it to us. The benefit will be discontinued as of the valuation date we receive the request, and the death benefit will be the EGMDB. We will stop deducting the charge for the 5% Step-Up as of that date. See Charges and Other Deductions. If you discontinue the benefit, it cannot be reinstated. All references to withdrawals include deductions for applicable charges and premium taxes, if any. Estate Enhancement Benefit Rider (EEB Rider). The amount of death benefit payable under this Rider is the greatest of the following amounts: o The 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. For contracts purchased prior to June 2, 2003 (or later, depending on your state) the sum of all purchase payments will be reduced by the sum of all withdrawals (withdrawals less than or equal to the Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o The highest contract value on any contract anniversary (including the inception date) prior to the 81st birthday of the deceased contractowner, joint owner (if applicable), or annuitant and prior to the death of the contractowner, joint owner or annuitant for whom a death claim is approved for payment. The highest contract value is adjusted for certain transactions. It is increased by purchase payments made on or after that contract anniversary on which the highest contract value is obtained. It is decreased by withdrawals subsequent to that contract anniversary date in the same proportion that withdrawals reduced the contract value. For 28 contracts purchased prior to June 2, 2003 (or later, depending on your state) the highest contract value will be reduced by the sum of all withdrawals; or o (Only if this Rider is elected in combination with the 5% Step Up death benefit): The accumulation of all purchase payments minus the accumulation of all withdrawals at an annual rate of 5% from the date of the transaction to the earlier of the date of death of the deceased person or the contract anniversary immediately preceding the deceased person's 81st birthday. Each transaction is accumulated separately to a maximum of 200% of the transaction. The accumulation as of the contract anniversary immediately preceding the 81st birthday of the deceased contractowner, joint owner or annuitant will then be increased by purchase payments made on or subsequent to that contract anniversary and decreased by withdrawals on or subsequent to the contract anniversary. This EEB death benefit option is no longer available unless you had elected it prior to January 15, 2003; or o The current contract value as of the valuation date we approve the payment of the claim plus an amount equal to the Enhancement Rate times the lesser of: o the contract earnings; or o the covered earnings limit. Note: If there are no contract earnings, there will not be an amount provided under this item. In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The Enhancement Rate is based on the age of the oldest contractowner, joint owner (if applicable), or annuitant on the date when the Rider becomes effective. If the oldest is under age 70, the rate is 40%. If the oldest is age 70 to 75, the rate is 25%. The EEB Rider is not available if the oldest contractowner, joint owner (if applicable), or annuitant is age 76 or older at the time the Rider would become effective. Contract earnings equal: o the contract value as of the date of death of the individual for whom a death claim is approved by us for payment; minus o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); minus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment; plus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. The covered earnings limit equals 200% of: o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); plus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, and prior to the contract anniversary immediately preceding the 76th birthday of the oldest of the contractowner, joint owner (if applicable) or annuitant; minus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. The EEB Rider may not be available in all states. Please check with your investment representative regarding availability of this rider. Contracts purchased after the Rider becomes available in your state may only elect the Rider at the time of purchase. The EEB Rider may not be terminated unless you surrender the contract or the contract is in the annuity payout period. Accumulated Benefit Enhancement (ABE). This is no longer available unless you had elected this death benefit option prior to January 15, 2003. An Accumulated Benefit Enhancement may also be available for non-qualified i4LIFE (Reg. TM) Advantage contracts. See i4LIFE (Reg. TM) Advantage. There is no additional charge for this benefit. Whenever this ABE Death Benefit is in effect, the death benefit amount will be the greater of the death benefit chosen under the contract and this ABE Death Benefit. Any death benefit will be paid in the manner defined within the contract (see the discussions on Death Benefits Before the Annuity Commencement Date and General Death Benefit Information in the prospectus). Upon the death of any contractowner, joint owner or annuitant, the ABE Death Benefit will be equal to the sum of all purchase payments made under the new contract, plus the Enhancement Amount minus all withdrawals, including any applicable charges and any premium tax incurred. However, if the death occurs in the first contract year, only 75% of the Enhancement Amount will be used to calculate the ABE Death Benefit. The Enhancement Amount is equal to the excess of the prior contract's documented death benefit(s) over the actual cash surrender value received by us. However, we will impose a limit on the prior contract's death benefit equal to the lesser of: 29 o 140% of the prior contract's cash value; or o the prior contract's cash value plus $400,000. In addition, if the actual cash surrender value received by us is less than 95% of the documented cash value from the prior insurance company, the prior contract's death benefit will be reduced proportionately according to the reduction in cash value amounts. For the ABE Death Benefit to be effective, documentation of the death benefit and cash value from the prior insurance company must be provided to us at the time of the application. We will only accept these amounts in a format provided by the prior insurance company. Examples of this documentation include: o the prior company's periodic customer statement; o a statement on the prior company's letterhead; o or a printout from the prior company's website. This documentation cannot be more than ninety (90) days old at the time of the application. You may provide updated documentation prior to the contract date if it becomes available from your prior company. If more than one annuity contract is exchanged to us, the ABE Enhancement Amount will be calculated for each prior contract separately, and then added together to determine the total ABE Enhancement Amount. Under the new contract, upon the death of any contractowner, joint owner or annuitant who was not a contractowner or annuitant on the effective date of the new contract, the ABE Death Benefit will be equal to the contract value under the new contract as of the date the death claim is approved by us for payment (unless the change occurred because of the death of a contractowner, joint owner or annuitant). If any contractowner, joint owner or annuitant is changed due to a death and the new contractowner, joint owner or annuitant is age 76 or older when added to the contract, then the ABE Death Benefit for this new contractowner, joint owner or annuitant will be equal to the contract value as of the date the death claim is approved by us for payment. The ABE Death Benefit will terminate on the earliest of: o the valuation date the selected death benefit option of the contract is changed; or o the annuity commencement date. It is important to realize that even with the ABE Enhancement Amount, your death benefit will in many cases be less than the death benefit from your prior company. This is always true in the first year, when only 75% of the Enhancement Amount is available. General Death Benefit Information Only one of these death benefit elections may be in effect at any one time (in addition to ABE), and these elections terminate if you elect i4LIFE (Reg. TM) Advantage. 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. 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. If the EEB Rider is in effect, the Enhancement Rate for future benefits will be based on the age of the older of the surviving spouse or the annuitant at the time the EEB is paid into the contract. The contract earnings and the covered earnings limit will be reset, treating the current contract value (after crediting any death benefit amount into the contract as described above) as the initial deposit for purposes of future benefit calculations. If either the surviving spouse or the surviving annuitant is 76 or older the EEB Rider with 5% Step-Up death benefit will be reduced to the 5% Step-Up death benefit for an annual charge of 1.80%, and the EEB Rider death benefit will be reduced to the EGMDB death benefit for an annual charge of 1.65%. 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, of the death; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). 30 Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: o If any beneficiary dies before the contractowner, that beneficiary's interest will go to any other beneficiaries named, according to their respective interests; and/or o If no beneficiary survives the contractowner, the proceeds will be paid to the contractowner's estate. If the beneficiary is a minor, court documents appointing the guardian/custodian may be required. Unless the contractowner has already selected a settlement option, the beneficiary may choose the method of payment of the death benefit. The death benefit payable to the beneficiary or joint owner must be distributed within five years of the contractowner's date of death unless the beneficiary begins receiving within one year of the contractowner's death the distribution in the form of a life annuity or an annuity for a designated period not extending beyond the beneficiary's life expectancy. Upon the death of the annuitant, Federal tax law requires that an annuity election be made no later than 60 days after we have approved the death claim for payment. If the death benefit becomes payable, the recipient may elect to receive payment either in the form of a lump sum settlement or an annuity payout. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. In the case of a death of one of the parties to the annuity contract, if the recipient of the death benefit has elected a lump sum settlement and the contract value is over $10,000, the proceeds will be placed into the interest-bearing account in the recipient's name as the owner of the account. The SecureLine (Reg. TM) account allows the recipient additional time to decide how to manage death benefit proceeds with the balance earning interest from the day the account is opened. SecureLine (Reg. TM) is not a method of deferring taxation. The SecureLine (Reg. TM) account is a special service that we offer in which the death benefit proceeds are placed into an interest-bearing account. Instead of mailing you (or the recipient of the death proceeds) a check, we will send a checkbook so that you (or the death proceeds recipient) will have access to the account simply by writing a check for all or any part of the proceeds. 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. Investment Requirements - Option 1 Contractowners who have elected 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit will be subject to the following requirements on variable subaccount investments. You will be subject to different Investment Requirements if you elect the Lincoln Lifetime IncomeSM Advantage rider. If you do not elect any of these benefits, the Investment Requirements will not apply to your contract. For 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, and i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit, we do not intend to enforce these Investment Requirements at this time. We will notify you at least 30 days in advance of when the Investment Requirements will be enforced. Our decision to enforce these requirements will be based on our review of the subaccount investments of the contractowners who have these riders and market conditions. No more than 35% of your contract value (includes account value if i4LIFE (Reg. TM) Advantage is in effect) can be invested in the following subaccounts ("Limited Subaccounts"): o AIM V.I. International Growth Fund o AllianceBernstein Global Technology Portfolio o AllianceBernstein International Value Portfolio o AllianceBernstein Small/Mid Cap Value Portfolio o American Funds Global Growth Fund o American Funds Global Small Capitalization Fund o American Funds International Fund o Delaware VIP Emerging Markets Series o Delaware VIP REIT Series o Delaware VIP Small Cap Value Series o Delaware VIP Trend Series o DWS Small Cap Index VIP o Fidelity (Reg. TM) VIP Overseas Portfolio o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Templeton Growth Securities Fund 31 o Janus Aspen Mid Cap Growth Portfolio o Janus Aspen Worldwide Growth Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Marsico International Growth Fund o LVIP Mondrian International Value Fund o LVIP SSgA Developed International 150 Fund o LVIP SSgA Emerging Markets 100 Fund o LVIP SSgA International Index Fund o LVIP SSgA Small/Mid Cap 200 Fund o LVIP SSgA Small-Cap Index Fund o LVIP T. Rowe Price Structured Mid-Cap Growth Fund o LVIP Templeton Growth Fund o LVIP Turner Mid-Cap Growth Fund o Neuberger Berman AMT Mid-Cap Growth Portfolio All other variable subaccounts will be referred to as "Non-Limited Subaccounts". You can select the percentages of contract value, if any, allocated to the Limited Subaccounts, but the cumulative total investment in all the Limited Subaccounts cannot exceed 35% of the total contract value. On each quarterly anniversary of the effective date of any of these benefits, if the contract value in the Limited Subaccounts exceeds 35%, Lincoln will rebalance your contract value so that the contract value in the Limited Subaccounts is 30%. If rebalancing is required, the contract value in excess of 30% will be removed from the Limited Subaccounts on a pro rata basis and invested in the remaining Non-Limited Subaccounts on a pro rata basis according to the contract value percentages in the Non-Limited Subaccounts at the time of the reallocation. If there is no contract value in the Non-Limited Subaccounts at that time, all contract value removed from the Limited Subaccounts will be placed in the LVIP Money Market subaccount. We may move subaccounts on or off the Limited Subaccount list, change the percentages of contract value allowed in the Limited Subaccounts or change the frequency of the contract value rebalancing, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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 or when you are notified that we will begin enforcing 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; 2. submit your own reallocation instructions for the contract value in excess of 35% in the Limited Subaccounts; or 3. take no action and be subject to the quarterly rebalancing as described above. Investment Requirements - Option 2 Contractowners who have elected the Lincoln Lifetime IncomeSM Advantage will be subject to the following Investment Requirements-Option 2 on the investments in their contracts. These Investment Requirements are different from the Investment Requirements-Option 1 that apply to purchases of other optional riders. Contractowners with an active Lincoln Lifetime IncomeSM Advantage who terminate Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit are also subject to Investment Requirements-Option 2. We have divided the subaccounts of your contract into two groups. We will specify the minimum or maximum percentages of your contract value that must be in each group at the time you purchase the Rider. In addition, you may allocate your contract value and purchase payments in accordance with certain asset allocation models. If you terminate an asset allocation model, you must follow the Investment Requirements applicable to your rider. Some investment options are not available to you if you purchase this Rider. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. You can select the percentages of contract value to allocate to individual funds within each group, but the total investment for all funds in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not 32 receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion, but we will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. 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 or change the investment options that are or are not available to you, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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 the new terms of the Investment Requirements; 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. if you take no action, such changes will apply only to additional deposits or to future transfers of contract value. You will not be required to change allocations to existing subaccounts, but you will not be allowed to add money, by either an additional deposit or a contract transfer, in excess of the new percentage applicable to a fund or fund group. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% Investments cannot exceed 75% --------------------------------------------------- -------------------------------------------------------- 1. American Century VIP Inflation Protection All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Capital Reserves Series 5. Delaware VIP Diversified Series 6. FTVIPT Templeton Global Income Securities Fund 7. LVIP SSgA Bond Index Fund
To satisfy the Investment Requirements for the Lincoln Lifetime Income (Reg. TM) Advantage, you may allocate 100% of your contract value to or among the MFS VIT Total Return Fund, the FTVIPT Franklin Income Securities Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 75% can be allocated to the LVIP Wilshire Aggressive Profile Fund. If you allocate less than 100% to these funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. In addition, you can allocate 100% of your contract value to the Founding Investment Strategy (FTVIPT Franklin Income Securities Fund 34%, LVIP Templeton Growth Fund 33% and FTVIPT Mutual Shares Securities Fund 33%). The LVIP SSgA Emerging Markets 100 Fund and the fixed accounts (except for dollar cost averaging) are not available with Lincoln Lifetime Income (Reg. TM) Advantage. To satisfy the Investment Requirements of Lincoln Lifetime Income (Reg. TM) Advantage, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. On or about June 16, 2008, 100% of the contract value can be allocated to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Structured Moderately Aggressive Model, SSgA Conservative Index Model, SSgA Moderate Index Model and SSgA Moderately Aggressive Index Model. As discussed in the Lincoln Lifetime IncomeSM Advantage Plus section, if you purchase the Lincoln Lifetime IncomeSM Advantage Plus rider, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund (both are funds of funds) or the FTVIPT Franklin Income Securities Fund. On or about June 16, 2008, you may also allocate 100% of your contract value to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. Lincoln Lifetime IncomeSM Advantage The Lincoln Lifetime IncomeSM Advantage is a Rider that is available for purchase with your variable annuity contract if the purchase payment or contract value (if purchased after the contract is issued) is at least $50,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contract owner/annuitant (Single Life Option) or for the lives of you as contract owner/annuitant and your spouse as joint owner or primary beneficiary (Joint Life Option) regardless of the investment performance of the contract, 33 provided that certain conditions are met. A minimum guaranteed amount (Guaranteed Amount) is used to calculate the periodic withdrawals from your contract but, is not available as a separate benefit upon death or surrender. The Guaranteed Amount is equal to the initial purchase payment (or contract value if elected after contract issue) increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the Step-up to 200% of the initial Guaranteed Amount and decreased by withdrawals in accordance with the provisions set forth below. No additional purchase payments are allowed if the contract value decreases to zero for any reason. This Rider provides annual withdrawals of 5% of the initial Guaranteed Amount called Maximum Annual Withdrawal amounts. With the Single Life option, you may receive Maximum Annual Withdrawal amounts for your lifetime. If you purchase the Joint Life option, Maximum Annual Withdrawal amounts for the lifetimes of you and your spouse will be available. Withdrawals in excess of the Maximum Annual Withdrawal amount and any withdrawals prior to age 591/2 (for the Single Life Option) or age 65 (for the Joint Life Option) may significantly reduce your Maximum Annual Withdrawal amount. Withdrawals will also negatively impact the availability of the 5% Enhancement, the 200% Step-up and the Lincoln Lifetime IncomeSM Advantage Plus. These options are discussed below in detail. An additional option, available for purchase with your Lincoln Lifetime IncomeSM Advantage provides that on the seventh Benefit Year anniversary, provided you have not made any withdrawals, you may choose to cancel your Lincoln Lifetime IncomeSM Advantage rider and receive an increase in your contract value of an amount equal to the excess of your initial Guaranteed Amount (and purchase payments made within 90 days of rider election) over your contract value. This option is called Lincoln Lifetime IncomeSM Advantage Plus and is discussed in detail below. You may consider purchasing this option if you want to guarantee at least a return of your initial purchase payment after 7 years. Lincoln Lifetime IncomeSM Advantage Plus must be purchased with the Lincoln Lifetime IncomeSM Advantage. By purchasing the Lincoln Lifetime IncomeSM Advantage Rider, you will be limited in how you can invest in the subaccounts in your contract. In addition, the fixed account is not available except for use with dollar cost averaging. See The Contracts - Investment Requirements - Option 2. If you purchase the Lincoln Lifetime IncomeSM Advantage Plus option, your only investment options until the seventh Benefit Year anniversary are the following: the LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. 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. These riders are fully discussed in this prospectus. 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 and these other riders is included later in this prospectus. Not all riders will be available at all times. We have designed the rider to protect you from outliving your contract value. If the rider terminates or you (or your spouse, if applicable) die before your contract value is reduced to zero, neither you nor your estate will receive any lifetime withdrawals from us under the rider. We limit your withdrawals to the Maximum Annual Withdrawal amount and impose Investment Requirements in order to minimize the risk that your contract value will be reduced to zero before your (or your spouse's) death. Accordingly, a significant risk against which the rider protects, i.e., that your contract value will be reduced to zero (due to poor market performance or charges) while you are still alive, may be minimal. 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. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage with any other living benefit rider. 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. 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 you elect the Rider. If you elect the Rider at the time you purchase the contract, the initial Guaranteed Amount will equal your initial purchase payment. If you elect the Rider after we issue the contract, the initial Guaranteed Amount will equal the contract value on the effective date of the Rider. The maximum Guaranteed Amount is $10,000,000. This maximum takes into consideration the total Guaranteed Amounts from all Lincoln Life contracts (or contracts issued by our affiliates) in which you (or spouse if Joint Life Option) are the covered lives under either the Lincoln Lifetime IncomeSM Advantage or Lincoln SmartSecurity (Reg. TM) Advantage. Additional purchase payments automatically increase the Guaranteed Amount by the amount of the purchase payment (not to exceed the maximum Guaranteed Amount); for example, a $10,000 additional purchase payment will increase the Guaranteed Amount by $10,000. After the first anniversary of the Rider effective date, each time a purchase payment is made after the cumulative purchase payments equal or exceed $100,000, the charge for your Rider may change on the next Benefit Year anniversary. The charge will be the current charge in effect on that next Benefit Year Anniversary, for new purchases of the Rider. The charge will never exceed the 34 guaranteed maximum annual charge. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge in this prospectus. Additional purchase payments will not be allowed if the contract value decreases to zero for any reason including market loss. The following example demonstrates the impact of additional purchase payments on the Lincoln Lifetime IncomeSM Advantage charge: Initial purchase payment $100,000 Additional purchase payment in Year 2 $ 95,000 No change to charge Additional purchase payment in Year 3 $ 75,000 Charge will be the current charge Additional purchase payment in Year 4 $ 25,000 Charge will be the current charge
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, Automatic Annual Step-ups, 5% Enhancements and the 200% Step-up are made, and the cost decreases as withdrawals are made because these transactions all adjust the Guaranteed Amount. In addition, the percentage charge may change when cumulative purchase payments exceed $100,000 and also when Automatic Annual Step-ups occur as discussed below. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. 5% Enhancement to the Guaranteed Amount. On each Benefit Year anniversary, the Guaranteed Amount, 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. Additional purchase payments must be invested in the contract at least one Benefit Year before the 5% Enhancement will be made on the portion of the Guaranteed Amount equal to that purchase payment. Any purchase payments made within the first 90 days after the effective date of the Rider will be included in the Guaranteed Amount for purposes of receiving the 5% Enhancement on the first Benefit Year anniversary. Note: The 5% Enhancement is not available in any year there is a withdrawal from contract value including a Maximum Annual Withdrawal Amount. A 5% Enhancement will occur in subsequent years after a withdrawal 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 Guaranteed Amount: Initial purchase payment = $100,000; Guaranteed Amount = $100,000 Additional purchase payment on day 30 = $15,000; Guaranteed Amount = $115,000 Additional purchase payment on day 95 = $10,000; Guaranteed Amount = $125,000 On the first Benefit Year Anniversary, the Guaranteed Amount is $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 15 years from the effective date of the Rider. The 5% Enhancement will cease upon the death of the contract owner/annuitant or upon the death of the survivor of the contractowner or spouse (if Joint Life option is in effect) or when the oldest of these individuals reaches age 86. A new 15-year 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 Guaranteed Amount, you will not receive the 5% Enhancement. The 5% Enhancement cannot increase the Guaranteed Amount above the maximum Guaranteed Amount of $10,000,000. Any withdrawal from the contract value limits the 5% Enhancement as follows: a. The 5% Enhancement will not occur on any Benefit Year anniversary in which there is a withdrawal, including a Maximum Annual Withdrawal amount, from the contract during that Benefit Year. The 5% Enhancement will occur on the following Benefit Year anniversary if no other withdrawals are made from the contract and the Rider is within the 15-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2or older or the contractowner and spouse (Joint Life Option) are age 65 or older. b. If the contractowner/annuitant (Single Life Option) is under age 591/2 or the contractowner or spouse (Joint Life Option) is under age 65, and a withdrawal is made from the contract, the 5% Enhancement will not occur again until an Automatic Annual Step-Up to the contract value (as described below) occurs. An example of the impact of a withdrawal on the 5% Enhancement is included in the Withdrawals section below. If your Guaranteed Amount is increased by the 5% Enhancement on the Benefit Year anniversary, your percentage charge for the Rider will not change. However, the amount you pay for the Rider will increase since the charge for the Rider is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. 35 Automatic Annual Step-ups of the Guaranteed Amount. The Guaranteed Amount 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 both still living and under age 86; and b. the contract value on that Benefit Year anniversary is greater than the Guaranteed Amount after the 5% Enhancement (if any) or 200% Step-up (if any, as described below). Each time the Guaranteed Amount 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 Charge. If your percentage rider charge is increased upon an Automatic Annual Step-up, 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 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. If you decline the Automatic Annual Step-up, you will receive the 200% Step-up (if you are eligible as described below) or the 5% Enhancement (if you are eligible as specified above); however, a new 15-year period for 5% Enhancements will not begin. You may not decline the Automatic Annual Step-up, if applicable, if your additional purchase payments would cause your charge to increase. See the earlier Guaranteed Amount section. Following is an example of how the Automatic Annual Step-ups and the 5% Enhancement will work (assuming no withdrawals or additional purchase payments and issue age above 591/2(Single Life) or 65 (Joint Life):
Potential for Length of 5% Guaranteed Charge to Enhancement Contract Value Amount Change Period ---------------- ------------ --------------- ------------- Initial Purchase Payment $50,000.... $50,000 $50,000 No 15 1st Benefit Year Anniversary ....... $54,000 $54,000 Yes 15 2nd Benefit Year Anniversary ....... $53,900 $56,700 No 14 3rd Benefit Year Anniversary ....... $57,000 $59,535 No 13 4th Benefit Year Anniversary ....... $64,000 $64,000 Yes 15
On the 1st Benefit Year anniversary, the Automatic Annual Step-up increased the Guaranteed Amount 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 Guaranteed Amount beyond the maximum Guaranteed Amount of $10,000,000. Step-up to 200% of the initial Guaranteed Amount. On the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 70, or the rider has been in effect for 10 years, whichever event is later, we will step-up your Guaranteed Amount to 200% of your initial Guaranteed Amount (plus any purchase payments made within 90 days of rider election), less any withdrawals, if this would increase your Guaranteed Amount to an amount higher than that provided by the 5% Enhancement or the Automatic Annual Step-up for that year, if applicable. (You will not also receive the 5% Enhancement or Automatic Annual Step-up if the 200% Step-up applies.) This Step-up will not occur if: 1) any withdrawal was made prior to age 591/2 (Single Life) or age 65 (Joint Life); 2) An Excess Withdrawal (defined below) has occurred; or 3) Cumulative withdrawals totaling more than 10% of the initial Guaranteed Amount (plus purchase payments within 90 days of rider election) have been made (even if these withdrawals were within the Maximum Annual Withdrawal amount). For example, assume the initial Guaranteed Amount is $200,000. A $10,000 Maximum Annual Withdrawal was made at age 65 and at age 66. If one more $10,000 Maximum Annual Withdrawal was made at age 67, the Step-up would not be available since withdrawals cannot exceed $20,000 (10% of $200,000). This Step-up is only available one time and it will not occur if, on the applicable Benefit Year anniversary, your Guaranteed Amount exceeds 200% of your initial Guaranteed Amount (plus purchase payments within 90 days of rider election). Required minimum distributions from qualified contracts may adversely impact this benefit because you may have to withdraw more than 10% of your initial Guaranteed Amount. See the terms governing RMDs in the Maximum Annual Withdrawal Amounts section below. 36 This Step-up will not cause a change to the percentage charge for your rider. However, the amount you pay for the rider will increase since the charge is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. The following example demonstrates the impact of this Step-up on the Guaranteed Amount: Initial purchase payment at age 60 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 70, the Guaranteed Amount is $272,339 (after applicable 5% Enhancements and two $10,000 Maximum Annual Withdrawal Amounts) and the contract value is $250,000. Since the Guaranteed Amount is less than $360,000 ($200,000 initial Guaranteed Amount reduced by the two $10,000 withdrawals times 200%), the Guaranteed Amount is increased to $360,000. The 200% Step-up cannot increase the Guaranteed Amount beyond the Maximum Guaranteed Amount of $10,000,000. Maximum Annual Withdrawal Amount. You may make periodic withdrawals up to the Maximum Annual Withdrawal 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 you are at least age 591/2 (Single Life Option) or you and your spouse are both at least age 65 (Joint Life Option) and your Maximum Annual Withdrawal amount is greater than zero. On the effective date of the Rider, the Maximum Annual Withdrawal amount is equal to 5% of the initial 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. If your contract value is reduced to zero because of market performance, withdrawals equal to the Maximum Annual Withdrawal amount will continue automatically for your life (and your spouse if applicable) under the Maximum Annual Withdrawal Amount Annuity Payment Option (discussed later). You may not withdraw the remaining Guaranteed Amount in a lump sum. Note: if any withdrawal is made, the 5% Enhancement is not available during that Benefit Year and the Lincoln Lifetime IncomeSM Advantage Plus is not available (see below). Withdrawals may also negatively impact the 200% Step-up (see above). The tax consequences of withdrawals are discussed in Federal Tax Matters section of this prospectus. All withdrawals you make, whether or not within the Maximum Annual Withdrawal amount, will decrease your contract value. The Maximum Annual Withdrawal amount will be doubled, called the Nursing Home Enhancement, during a Benefit Year when the contractowner/annuitant is age 591/2 or older or the contractowner and spouse (Joint Life option), are both age 65 or older, 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 36 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. Proof of nursing home confinement will be required each year. If you leave the nursing home, your Maximum Annual Withdrawal amount will be reduced by 50% starting after the next Benefit Year anniversary. 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 remaining references to the 5% Maximum Annual Withdrawal amount also include the Nursing Home Enhancement Maximum Annual Withdrawal amount. The Maximum Annual Withdrawal amount is increased by 5% of any additional purchase payments. For example, if the 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). 5% Enhancements, Automatic Annual Step-ups and the 200% Step-up will cause a recalculation of the eligible Maximum Annual Withdrawal amount to the greater of: a. the Maximum Annual Withdrawal amount immediately prior to the 5% Enhancement, Automatic Annual Step-up or 200% Step-up; or b. 5% of the Guaranteed Amount on the Benefit Year anniversary. See the chart below for examples of the recalculation. The Maximum Annual Withdrawal amount from both Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage under all Lincoln Life contracts (or contracts issued by our affiliates) applicable to you (or your spouse if Joint Life Option) can never exceed 5% of the maximum Guaranteed Amount. 37 Withdrawals after age 591/2 (Single Life Option) or age 65 (Joint Life Option). If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) after age 591/2 (Single Life) or age 65 (Joint Life) 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. The impact of withdrawals prior to age 591/2 or age 65 will be discussed later in this section. The following example illustrates the impact of Maximum Annual Withdrawals on the Guaranteed Amount and the recalculation of the Maximum Annual Withdrawal amount (assuming no additional purchase payments and the contractowner (Single Life) is older than 591/2 and the contractowner and spouse (Joint Life) are both older than 65):
Guaranteed Maximum Annual Contract Value Amount Withdrawal Amount ---------------- ------------ ------------------ Initial Purchase Payment $50,000.... $50,000 $50,000 $2,500 1st Benefit Year Anniversary ....... $54,000 $54,000 $2,700 2nd Benefit Year Anniversary ....... $51,000 $51,300 $2,700 3rd Benefit Year Anniversary ....... $57,000 $57,000 $2,850 4th Benefit Year Anniversary ....... $64,000 $64,000 $3,200
The initial Maximum Annual Withdrawal amount is equal to 5% of the Guaranteed Amount. Since withdrawals occurred each year (even withdrawals within the Maximum Annual Withdrawal amount), the 5% Enhancement of the Guaranteed Amount was not available. However, each year the Automatic Annual Step-up occurred (1st, 3rd and 4th anniversaries), the Maximum Annual Withdrawal amount was recalculated to 5% of the current Guaranteed Amount. Withdrawals from Individual Retirement Annuity 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 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 that Benefit Year (except as described in next paragraph). If your RMD withdrawals during a Benefit Year are less than the Maximum Annual Withdrawal amount, an additional amount up to the Maximum Annual Withdrawal Amount may be withdrawn. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the Maximum Annual Withdrawal amount, including amounts attributed to RMDs, will be treated as Excess Withdrawals (see below). 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. Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) that exceed the Maximum Annual Withdrawal amount. When Excess Withdrawals occur: 1. The Guaranteed Amount is reduced by the same proportion that the Excess Withdrawal reduces the contract value. This means that the reduction in the Guaranteed Amount could be more than a dollar-for-dollar reduction. 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount (after the pro rata reduction for the Excess Withdrawal); and 3. The 200% Step-up will never occur. The following example demonstrates the impact of an Excess Withdrawal on the Guaranteed Amount and the Maximum Annual Withdrawal amount. A $12,000 withdrawal caused a $15,182 reduction in the Guaranteed Amount. Prior to Excess Withdrawal: Contract Value = $60,000 Guaranteed Amount = $85,000 Maximum Annual Withdrawal amount = $5,000 (5% of the initial Guaranteed Amount of $100,000) After a $12,000 Withdrawal ($5,000 is within the Maximum Annual Withdrawal amount, $7,000 is the Excess Withdrawal): The contract value and Guaranteed Amount are reduced dollar for dollar for the Maximum Annual Withdrawal amount of $5,000: 38 Contract Value = $55,000 Guaranteed Amount = $80,000 The contract value is reduced by the $7,000 Excess Withdrawal and the Guaranteed Amount is reduced by 12.72%, the same proportion that the Excess Withdrawal reduced the $55,000 contract value ($7,000 \d $55,000) Contract value = $48,000 Guaranteed Amount = $69,818 ($80,000 X 12.72% = $10,181; $80,000 - $10,181 = $69,818) Maximum Annual Withdrawal amount = $3,491.00 (5% of $69,818) In a declining market, withdrawals that exceed the Maximum Annual Withdrawal amount may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. Withdrawals before age 591/2/65. If any withdrawal is made prior to the time the contractowner, is age 591/2 (Single Life) or the contractowner and spouse (Joint Life) are both age 65, including withdrawals equal to Maximum Annual Withdrawal amounts, the following will occur: 1. The Guaranteed Amount will be reduced in the same proportion that the entire withdrawal reduced the contract value (this means that the reduction in the Guaranteed amount could be more than a dollar-for-dollar reduction); 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount; 3. The 5% Enhancement to the Guaranteed Amount is not available until after an Automatic Annual Step-up to the contract value occurs. This Automatic Annual Step-up will not occur until the contract value exceeds the Guaranteed Amount on a Benefit Year anniversary.See the 5% Enhancement section above), and 4. The 200% Step-up will never occur. The following is an example of the impact of a withdrawal prior to age 591/2 for single or age 65 for joint: o $100,000 purchase payment o $100,000 Guaranteed Amount o A 10% market decline results in a contract value of $90,000 o $5,000 Maximum Annual Withdrawal amount If a $5,000 withdrawal is made before age 591/2, the Guaranteed Amount will be $94,444 ($100,000 reduced by 5.56% ($5,000/ $90,000) and the new Maximum Annual Withdrawal amount is $4,722 (5% times $94,444). In a declining market, withdrawals prior to age 591/2 (or 65 if Joint Life) may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. Lincoln Lifetime IncomeSM Advantage Plus. If you have purchased Lincoln Lifetime IncomeSM Advantage Plus, ("Plus Option"), on the seventh Benefit Year anniversary, you may elect to receive an increase in your contract value equal to the excess of your initial Guaranteed Amount, (plus any purchase payments made within 90 days of the rider effective date) over your current contract value. Making this election will terminate the Plus Option as well as the Lincoln Lifetime IncomeSM Advantage and the total charge for this rider and you will have no further rights to Maximum Annual Withdrawal amounts or any other benefits under this rider. You have 30 days after the seventh Benefit Year anniversary to make this election, but you will receive no more than the difference between the contract value and the initial Guaranteed Amount (plus any purchase payments within 90 days of the rider effective date) on the seventh Benefit Year anniversary. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts, prior to the seventh Benefit Year anniversary. If you make a withdrawal prior to the seventh Benefit Year anniversary, the charge for this Plus Option (in addition to the Lincoln Lifetime IncomeSM Advantage charge) will continue until the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed from your contract and the charge for your Lincoln Lifetime IncomeSM Advantage will continue. If you do not elect to exercise the Plus Option, after the seventh Benefit Year anniversary, your Lincoln Lifetime IncomeSM Advantage and its charge will continue and the Plus Option 0.15% charge will be removed from your contract. The following example illustrates the Plus Option upon the seventh Benefit Year anniversary: Initial purchase payment of $100,000; Initial Guaranteed Amount of $100,000. On the seventh Benefit Year anniversary, if the current contract value is $90,000; the contractowner may choose to have $10,000 placed in the contract and the Plus Option (including the right to continue the Lincoln Lifetime IncomeSM Advantage) will terminate at that time. 39 If you decide to purchase the Plus Option, your only investment options until the seventh Benefit Year anniversary are the: LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. You may not transfer contract value out of these funds to any other funds before the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, you may invest in other subaccounts in your contract, subject to the Investment Requirements. Maximum Annual Withdrawal Amount Annuity Payout Option. If you are required to annuitize your Maximum Annual Withdrawal Amount, because you have reached the Maturity Date of the Contract, the Maximum Annual Withdrawal Amount Annuity Payout Option is available. The Maximum Annual Withdrawal Amount Annuity Payment Option is a fixed annuitization in which the contractowner (and spouse if applicable) will receive annual annuity payments equal to the Maximum Annual Withdrawal amount for life (this option is different from other annuity payment options discussed in your prospectus, 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 Maximum Annual Withdrawal amount (including the Nursing Home Enhancement if you qualify) for your life or the life of you and your spouse for the Joint Life option. If the contract value is zero and you have a remaining Maximum Annual Withdrawal amount, you will receive the Maximum Annual Withdrawal Amount Annuity Payment Option. If you are receiving the Maximum Annual Withdrawal Amount Annuity Payout Option, you may be eligible for a 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 Maximum Annual Withdrawal Amount Annuity Payout Option must not be the Account Value Death Benefit. The final payment is equal to the sum of all purchase payments, decreased by withdrawals in the same proportion as the withdrawals reduce the contract value; withdrawals less than or equal to the Maximum Annual Withdrawal amount and payments under the Maximum Annual Withdrawal Annuity Payout Option will reduce the sum of the purchase payments dollar for dollar. If your death benefit option in effect immediately prior to the Maximum Annual Withdrawal Amount Annuity Payout Option provided for deduction for withdrawals on a dollar for dollar basis, then any withdrawals that occurred prior to the election of the Lincoln Lifetime Income (Reg. TM) Advantage will reduce the sum of all purchase payments on a dollar for dollar basis. Death Prior to the Annuity Commencement Date. The Lincoln Lifetime IncomeSM Advantage has no provision for a payout of the Guaranteed Amount 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 in the Death Benefit section of this prospectus) will be in effect. Election of the Lincoln Lifetime IncomeSM Advantage 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 will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. 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 Rider if available under the terms and charge in effect at the time of the new purchase. There is no carryover of the Guaranteed Amount. Upon the first death under the Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount will continue for the life of the surviving spouse. The 5% Enhancement, 200% Step-up, Lincoln Lifetime IncomeSM Advantage Plus and Automatic Annual Step-up will continue if applicable as discussed above. Upon the death of the surviving spouse, the Lincoln Lifetime IncomeSM Advantage will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. As an alternative, after the first death, the surviving spouse 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. The surviving spouse must be under age 65. In deciding whether to make this change, the surviving spouse should consider: 1) if the change will cause the Guaranteed Amount and the Maximum Annual Withdrawal amount to decrease and 2) if the Single Life Rider option for new issues will provide an earlier age (591/2) to receive Maximum Annual Withdrawal amounts. Impact of Divorce on Joint Life Option. In the event of a divorce, the contractowner may terminate the Joint Life Option and purchase a Single Life Option, if available, (if the contractowner is under age 65) at the current Rider charge and the terms in effect for new sales of the Single Life Option. 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. 40 General Provisions. Termination. After the seventh anniversary of the effective date of the Rider, the contractowner may terminate the Rider by notifying us in writing. Lincoln Lifetime IncomeSM Advantage will automatically terminate: o Upon exercise of the Lincoln Lifetime IncomeSM Advantage Plus option to receive an increase in the contract value equal to the excess of your initial Guaranteed Amount over the contract value; o on the annuity commencement date (except payments under the Maximum Annual Withdrawal Amount Annuity Payment Option will continue if applicable); o if the contractowner or annuitant is changed (except if the surviving spouse under the Joint Life option 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 death under the Single Life option or the death of the surviving spouse under the Joint Life option; o when the Maximum Annual Withdrawal amount is reduced 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 re-elect any Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, 4LATER (Reg. TM) Advantage or any other living benefits we may offer in the future. The one-year wait does not apply to the election of a new rider after the exercise (and resulting termination) of the Lincoln Lifetime IncomeSM Advantage Plus. 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 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 has the opportunity to provide a higher Guaranteed Amount because of the 5% Enhancement, Automatic Annual Step-up or 200% Step-up and this benefit also provides the potential for lifetime withdrawals from an earlier age for the Single Life Option only (59 1/2 rather than age 65 with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-Up). However, the percentage charge for the Lincoln Lifetime IncomeSM Advantage is higher for the Single Life (lower for the Joint Life) and has the potential to increase on every Benefit Year Anniversary if the increase in contract value exceeds the 5% Enhancement. Another factor to consider is that immediate withdrawals from your contract, under the Lincoln Lifetime IncomeSM Advantage, will adversely impact the 5% Enhancement and 200% Step-up. In addition, if the withdrawal is made before age 591/2 (Single Life) or age 65 (Joint Life), the 5% Enhancement is further limited and the 200% Step-up is not available. The Lincoln SmartSecurity (Reg. TM) Advantage provides that Maximum Annual Withdrawal amounts can continue to a beneficiary to the extent of any remaining Guaranteed Amount while the Lincoln Lifetime IncomeSM Advantage does not offer this feature. The Investment Requirements and Termination provisions are different between these two riders. i4LIFE (Reg. TM) Advantage Option. i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable income payments for life, the ability to make withdrawals during a defined period of time (the Access Period) and a death benefit during the Access Period. A minimum payout floor, called the Guaranteed Income Benefit, is also available for purchase at the time you elect i4LIFE (Reg. TM) Advantage. 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 Maximum Annual Withdrawal amounts under Lincoln Lifetime IncomeSM Advantage. You cannot have both i4LIFE (Reg. TM)Advantage and Lincoln Lifetime IncomeSM Advantage in effect on your contract at the same time. Contractowners with an active Lincoln Lifetime IncomeSM Advantage may decide to drop Lincoln Lifetime IncomeSM Advantage and purchase i4LIFE (Reg. TM) Advantage if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. If this decision is made, the contractowner can use any remaining Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage at the terms in effect for owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit must be elected before the Annuity Commencement Date and by age 99 for nonqualified contracts or age 85 for qualified contracts. See i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit sections of your prospectus. The charges for these benefits will be the current charges in effect for the i4LIFE (Reg. TM) Advantage and Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit at the time of election of these benefits. If you use your Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. In addition, Option 2 of the Investment Requirements applicable to Lincoln Lifetime IncomeSM Advantage will also apply to i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit Below is an example of how the Guaranteed Amount from the Lincoln Lifetime IncomeSM Advantage is used to establish the Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. Prior to i4LIFE (Reg. TM) Advantage election: Contract Value = $100,000 41 Guaranteed Amount = $100,000 After i4LIFE (Reg. TM)Advantage election: Regular Income Payment = $6,700 per year = Contract Value divided by the i4LIFE (Reg. TM) Advantage annuity factor Guaranteed Income Benefit = $5,020 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. 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. 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, withdrawals less than or equal to the Maximum Annual Withdrawal amount, after age 591/2 for the Single Life Option or age 65 for Joint Life Option, 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 Enhanced Guaranteed Minimum Death Benefit or the Estate Enhancement Benefit, whichever is in effect. See Death Benefits in your prospectus. Any Excess Withdrawals and all withdrawals prior to age 591/2 for Single Life or age 65 for Joint Life 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. The following example demonstrates how a withdrawal will reduce the death benefit if both the Enhanced Guaranteed Minimum Death Benefit (EGMDB) and the Lincoln Lifetime IncomeSM Advantage 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 Maximum Annual Withdrawal Amount $ 5,000 Enhanced Guaranteed Minimum Death Benefit (EGMDB) values before withdrawal is the greatest of a), b), or c) described in detail in the EGMDB section of this prospectus: a) Contract value $80,000 b) Sum of purchase payments $100,000 c) Highest anniversary contract value $150,000 Withdrawal of $9,000 will impact the death benefit calculations as follows: a) $80,000 - $9,000 = $71,000 (Reduction $9,000) b) $100,000 - $5,000 = $95,000 (dollar for dollar reduction of Maximum Annual Withdrawal amount) $95,000 - $5,067 = $89,933 [$95,000 times ($4,000/$75,000) = $5,067] Pro rata 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 reduces the death benefit option pro rata. Total reduction = $16,875. Item c) provides the largest death benefit of $133,125. Availability. The Lincoln Lifetime IncomeSM Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts, for existing contractowners, on or about May 19, 2008. 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 on or after the purchase of i4LIFE (Reg. TM) Advantage or on or after the Annuity Commencement Date and must wait at least 12 months after terminating 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage or any other living benefits we may offer in the future. The 12 month wait will be waived until the later of July 31, 2008 or 60 days after the Lincoln Lifetime IncomeSM Advantage is available for sale in your state. If you decide to drop a rider to add Lincoln Lifetime IncomeSM Advantage, your Guaranteed Amount will equal the current contract value on the effective date of the change. Before you make this change, you should consider that no guarantees or fee waiver provisions carry over from the previous rider. The Lincoln Lifetime IncomeSM Advantage terminates after the death of a covered life and the Guaranteed Amount is not available to a benefiicary. You will be subject to additional Investment Requirements. See the comparison to Lincoln SmartSecurity (Reg. TM) Advantage for other factors to consider before making a change. 42 There is no guarantee that the Lincoln Lifetime IncomeSM Advantage 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. In addition, certain features of the Rider may not be available in some states. Check with your investment representative regarding availability. 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. Two different options are available to step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up). You must choose one of these two options: Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up when you purchase the benefit. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up, the contractowner has the option to step-up the Guaranteed Amount after five years. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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 may 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 its 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, which provides minimum guaranteed, periodic withdrawals for life. See The Contracts - Lincoln Lifetime IncomeSM Advantage - 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 $5,000,000 under Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and $10,000,000 for Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. This maximum takes into consideration the combined Guaranteed Amount 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) under either the Lincoln SmartSecuritySM Advantage or the Lincoln Lifetime IncomeSM Advantage. 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. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option we may restrict purchase payments to your annuity contract in the future. We will notify you if we restrict additional purchase payments. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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. 43 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 option, 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 interest adjustments), the Rider charge and account fee plus any purchase payments made on that date is greater than the Guaranteed Amount immediately preceding the valuation date. After the tenth Benefit Year anniversary, you may initiate another ten-year period of automatic step-ups by electing (in writing) to step-up the Guaranteed Amount to the greater of the Contract Value or the current Guaranteed Amount if: a. each contractowner and annuitant is under age 81; and b. the contractowner or joint owner is still living. If you choose, we will administer this election for you automatically, so that a new ten-year period of step-ups will begin at the end of each prior ten-year step-up period. Following is an example of how the step-ups work in the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, (assuming no withdrawals or additional purchase payments):
Contract Value Guaranteed Amount o Initial Deposit $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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the fifth anniversary of the Rider, you may elect (in writing) to step-up the Guaranteed Amount to an amount equal to the contract value on the effective date of the step-up. Additional step-ups are permitted, but you must wait at least 5 years between each step-up. Under both the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up options, 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: o 7% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and o 5% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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 7% or 5% (depending on your option) 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: 44 a. the Maximum Annual Withdrawal amount immediately prior to the step-up; or b. 7% or 5% (depending on your option) of the new (stepped-up) Guaranteed Amount. If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) are within the Maximum Annual Withdrawal amount, then: 1. the withdrawal will reduce the Guaranteed Amount by the amount of the withdrawal on a dollar-for-dollar basis, and 2. the Maximum Annual Withdrawal amount will remain the same. Withdrawals within the Maximum Annual Withdrawal amount are not subject to the interest adjustment on the amount withdrawn from the fixed account, if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option is in effect, withdrawals from IRA contracts will be treated as within the Maximum Annual Withdrawal amount (even if they exceed the 5% Maximum Annual Withdrawal amount) only if the withdrawals are taken in the form of systematic monthly or quarterly installments, as calculated by Lincoln, of the amount needed to satisfy the required minimum distribution rules under Internal Revenue Code Section 401(a)(9) for this contract value. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters. When cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) exceed the Maximum Annual Withdrawal amount: 1. The Guaranteed Amount is reduced to the lesser of: o the contract value immediately following the withdrawal, or o the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal. 2. The Maximum Annual Withdrawal amount will be the least of: o the Maximum Annual Withdrawal amount immediately prior to the withdrawal; or o the greater of: o 7% or 5% (depending on your option) of the reduced Guaranteed Amount immediately following the withdrawal (as specified above when withdrawals exceed the Maximum Annual Withdrawal amount); or o 7% or 5% (depending on your option) 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 option 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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option for IRA contracts, the annual amount available for withdrawal within the Maximum Annual Withdrawal amount may not be sufficient to satisfy your required minimum distributions under the Internal Revenue Code. This is particularly true for individuals over age 84. Therefore, you may have to make withdrawals that exceed the Maximum Annual Withdrawal amount. Withdrawals over the Maximum Annual Withdrawal amount may quickly and substantially decrease your Guaranteed Amount and Maximum Annual Withdrawal amount, especially in a declining market. You 45 should consult your tax advisor to determine if there are ways to limit the risks associated with these withdrawals. Such methods may involve the timing of withdrawals or foregoing step-ups of the Guaranteed Amount. Withdrawals in excess of the Maximum Annual Withdrawal amount will be subject to 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. (Available only with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single or Joint Life options and not the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or the prior version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option). Payment of the Maximum Annual Withdrawal amount will be guaranteed for your (contractowner) lifetime (if you purchase the Single Life option) or for the lifetimes of you (contractowner) and your spouse (if the Joint Life option is purchased), as long as: 1) No withdrawals are made before you (and your spouse if a Joint Life) are age 65; and 2) An excess withdrawal (described above) has not reduced the Maximum Annual Withdrawal amount to zero. If the lifetime withdrawal is not in effect, the Maximum Annual Withdrawal amount will last only until the Guaranteed Amount equals zero. If any withdrawal is made prior to the time you (or both spouses) are age 65, the Maximum Annual Withdrawal amount will not last for the lifetime(s), except in the two situations described below: 1) If a step-up of the Guaranteed Amount after age 65 causes the Maximum Annual Withdrawal amount to equal or increase from the immediately prior Maximum Annual Withdrawal amount. This typically occurs if the contract value equals or exceeds the highest, prior Guaranteed Amount. If this happens, the new Maximum Annual Withdrawal amount will automatically be available for the specified lifetime(s); or 2) The contractowner makes a one-time election to reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount. This reset will occur on the first valuation date following the Benefit Year anniversary and will be based on the Guaranteed Amount as of that valuation date. This will reduce your Maximum Annual Withdrawal amount. A contractowner would only choose this if the above situation did not occur. To reset the Maximum Annual Withdrawal amount, the following must occur: a. the contractowner (and spouse if applicable) is age 65; b. the contract is currently within a ten-year automatic step-up period described above (or else a contractowner submits a step-up request to start a new ten-year automatic step-up period) (the contractowner must be eligible to elect a step-up; i.e., all contractowners and the annuitant must be alive and under age 81); and c. you have submitted this request to us in writing at least 30 days prior to the end of the Benefit Year. As an example of these two situations, if you purchased the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single Life with $100,000, your initial Guaranteed Amount is $100,000 and your initial Maximum Annual Withdrawal amount is $5,000. If you make a $5,000 withdrawal at age 62, your Guaranteed Amount will decrease to $95,000. Since you did not satisfy the age 65 requirement, you do not have a lifetime Maximum Annual Withdrawal amount. If a step-up of the Guaranteed Amount after age 65 (either automatic or owner-elected) causes the Guaranteed Amount to equal or exceed $100,000, then the Maximum Annual Withdrawal amount of $5,000 (or greater) will become a lifetime payout. This is the first situation described above. However, if the Guaranteed Amount has not been reset to equal or exceed the highest prior Guaranteed Amount, then you can choose the second situation described above if you are age 65 and the contract is within a ten-year automatic step-up period. This will reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount; 5% of $95,000 is $4,750. This is your new Maximum Annual Withdrawal amount which can be paid for your lifetime unless excess withdrawals are made. The tax consequences of withdrawals and annuity payments are discussed in Federal Tax Matters. 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 7% or 5% (depending on your option) Maximum Annual Withdrawal amount, including the lifetime Maximum Annual Withdrawals if in effect (this option is different from other annuity 46 payment options discussed in your prospectus, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. Payments will continue until the Guaranteed Amount equals zero and may continue until death if the lifetime Maximum Annual Withdrawal is in effect. This may result in a partial, final payment. You would consider this option only if your contract value is less than the Guaranteed Amount (and you don't believe the contract value will ever exceed the Guaranteed Amount) and you do not wish to keep your annuity contract in force other than to pay out the Guaranteed Amount. You will have no other contract features other than the right to receive annuity payments equal to the Maximum Annual Withdrawal amount until the Guaranteed Amount equals zero. If the contract value is zero and you have a remaining Guaranteed Amount, you may not withdraw the remaining Guaranteed Amount in a lump sum, but must elect the Guaranteed Amount Annuity Payment Option. Death Prior to the Annuity Commencement Date. There is no provision for a lump sum payout of the Guaranteed Amount upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit will be paid other than any applicable Maximum Annual Withdrawal amounts. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the Single Life under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Single Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will end. If the contract is continued as discussed below, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero. In the alternative, the surviving spouse can choose to become the new Single Life, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. The surviving spouse will need to be 65 before taking withdrawals to qualify for a lifetime payout. In deciding whether to make this change, the surviving spouse should consider: 1) the change a reset would cause to the Guaranteed Amount and the Maximum Annual Withdrawal amount ; 2) whether it is important to have Maximum Annual Withdrawal amounts for life versus the remainder of the prior Guaranteed Amount and 3) the cost of the Single Life option. Upon the first death under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will continue for the life of the surviving spouse. Upon the death of the surviving spouse, the lifetime payout of the Maximum Annual Withdrawal amount will end. However, if the spouse's beneficiary elects to take the annuity death benefit in installments, 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 option, will apply to the spouse as the new contractowner. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, the new contractowner is eligible to elect to step-up the Guaranteed Amount prior to the next available step-up date; however, all other conditions for the step-up apply and any subsequent step-up by the new contractowner must meet all conditions for a step-up. If a non-spouse beneficiary elects to receive the death benefit in installments (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 option 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. 47 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 re-elect any Lincoln SmartSecurity (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage or 4LATER (Reg. TM) Advantage or any other living benefit we are offering in the future. i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to drop Lincoln SmartSecurity (Reg. TM) Advantage 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. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. All contractowners and the annuitant of the contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option and contractowners of qualified annuity contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option must be under age 81 at the time this Rider is elected. You cannot elect the Rider on or after the purchase of i4LIFE (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage or on or after the Annuity Commencement Date. There is no guarantee that the Lincoln SmartSecurity (Reg. TM) Advantage will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. The availability of this Rider will depend upon your state's approval of this Rider. Check with your investment representative regarding availability. i4LIFE (Reg. TM) Advantage i4LIFE (Reg. TM) Advantage (the Variable Annuity Payout Option Rider in your contract) is an optional annuity payout rider you may purchase at an additional cost and is separate and distinct from other annuity payout options offered under your contract and described later in this prospectus. You may also purchase either the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit or the 4LATER Guaranteed Income Benefit (described below) for an additional charge. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is a payout option that provides you with variable, periodic regular income payments for life. These payouts are made during an Access Period, where you have access to the Account Value. After the Access Period ends, payouts continue for the rest of your life, during the Lifetime Income Period. i4LIFE (Reg. TM) Advantage is different from other annuity payout options provided by Lincoln because with i4LIFE (Reg. TM) Advantage, you have the ability to make additional withdrawals or surrender the contract during the Access Period. You may also purchase the Guaranteed Income Benefit which provides a minimum payout floor for your regular income payments. The initial regular income payment is calculated from the Account Value on the periodic income commencement date, a date no more than 14 days prior to the date you select to begin receiving the regular income payments. This option is available on non-qualified annuities, IRAs and Roth IRAs (check with your registered representative regarding availability with SEP markets). This option, when available in your state, 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 an annuity payout option is elected by sending a written request to our Home Office. If you purchased 4LATER (Reg. TM) Advantage, you must wait at least one year before you can purchase i4LIFE (Reg. TM) Advantage. When you elect i4LIFE (Reg. TM) Advantage, you must choose the annuitant, secondary life, if applicable, and make several choices about your regular income payments. The annuitant and secondary life may not be changed after i4LIFE (Reg. TM) Advantage is elected. For qualified contracts, the secondary life must be the spouse. See i4LIFE (Reg. TM) Advantage Death Benefits regarding the impact of a change to the annuitant prior to the i4LIFE (Reg. TM) Advantage election. 48 i4LIFE (Reg. TM) Advantage for IRA annuity contracts is only available if the annuitant and secondary life, if applicable, is age 591/2 or older at the time the option is elected. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. i4LIFE (Reg. TM) Advantage must be elected by age 85 for qualified contracts. Additional purchase payments may be made during the Access Period for an IRA annuity contract, unless the 4LATERSM Advantage Guaranteed Income Benefit or i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit has been elected. Additional purchase payments will not be accepted once i4LIFE (Reg. TM) Advantage becomes effective for a non-qualified annuity contract. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The Contracts - Transfers on or Before the Annuity Commencement Date. When you elect i4LIFE (Reg. TM) Advantage you must select a death benefit option. Once i4LIFE (Reg. TM) Advantage begins, any prior death benefit election will terminate and the i4LIFE (Reg. TM) Advantage death benefit will be in effect. The amount paid under the new death benefit may be less than the amount that would have been paid under the death benefit provided before i4LIFE (Reg. TM) Advantage began. See The Contracts - i4LIFE (Reg. TM) Advantage Death Benefits. Access Period. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period, which begins on the periodic income commencement date. The Access Period is a defined period of time during which we pay variable, periodic regular income payments and provide a death benefit, and during which you may surrender the contract and make withdrawals from your Account Value (defined below). At the end of the Access Period, the remaining Account Value is used to make regular income payments for the rest of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently to age 115 for non-qualified contracts; to age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. 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. Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value will be increased/decreased by any investment gains/losses including interest credited on the fixed account, and will be reduced by regular income payments made and 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 applicable interest adjustments. See Charges and Other Deductions. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (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; 49 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 annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and the Guaranteed Income Benefit if applicable) will terminate. Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed investment return and the frequency of the recalculation do not change. The initial regular income payment during the Lifetime Income Period is determined by dividing the Account Value on the last valuation date of the Access Period by 1000 and multiplying the result by an annuity factor revised to reflect that the Access Period has ended. The annuity factor is based upon: o the age 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. 50 i4LIFE (Reg. TM) Advantage Death Benefits i4LIFE (Reg. TM) Advantage Account Value Death Benefit. The i4LIFE (Reg. TM) Advantage Account Value death benefit is available during the Access Period. This death benefit is equal to the Account Value as of the valuation date on which we approve the payment of the death claim. You may not change this death benefit once it is elected. i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit. The i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit is available during the Access Period and will be equal to the greater of: o the Account Value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefits, reduce the death benefit by the dollar amount of the payment; and o all other withdrawals, if any, reduce the death benefit on either a dollar for dollar basis or in the same proportion that withdrawals reduce the contract value or Account Value, depending on the terms of your contract. 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 or Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The following example demonstrates the impact of a proportionate withdrawal on your death benefit: o i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit $200,000 o Total i4LIFE (Reg. TM) Regular Income payments $ 25,000 o Additional Withdrawal $15,000 ($15,000/$150,000=10% withdrawal) o Account Value at the time of Additional Withdrawal $150,000
Death Benefit Value after i4LIFE (Reg. TM) regular income payment = $200,000 - $25,000 = $175,000 Death Benefit Value after additional withdrawal = $175,000 - $17,500 = $157,500 Reduction in Death Benefit Value for Withdrawal = $175,000 X 10% = $17,500 The regular income payments reduce the death benefit by $25,000 and the additional withdrawal causes a 10% reduction in the death benefit, the same percentage that the withdrawal reduced the Account Value. During the Access Period, contracts with the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit may elect to change to the i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our 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 Guarantee of Principal Death Benefit. i4LIFE (Reg. TM) Advantage EGMDB. The i4LIFE (Reg. TM) Advantage EGMDB is only available during the Access Period. This benefit is the greatest of: o the Account Value as of the valuation date on which we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefit, reduce the death benefit by the dollar amount of the payment or in the same proportion that regular income payments reduce the Account Value, depending on the terms of your contract; and o all other withdrawals, if any, reduce the death benefit on either a dollar for dollar basis or in the same proportion that withdrawals reduce the contract value or Account Value, depending on the terms of your contract. 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 on either a dollar for dollar basis or in the same proportion that regular income payments and withdrawals reduce the contract value or Account Value, depending on the terms of your contract. 51 If your contract has the ABE Enhancement Amount (if elected at the time of application) (see discussion under Accumulated Benefit Enhancement ABE) specified in your contract benefit data pages as applicable on the date of death, this Enhancement Amount will be added to the sum of the purchase payments, but will be reduced by the regular income payments and withdrawals on either a dollar for dollar basis or in the same proportion that the regular income payment or withdrawal reduced the contract value or Account Value, depending on the terms of your contract. 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 applicable charges and premium taxes, if any. Contracts with the i4LIFE (Reg. TM) Advantage EGMDB may elect to change to the i4LIFE (Reg. TM) Advantage Guarantee of Principal or i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our 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 i4LIFE (Reg. TM) Advantage Account Value death benefit. For non-qualified contracts, upon the death of the contractowner, joint owner or annuitant, the contractowner (or beneficiary) may elect to terminate the contract and receive full payment of the death benefit or may elect to continue the contract and receive regular income payments. Upon the death of the secondary life, who is not also an owner, only the surrender value is paid. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. 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. Accumulated Benefit Enhancement (ABESM) (Non-qualified contracts only). This benefit is no longer available to contract purchasers after November 1, 2005. We provide to eligible contractowners of non-qualified i4LIFE (Reg. TM) Advantage contracts only an ABE Enhancement Amount, if requested at the time of application, at no additional charge. You are eligible to receive the ABE Enhancement Amount if: o you are purchasing i4LIFE (Reg. TM) Advantage with the EGMDB death benefit; o you are utilizing the proceeds of a variable annuity contract of an insurer not affiliated with us to purchase the contract. Prior contracts with loans or collateral assignments are not eligible for this benefit; o the cash surrender value of the prior contract(s) is at least $50,000 at the time of the surrender (amounts above $2,000,000 will require our approval); o all contractowners, joint owners and annuitants must be under the age of 76 as of the contract date (as shown in your contract) to select this benefit; or o the contractowners, joint owners and annuitants of this contract must have been owner(s) or annuitants of the prior contract(s). 52 Upon the death of any contractowner, joint owner or annuitant, the ABE Enhancement Amount will be payable in accordance with the terms of the i4LIFE (Reg. TM) Advantage EGMDB death benefit. However, if the death occurs in the first contract year, only 75% of the Enhancement Amount is available. The ABE Enhancement Amount is equal to the excess of the prior contract's documented death benefit(s) over the actual cash surrender value received by us. However, we will impose a limit on the prior contract's death benefit equal to the lesser of: o 140% of the prior contract's cash value; or o the prior contract's cash value plus $400,000. In addition, if the actual cash surrender value we receive is less than 95% of the documented cash value from the prior insurance company, the prior contract's death benefit will be reduced proportionately according to the reduction in cash value amounts. For the ABE Enhancement Amount to be effective, documentation of the death benefit and cash value from the prior insurance company must be provided to us at the time of the application. We will only accept these amounts in a format provided by the prior insurance company. Examples of this documentation include: the prior company's periodic customer statement, a statement on the prior company's letterhead, or a printout from the prior company's website. This documentation cannot be more than ninety (90) days old at the time of the application. You may provide updated documentation prior to the contract date if it becomes available from your prior company. If more than one annuity contract is exchanged to a contract with us, the ABE Enhancement Amount will be calculated for each prior contract separately, and then added together to determine the total ABE Enhancement Amount. Upon the death of any contractowner or joint owner who was not a contractowner on the effective date of the i4LIFE (Reg. TM) Advantage EGMDB death benefit, the ABE Enhancement Amount will be equal to zero (unless the change occurred because of the death of a contractowner or joint owner). If any contractowner or joint owner is changed due to a death and the new contractowner or joint owner is age 76 or older when added to the contract, then the ABE Enhancement Amount for this new contractowner or joint owner will be equal to zero. The ABE Enhancement Amount will terminate on the valuation date the i4LIFE (Reg. TM) Advantage EGMDB death benefit option of the contract is changed or terminated. It is important to realize that even with the ABE Enhancement Amount, your death benefit will in many cases be less than the death benefit from your prior company. This is always true in the first year, when only 75% of the ABE Enhancement Amount is available. Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage There is a Guaranteed Income Benefit 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 i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit charge. 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 prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit. Refer to the 4LATER (Reg. TM) section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider may limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements - Option 1. 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 for new elections 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 who decides to drop Lincoln Lifetime IncomeSM Advantage 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 rider. i4LIFE (Reg. TM) Guaranteed Income Benefit, if available, is purchased when you elect i4LIFE (Reg. TM) Advantage or anytime during the Access Period. If you intend to use the Guaranteed Amount from either the Lincoln SmartSecurity (Reg. TM) Advantage or the Lincoln Lifetime IncomeSM Advantage riders to establish the Guaranteed Income Benefit, you must elect the Guaranteed Income Benefit at the time you elect i4LIFE (Reg. TM) Advantage. The Guaranteed Income Benefit is initially equal to 75% of the regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) in effect at the time the Guaranteed Income Benefit is elected. Contractowners who purchased the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage can use the remaining Guaranteed Amount (if greater than the contract value) at the time the Guaranteed Income Benefit is determined, to increase the Guaranteed Income Benefit. The Guaranteed Income Benefit will be increased by the ratio of the remaining Guaranteed Amount to the contract value at the time the initial i4LIFE (Reg. TM) 53 Advantage payment is calculated. In other words, the Guaranteed Income Benefit will equal 75% of the initial regular income payment times the remaining Guaranteed Amount divided by the contract value, if the Guaranteed Amount is greater than the contract value. 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 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. This withdrawal 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 withdrawals 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. If your Account Value equals zero, no death benefit will be paid. 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. 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. 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. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment affects the i4LIFE (Reg. TM) Account Value: Guaranteed Income Benefit = $5,692; i4LIFE regular income payment = $5,280 i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment -$5,280 Additional withdrawal for Guaranteed Income Benefit -$412 i4LIFE (Reg. TM) Account Value after payouts $74,308
In the current version of the Guaranteed Income Benefit option ("Version 2") the Guaranteed Income Benefit will automatically step-up every three years to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary during a 15-year step-up period. At the end of a 15-year step-up period, you may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that we administer this election for you. At the time of a reset of the 15 year period, the Guaranteed Income Benefit charge may increase subject to the guaranteed maximum charge of 1.50%. (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charges.) After we administer this election, you have 30 days to notify us if you wish to reverse the election. If you have an older version of the Guaranteed Income Benefit ("Version 1"), your Guaranteed Income Benefit will not step-up on an anniversary, but will remain level. This version is no longer available for sale. 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 General i4LIFE (Reg. TM) Provisions for an example. 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 this benefit is 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) thereby reducing your regular income payment, your i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will also be reduced. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be reduced in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will terminate. Refer to the Example in the 4LATER (Reg. TM) Guaranteed Income Benefit section. 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 periodic income payment frequency; or o upon written notice to us; or o assignment of the contract. 54 A termination due to a decrease in the Access Period, a change in the periodic 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. If you used your Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. 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. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit. Contractowners with the Lincoln Lifetime IncomeSM Advantage rider who purchase the Guaranteed Income Benefit are subject to the following guarantees which are set forth in the Lincoln Lifetime IncomeSM Advantage rider: a) Maximum charge for the Guaranteed Income Benefit b) guaranteed annuity factors. General i4LIFE (Reg. TM) Provisions Withdrawals. You may request a withdrawal at any time prior to or during the Access Period. We reduce the Account Value by the amount of the withdrawal, and all subsequent regular income payments and Guaranteed Income Benefit payments, if applicable, will be reduced proportionately. Withdrawals may have tax consequences. See Federal Tax Matters. 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 $ 750 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 = $750 X 10% = $75 Guaranteed Income Benefit after Withdrawal = $750 - $75 = $675 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. 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 will receive 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. 4LATER (Reg. TM) Advantage 4LATER (Reg. TM) Advantage is a rider that is available to protect against market loss by providing you with a method to receive a minimum payout from your annuity. The rider provides an Income Base (described below) prior to the time you begin taking payouts from your annuity. If you elect 4LATER (Reg. TM) Advantage, you must elect i4LIFE (Reg. TM) with the 4LATER (Reg. TM) Guaranteed Income Benefit to receive a benefit from 4LATER (Reg. TM) Advantage. Election of these riders may limit how much you can invest in certain subaccounts. See The Contracts-Investment Requirements. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Advantage charge. 4LATER (Reg. TM) Advantage Before Payouts Begin The following discussion applies to 4LATER (Reg. TM) Advantage during the accumulation phase of your annuity, referred to as 4LATER (Reg. TM). This is prior to the time any payouts begin under i4LIFE (Reg. TM) Advantage with the 4LATER (Reg. TM) Guaranteed Income Benefit. Income Base. The Income Base is a value established when you purchase 4LATER (Reg. TM) and will only be used to calculate the minimum payouts available under your contract at a later date. The Income Base is not available for withdrawals or as a death benefit. If you 55 elect 4LATER (Reg. TM) at the time you purchase the contract, the Income Base initially equals the purchase payments. If you elect 4LATER (Reg. TM) after we issue the contract, the Income Base will initially equal the contract value on the 4LATER (Reg. TM) Effective Date. Additional purchase payments automatically increase the Income Base by the amount of the purchase payments. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. As described below, during the accumulation phase, the Income Base will be automatically enhanced by 15% (adjusted for additional purchase payments and withdrawals as described in the Future Income Base section below) at the end of each Waiting Period. In addition, after the Initial Waiting Period, you may elect to reset your Income Base to the current contract value if your contract value has grown beyond the 15% enhancement. You may elect this reset on your own or you may choose to have Lincoln Life automatically reset the Income Base for you at the end of each Waiting Period. These reset options are discussed below. Then, when you are ready to elect i4LIFE (Reg. TM) Advantage and establish the 4LATER (Reg. TM) Guaranteed Income Benefit, the Income Base (if higher than the contract value) is used in the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit calculation. Waiting Period. The Waiting Period is each consecutive 3-year period which begins on the 4LATER (Reg. TM) Effective Date, or on the date of any reset of the Income Base to the contract value. At the end of each completed Waiting Period, the Income Base is increased by 15% (as adjusted for purchase payments and withdrawals) to equal the Future Income Base as discussed below. The Waiting Period is also the amount of time that must pass before the Income Base can be reset to the current contract value. A new Waiting Period begins after each reset and must be completed before the next 15% enhancement or another reset occurs. Future Income Base. 4LATER (Reg. TM) provides a 15% automatic enhancement to the Income Base after a 3-year Waiting Period. This enhancement will continue every 3 years until i4LIFE (Reg. TM) Advantage is elected, you terminate 4LATER (Reg. TM) or you reach the Maximum Income Base. See Maximum Income Base. During the Waiting Period, the Future Income Base is established to provide the value of this 15% enhancement on the Income Base. After each 3-year Waiting Period is satisfied, the Income Base is increased to equal the value of the Future Income Base. The 4LATER (Reg. TM) charge will then be assessed on this newly adjusted Income Base, but the percentage charge will not change. Any purchase payment made after the 4LATER (Reg. TM) Effective Date, but within 90 days of the contract effective date, will increase the Future Income Base by the amount of the purchase payment, plus 15% of that purchase payment. Example: Initial Purchase Payment $100,000 Purchase Payment 60 days later $ 10,000 -------- Income Base $110,000 Future Income Base (during the 1st Waiting Period) $126,500 ($110,000 x 115%) Income Base (after 1st Waiting Period) $126,500 New Future Income Base (during 2nd Waiting Period) $145,475 ($126,500 x 115%)
Any purchase payments made after the 4LATER (Reg. TM) Effective Date and more than 90 days after the contract effective date will increase the Future Income Base by the amount of the purchase payment plus 15% of that purchase payment on a pro-rata basis for the number of full years remaining in the current Waiting Period. Example: Income Base $100,000 Purchase Payment in Year 2 $ 10,000 New Income Base $110,000 -------- Future Income Base (during 1st Waiting Period-Year 2) $125,500 ($100,000 x 115%) + ($10,000 x 100%) + (10,000 x 15% x 1/3) Income Base (after 1st Waiting Period) $125,500 New Future Income Base (during 2nd Waiting Period) $144,325 (125,500 x 115%)
Withdrawals reduce the Future Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. During any subsequent Waiting Periods, if you elect to reset the Income Base to the contract value, the Future Income Base will equal 115% of the contract value on the date of the reset and a new Waiting Period will begin. See Resets of the Income Base to the current contract value below. In all situations, the Future Income Base is subject to the Maximum Income Base described below. The Future Income Base is never available to the contractowner to establish a 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, but is the value the Income Base will become at the end of the Waiting Period. 56 Maximum Income Base. The Maximum Income Base is equal to 200% of the Income Base on the 4LATER (Reg. TM) Effective Date. The Maximum Income Base will be increased by 200% of any additional purchase payments. In all circumstances, the Maximum Income Base can never exceed $10,000,000. This maximum takes into consideration the combined Income Bases for all Lincoln Life contracts (or contracts issued by our affiliates) owned by you or on which you are the annuitant. After a reset to the current contract value, the Maximum Income Base will equal 200% of the contract value on the valuation date of the reset not to exceed $10,000,000. Each withdrawal will reduce the Maximum Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. Example: Income Base $100,000 Maximum Income Base $200,000 Purchase Payment in Year 2 $ 10,000 Increase to Maximum Income Base $ 20,000 New Income Base $110,000 New Maximum Income Base $220,000 Future Income Base after Purchase $125,500 Maximum Income Base $220,000 Payment Income Base (after 1st Waiting $125,500 Period) Future Income Base (during 2nd $144,325 Maximum Income Base $220,000 Waiting Period) Contract Value in Year 4 $112,000 Withdrawal of 10% $ 11,200 After Withdrawal (10% adjustment) ----------------------------------------- Contract Value $100,800 Income Base $112,950 Future Income Base $129,892 Maximum Income Base $198,000
Resets of the Income Base to the current contract value ("Resets"). You may elect to reset the Income Base to the current contract value at any time after the initial Waiting Period following: (a) the 4LATER (Reg. TM) Effective Date or (b) any prior reset of the Income Base. Resets are subject to a maximum of $10,000,000 and the annuitant must be under age 81. You might consider resetting the Income Base if your contract value has increased above the Income Base (including the 15% automatic Enhancements) and you want to lock-in this increased amount to use when setting the Guaranteed Income Benefit. If the Income Base is reset to the contract value, the 15% automatic Enhancement will not apply until the end of the next Waiting Period. This reset may be elected by sending a written request to our Home office or by specifying at the time of purchase that you would like us to administer this reset election for you. If you want us to administer this reset for you, at the end of each 3-year Waiting Period, if the contract value is higher than the Income Base (after the Income Base has been reset to the Future Income Base), we will implement this election and the Income Base will be equal to the contract value on that date. We will notify you that a reset has occurred. This will continue until you elect i4LIFE (Reg. TM) Advantage, the annuitant reaches age 81, or you reach the Maximum Income Base. If we administer this reset election for you, you have 30 days after the election to notify us if you wish to reverse this election and have your Income Base increased to the Future Income Base instead. You may wish to reverse this election if you are not interested in the increased charge. If the contract value is less than the Income Base on any reset date, we will not administer this reset. We will not attempt to administer another reset until the end of the next 3-year Waiting Period; however, you have the option to request a reset during this period by sending a written request to our Home office. At the time of each reset (whether you elect the reset or we administer the reset for you), the annual charge will change to the current charge in effect at the time of the reset, not to exceed the guaranteed maximum charge. At the time of reset, a new Waiting Period will begin. Subsequent resets may be elected at the end of each new Waiting Period. The reset will be effective on the next valuation date after notice of the reset is approved by us. We reserve the right to restrict resets to Benefit Year anniversaries. The Benefit Year is the 12-month period starting with the 4LATER (Reg. TM) Effective Date and starting with each anniversary of the 4LATER (Reg. TM) Effective Date after that. If the contractowner elects to reset the Income Base, the Benefit Year will begin on the effective date of the reset and each anniversary of the effective date of the reset after that. Eligibility. To purchase 4LATER (Reg. TM) Advantage, the annuitant must be age 80 or younger. If you plan to elect i4LIFE (Reg. TM) Advantage within three years of the issue date of 4LATER (Reg. TM) Advantage, you will not receive the benefit of the Future Income Base. 57 4LATER (Reg. TM) Rider Effective Date. If 4LATER (Reg. TM) is elected at contract issue, then it will be effective on the contract's effective date. If 4LATER (Reg. TM) is elected after the contract is issued (by sending a written request to our Home office), then it will be effective on the next valuation date following approval by us. 4LATER (Reg. TM) Guaranteed Income Benefit When you are ready to elect i4LIFE (Reg. TM) Advantage regular income payments, the greater of the Income Base accumulated under 4LATER (Reg. TM) or the contract value will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. The 4LATER (Reg. TM) Guaranteed Income Benefit is a minimum payout floor for your i4LIFE (Reg. TM) Advantage regular income payments. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit charge. The Guaranteed Income Benefit will be determined by dividing the greater of the Income Base or contract value (or Guaranteed Amount if applicable) on the periodic income commencement date, by 1000 and multiplying the result by the rate per $1000 from the Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: 4LATER (Reg. TM) Guaranteed Income $ 5,692 i4LIFE (Reg. TM) regular income payment $ 5,280 Benefit
i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment - $ 5,280 Additional payment for 4LATER (Reg. TM) Guaranteed Income Benefit - $ 412 ---------------------------------------------------------------------------- ------- i4LIFE (Reg. TM) Account Value after payment $74,308
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that Lincoln Life administer this election for you. At the time of a reset of the 15 year period, the charge for the 4LATER (Reg. TM) Guaranteed Income Benefit will become the current charge up to the guaranteed maximum charge of 1.50% (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charge). After we administer this election, you have 30 days to notify us if you wish to reverse the election (because you do not wish to incur the additional cost). Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. 58 Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. When you make your 4LATER (Reg. TM) Guaranteed Income Benefit and i4LIFE (Reg. TM) Advantage elections, you must also choose an assumed investment return of 4% to calculate your i4LIFE (Reg. TM) Advantage regular income payments. Once you have elected 4LATER (Reg. TM), the assumed investment return rate will not change; however, we may change the required assumed investment return rate in the future for new purchasers only. The following is an example of what happens when you extend the Access Period: Assume: i4LIFE (Reg. TM) Advantage remaining Access Period = 10 years Current i4LIFE (Reg. TM) Advantage regular income payment = $6375 Current 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 Extend Access Period 5 years: i4LIFE (Reg. TM) Advantage regular income payment after extension = $5355 Percentage change in i4LIFE (Reg. TM) Advantage regular income payment = $5355 \d $6375 = 84% New 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 x 84% = $4781 General Provisions of 4LATER (Reg. TM) Advantage Termination. After the later of the third anniversary of the 4LATER (Reg. TM) Rider Effective Date or the most recent Reset, the 4LATER (Reg. TM) Rider may be terminated upon written notice to us. Prior to the periodic income commencement date, 4LATER (Reg. TM) will automatically terminate upon any of the following events: o termination of the contract to which the 4LATER (Reg. TM) Rider is attached; o the change of or the death of the annuitant (except if the surviving spouse assumes ownership of the contract and the role of the annuitant upon death of the contractowner); or o the change of contractowner (except if the surviving spouse assumes ownership of the contract and the role of annuitant upon the death of the contractowner), including the assignment of the contract. After the periodic income commencement date, the 4LATER (Reg. TM) Rider will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the 4LATER (Reg. TM) Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. If you terminate 4LATER (Reg. TM) prior to the periodic income commencement date, you must wait one year before you can re-elect 4LATER (Reg. TM) or purchase the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. If you terminate the 4LATER (Reg. TM) Rider on or after the periodic income commencement date, you cannot re-elect it. You may be able to elect the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, after one year. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. The election of one of these benefits, if available, will be treated as a new purchase, subject to the terms and charges in effect at the time of election. Availability. The availability of 4LATER (Reg. TM) will depend upon your state's approval of the 4LATER (Reg. TM) Rider. Check with your registered representative regarding availability. You cannot elect 4LATER (Reg. TM) after an annuity payout option or i4LIFE (Reg. TM) Advantage has been elected, and it cannot be elected on contracts that currently have Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage and elect 4LATER (Reg. TM) will not carry their Guaranteed Amount over into the new 4LATER (Reg. TM). The 4LATER (Reg. TM) Income Base will be established based on the contractowner's contract value on the Effective Date of 4LATER (Reg. TM). Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will have to wait one year before they can elect 4LATER (Reg. TM). See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. 59 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 may elect the Maximum Annual Withdrawal 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 Maximum Annual Withdrawal Amount Annuity Payout option or the Guaranteed Amount Annuity Payout option. Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if the annuitant dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Payouts Guaranteed for Designated Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option provides a periodic payout during the joint lifetime of the annuitant and a joint annuitant. When one of the joint annuitants dies, the survivor receives two-thirds of the periodic payout made when both were alive. This option further provides that should one or both of the annuitants die during the elected guaranteed period, usually 10 or 20 years, full benefit payment will continue for the rest of the guaranteed period. Unit Refund Life Annuity. This option offers a periodic payout during the lifetime of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable Annuity Payouts) equal to the excess, if any, of: o the total amount applied under this option divided by the annuity unit value for the date payouts begin, minus o the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for payment by the 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. 60 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. 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. Contracts issued in certain states or those contracts issued prior to June 2, 2003 may guarantee a higher minimum rate of interest. Refer to your contract for the specific guaranteed minimum interest rate applicable to your contract. 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). The interest adjustment will NOT reduce the amount available for a surrender, withdrawal or transfer 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. 61 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, 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, cross-reinvestment, portfolio rebalancing transfers, regular income payments under i4LIFE (Reg. TM) Advantage or withdrawals within the Maximum Annual Withdrawal Limit in Lincoln SmartSecurity (Reg. TM) Advantage) will be subject to the interest adjustment. A surrender, withdrawal or transfer effective upon the expiration date of the guaranteed period will not be subject to the interest adjustment. The interest adjustment will be applied to the amount being surrendered, withdrawn or transferred. The interest adjustment will be applied after the deduction of any applicable account fees and before any applicable transfer charges. Any transfer, withdrawal, or surrender of contract value from a fixed subaccount will be increased or decreased by an interest adjustment, unless the transfer, withdrawal or surrender is effective: o during the free look period (See Return Privilege). o on the expiration date of a guaranteed period. o as a result of the death of the contractowner or annuitant. o subsequent to the diagnosis of a terminal illness of the contractowner. Diagnosis of the terminal illness must be after the 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. 62 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. 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. 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 63 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 ("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 ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us. While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. The following paragraphs describe how payments are made by us and The Principal Underwriter to various parties. Compensation Paid to LFA. The maximum commission the Principal Underwriter pays to LFA is 2.50% of purchase payments, plus up to 0.25% quarterly based on contract value. LFA 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 LFA is 4.00% of annuitized value and/or ongoing annual compensation of up to 1.00% of annuity value or statutory reserves. Lincoln Life also pays for the operating and other expenses of LFA, including the following sales expenses: sales representative training allowances; compensation and bonuses for LFA's management team; advertising expenses; and all other expenses of distributing the contracts. LFA pays its sales representatives a portion of the commissions received for their sales of contracts. LFA 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 LFA. Non-cash compensation items may include conferences, seminars, trips, entertainment, merchandise and other similar items. In addition, LFA sales representatives who meet certain productivity, persistency and length of service standards and/or their managers may be eligible for additional compensation. Sales of the contracts may help LFA sales representatives and/or their managers qualify for such benefits. LFA 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 LFA, is 2.50% 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 4.00% of annuitized value and/or ongoing annual compensation of up to 1.00% 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 2007 is contained in the SAI. 64 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. Contracts, endorsements and riders may vary as required by state law. This prospectus provides a general description of the contract. Questions about your contract should be directed to us at 1-888-868-2583. Federal Tax Matters Introduction The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules to your individual situation. Nonqualified Annuities This part of the discussion describes some of the Federal income tax rules applicable to nonqualified annuities. A nonqualified annuity is a contract not issued in connection with a qualified retirement plan, such as an IRA or a section 403(b) plan, receiving special tax treatment under the tax code. We may not offer nonqualified annuities for all of our annuity products. Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decendent; 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 65 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 not issued 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 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, and if your Guaranteed Amount 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 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 in the same manner as a withdrawal during the deferral period. 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. 66 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). Special Rules If You Own More Than One Annuity Contract In certain circumstances, you must combine some or all of the nonqualified annuity contracts you own in order to determine the amount of an annuity payout, a surrender, or a withdrawal that you must include in income. For example, if you purchase two or more deferred annuity contracts from the same life insurance company (or its affiliates) during any calendar year, the tax code treats all such contracts as one contract. Treating two or more contracts as one contract could affect the amount of a surrender, a withdrawal or an annuity payout that you must include in income and the amount that might be subject to the penalty tax described previously. Loans and Assignments Except for certain qualified contracts, the tax code treats any amount received as a loan under your contract, and any assignment or pledge (or agreement to assign or pledge) of any portion of your contract value, as a withdrawal of such amount or portion. Gifting A Contract If you transfer ownership of your contract, 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 charge and charges for other optional riders, 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. 67 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. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o 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 has issued new regulations concerning required minimum distributions. The regulations 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. 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 Plan Act permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distributions after 2007). There are special rules that apply to rollovers, direct rollovers and transfers (including rollovers or transfers of after-tax amounts). If the applicable rules are not followed, you may incur adverse Federal income tax consequences, including paying taxes which you might not otherwise have had to pay. Before we send a rollover distribution, we will 68 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. 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 Separate Account 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. 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. 69 Return Privilege Within the free-look period after you receive the contract, you may cancel it for any reason by delivering or mailing it postage prepaid, to the Home office at PO Box 7866, 1300 South Clinton Street, Fort Wayne, IN 46802-7866. 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 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 only the purchase payment(s). IRA purchasers will receive purchase payments only. 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 Mellon Bank, N.A., 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 A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further information about the VAA, Lincoln Life and the contracts offered. Statements in this prospectus about the content of contracts and other legal instruments are summaries. For the complete text of those contracts and instruments, please refer to those documents as filed with the SEC. 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.LFG.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 VAA, or the principal underwriter. 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. 70 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 Advertising Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below. Statement of Additional Information Request Card Lincoln ChoicePlus IISM Access 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. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 71 (This page intentionally left blank) 72 Appendix A - Condensed Financial Information Accumulation Unit Values The following information relates to accumulation unit values and accumulation units for funds in the periods ended December 31. It should be read along with the VAA's financial statement and notes which are included in the SAI.
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AIM V.I. Capital Appreciation 2006......... N/A N/A N/A N/A N/A N/A 12.012 11.813 2007......... N/A N/A N/A N/A N/A N/A 11.813 12.963 ------------- -- ---- --- -- ---- --- ------ ------ AIM V.I. Core Equity 2006......... 11.100 11.944 6 10.626 11.438 4 11.152 12.008 2007......... 11.944 12.643 6 11.438 12.113 4 12.008 12.723 ------------- ------ ------ ---- ------ ------ ---- ------ ------ AIM V.I. International Growth Fund 2001......... 10.000 11.222(3) 1** 10.000 10.610(1) 1** 10.000 11.226(3) 2002......... 11.222 9.259 1** 10.610 8.760 1 11.226 9.273 2003......... N/A N/A N/A 8.760 11.059 1 9.273 11.712 2004......... N/A N/A N/A 11.059 13.430 1 11.712 14.230 2005......... N/A N/A N/A 13.430 15.518 1 14.230 16.450 2006......... N/A N/A N/A 15.518 19.481 2 16.450 20.661 2007......... N/A N/A N/A 19.481 21.886 2 20.661 23.225 ------------- ------ -------- ---- ------ -------- ---- ------ -------- AllianceBernstein VPS Global Technology 2001......... 10.000 12.865(1) 1** 10.000 11.546(2) 1 6.639 4.861 2002......... 12.865 7.345 0 11.546 6.595 1** 4.861 2.778 2003......... N/A N/A N/A 6.595 9.309 3 N/A N/A 2004......... N/A N/A N/A 9.309 9.603 3 N/A N/A 2005......... N/A N/A N/A 9.603 9.771 3 N/A N/A 2006......... N/A N/A N/A 9.771 10.396 3 N/A N/A 2007......... N/A N/A N/A 10.396 12.237 2 N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- AllianceBernstein VPS Growth and Income 2001......... 10.000 11.312(1) 1 10.000 10.342(2) 30 10.467 10.296 2002......... 11.312 8.627 10 10.342 7.892 19 10.296 7.861 2003......... 8.627 11.190 12 7.892 10.241 7 7.861 10.205 2004......... 11.190 12.211 11 10.241 11.181 9 10.205 11.148 2005......... 12.211 12.532 12 11.181 11.481 10 11.148 11.452 2006......... 12.532 14.385 13 11.481 13.185 7 11.452 13.158 2007......... 14.385 14.800 10 13.185 13.573 3 13.158 13.552 ------------- ------ -------- ---- ------ -------- ---- ------ -------- AllianceBernstein VPS International Value 2006......... N/A N/A N/A N/A N/A N/A 11.722 11.832 2007......... N/A N/A N/A 11.697 12.257 1* 11.832 12.269 ------------- ------ -------- ---- ------ -------- ---- ------ -------- AllianceBernstein VPS Large Cap Growth 2001......... 10.000 11.944(1) 1** 10.000 10.999(2) 11 7.726 6.268 2002......... 11.944 8.104 2 10.999 7.467 11 6.268 4.257 2003......... 8.104 9.810 2 7.467 9.043 4 4.257 5.159 2004......... 9.810 10.429 2 9.043 9.619 6 5.159 5.489 2005......... 10.429 11.751 2 9.619 10.844 6 5.489 6.192 2006......... 11.751 11.456 2 10.844 10.577 7 6.192 6.042 2007......... 11.456 12.771 2 10.577 11.797 4 6.042 6.743 ------------- ------ -------- ---- ------ -------- ---- ------ -------- AllianceBernstein VPS Small/Mid Cap Value 2001......... 10.000 11.866(1) 1** 10.000 11.868(1) 1** 10.000 11.869(1) 2002......... 11.866 10.902 3 11.868 10.907 1 11.869 10.915 2003......... 10.902 15.071 2 10.907 15.086 1 10.915 15.104 2004......... 15.071 17.608 2 15.086 17.634 1 15.104 17.664 2005......... 17.608 18.422 3 17.634 18.459 2 17.664 18.499 2006......... 18.422 20.642 3 18.459 20.694 2 18.499 20.750 2007......... 20.642 20.564 4 20.694 20.626 2 20.750 20.691 ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AIM V.I. Capital Appreciation 2006......... 2 12.095 11.906 10 N/A N/A N/A 2007......... 2 11.906 13.086 9 N/A N/A N/A ------------- - ------ ------ -- -- --- --- AIM V.I. Core Equity 2006......... 7 10.725 11.560 11 10.774 11.621 2 2007......... 7 11.560 12.267 8 11.621 12.344 2 ------------- - ------ ------ -- ------ ------ ---- AIM V.I. International Growth Fund 2001......... 1** 10.000 11.229(3) 1** 2002......... 3 11.229 9.287 3 2003......... 3 9.287 11.747 15 8.792 11.133 0 2004......... 3 11.747 14.294 13 11.133 13.560 2 2005......... 3 14.294 16.550 10 13.560 15.715 2 2006......... 3 16.550 20.818 11 15.715 19.788 1** 2007......... 2 20.818 23.435 10 19.788 22.298 1* ------------- - ------ -------- -- ------ ------ ---- AllianceBernstein VPS Global Technology 2001......... 63 6.644 4.871 176 2002......... 62 4.871 2.788 166 2003......... N/A 2.788 3.944 62 N/A N/A N/A 2004......... N/A 3.944 4.076 68 N/A N/A N/A 2005......... N/A 4.076 4.156 59 N/A N/A N/A 2006......... N/A 4.156 4.431 91 N/A N/A N/A 2007......... N/A 4.431 5.226 108 N/A N/A N/A ------------- ---- ------ -------- --- ------ ------ ---- AllianceBernstein VPS Growth and Income 2001......... 142 10.473 10.317 462 2002......... 209 10.317 7.889 574 2003......... 62 7.889 10.257 299 8.667 11.281 31 2004......... 61 10.257 11.221 289 11.281 12.354 57 2005......... 45 11.221 11.545 234 12.354 12.723 76 2006......... 23 11.545 13.285 212 12.723 14.655 65 2007......... 21 13.285 13.703 144 14.655 15.130 63 ------------- ---- ------ -------- --- ------ ------ ---- AllianceBernstein VPS International Value 2006......... 1 10.571 11.842 5 11.021 11.850 1** 2007......... 1 11.842 12.297 5 11.850 12.318 1 ------------- ---- ------ -------- --- ------ ------ ---- AllianceBernstein VPS Large Cap Growth 2001......... 138 7.732 6.282 335 2002......... 167 6.282 4.273 306 2003......... 25 4.273 5.186 73 8.142 9.891 0 2004......... 22 5.186 5.527 98 9.891 10.551 3 2005......... 22 5.527 6.243 84 10.551 11.931 10 2006......... 14 6.243 6.101 78 11.931 11.672 10 2007......... 10 6.101 6.819 69 11.672 13.057 10 ------------- ---- ------ -------- --- ------ ------ ---- AllianceBernstein VPS Small/Mid Cap Value 2001......... 1** 10.000 11.874(1) 1 2002......... 4 11.874 10.936 17 2003......... 4 10.936 15.156 27 10.950 15.191 4 2004......... 4 15.156 17.751 29 15.191 17.811 27 2005......... 3 17.751 18.619 21 17.811 18.700 21 2006......... 2 18.619 20.915 18 18.700 21.027 20 2007......... 1 20.915 20.887 18 21.027 21.020 16 ------------- ---- ------ -------- --- ------ ------ ----
A-1
with EEB and Step-Up with EEB ----------------------------------------- ----------------------------------------- Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- --------------- ------------- ----------- --------------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) American Century Investments VP Inflation Protection Fund 2004......... 10.042 10.389 25 N/A N/A N/A 2005......... 10.389 10.352 29 10.392 10.360 1 2006......... 10.352 10.317 28 10.360 10.330 1** 2007......... 10.317 11.085 3 10.330 11.105 1* ------------- ------ ------ -- ------ ------ ---- American Funds Global Growth Fund 2004......... N/A N/A N/A N/A N/A N/A 2005......... N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A 2007......... 16.079 16.765 3 N/A N/A N/A ------------- ------ ------ ---- ------ ------ ---- American Funds Global Small Capitalization Fund 2001......... 10.000 12.494(1) 1** 10.000 12.496(1) 1** 2002......... 12.494 9.922 8 12.496 9.929 1 2003......... 9.922 14.947 8 9.929 14.965 1 2004......... 14.947 17.729 8 14.965 17.758 2 2005......... 17.729 21.805 8 17.758 21.853 2 2006......... 21.805 26.541 9 21.853 26.612 2 2007......... 26.541 31.622 3 26.612 31.723 1 ------------- ------ -------- ---- ------ -------- ---- American Funds Growth Fund 2001......... 10.000 12.305(1) 3 10.000 10.811(2) 15 2002......... 12.305 9.121 48 10.811 8.018 26 2003......... 9.121 12.243 45 8.018 10.768 26 2004......... 12.243 13.514 46 10.768 11.892 23 2005......... 13.514 15.407 46 11.892 13.564 22 2006......... 15.407 16.662 45 13.564 14.676 20 2007......... 16.662 18.367 43 14.676 16.186 16 ------------- ------ -------- ---- ------ -------- ---- American Funds Growth-Income Fund 2001......... 10.000 11.308(1) 2 10.000 10.527(2) 32 2002......... 11.308 9.059 141 10.527 8.438 42 2003......... 9.059 11.772 228 8.438 10.970 79 2004......... 11.772 12.748 235 10.970 11.886 81 2005......... 12.748 13.238 209 11.886 12.348 65 2006......... 13.238 14.963 155 12.348 13.965 58 2007......... 14.963 15.422 121 13.965 14.400 49 ------------- ------ -------- ---- ------ -------- ---- American Funds International Fund 2001......... 10.000 10.834(1) 2 10.000 10.216(1) 11 2002......... 10.834 9.053 11 10.216 8.540 13 2003......... 9.053 11.978 10 8.540 11.306 16 2004......... 11.978 14.023 11 11.306 13.243 17 2005......... 14.023 16.718 19 13.243 15.796 16 2006......... 16.718 19.517 29 15.796 18.449 21 2007......... 19.517 22.984 31 18.449 21.737 29 ------------- ------ -------- ---- ------ -------- ---- Delaware VIP Capital Reserves 2005......... N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- Delaware VIP Diversified Income Series 2004......... 10.080 10.855 30 10.011 10.858 1** 2005......... 10.855 10.588 39 10.858 10.597 1 2006......... 10.588 11.175 31 10.597 11.190 1 2007......... 11.175 11.778 40 11.190 11.799 1* ------------- ------ -------- ---- ------ -------- ---- Delaware VIP Emerging Markets Series(4) 2004......... N/A N/A N/A N/A N/A N/A 2005......... 25.668 32.013 2 25.710 32.081 1** 2006......... 32.013 39.833 1 32.081 39.937 1** 2007......... 39.833 54.134 2 39.937 54.303 1* ------------- ------ -------- ---- ------ -------- ---- with Step-Up with EGMDB with GOP ---------------------------------- ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) American Century Investments VP Inflation Protection Fund 2004......... N/A N/A N/A 9.905 10.404 23 10.042 10.410 13 2005......... 10.395 10.368 1** 10.404 10.393 70 10.410 10.410 191 2006......... 10.368 10.344 1** 10.393 10.384 79 10.410 10.411 109 2007......... 10.344 11.125 1* 10.384 11.185 65 10.411 11.226 109 ------------- ------ ------ ---- ------ ------ -- ------ ------ --- American Funds Global Growth Fund 2004......... 10.082 11.256 1 10.216 11.266 8 10.239 11.273 23 2005......... 11.256 12.611 2 11.266 12.641 16 11.273 12.662 24 2006......... 12.611 14.916 3 12.641 14.975 41 12.662 15.014 44 2007......... 14.916 16.826 3 14.975 16.917 39 15.014 16.978 32 ------------- ------ ------ ---- ------ ------ -- ------ ------ --- American Funds Global Small Capitalization Fund 2001......... 8.238 7.051 31 8.244 7.067 90 2002......... 7.051 5.606 50 7.067 5.627 136 2003......... 5.606 8.453 8 5.627 8.497 57 9.969 15.071 2 2004......... 8.453 10.036 7 8.497 10.104 126 15.071 17.937 31 2005......... 10.036 12.356 7 10.104 12.458 128 17.937 22.139 38 2006......... 12.356 15.055 7 12.458 15.201 159 22.139 27.042 49 2007......... 15.055 17.955 6 15.201 18.157 147 27.042 32.332 43 ------------- ------ ------ ---- ------ ------ --- ------ ------ --- American Funds Growth Fund 2001......... 8.968 7.209 358 8.973 7.224 1,347 2002......... 7.209 5.349 559 7.224 5.368 1,812 2003......... 5.349 7.187 138 5.368 7.224 1,098 9.164 12.344 80 2004......... 7.187 7.941 130 7.224 7.993 1,372 12.344 13.673 310 2005......... 7.941 9.062 120 7.993 9.136 1,356 13.673 15.643 298 2006......... 9.062 9.810 95 9.136 9.904 1,273 15.643 16.976 298 2007......... 9.810 10.824 71 9.904 10.945 1,084 16.976 18.779 260 ------------- ------ ------ ---- ------ ------ ----- ------ ------ --- American Funds Growth-Income Fund 2001......... 10.430 10.506 620 10.436 10.528 970 2002......... 10.506 8.426 773 10.528 8.456 1,792 2003......... 8.426 10.959 121 8.456 11.015 761 9.101 11.867 163 2004......... 10.959 11.880 122 11.015 11.959 1,033 11.867 12.897 518 2005......... 11.880 12.349 99 11.959 12.449 1,005 12.897 13.439 507 2006......... 12.349 13.972 69 12.449 14.107 916 13.439 15.244 475 2007......... 13.972 14.415 54 14.107 14.576 776 15.244 15.767 397 ------------- ------ ------ ---- ------ ------ ----- ------ ------ --- American Funds International Fund 2001......... 7.824 6.156 135 7.829 6.170 552 2002......... 6.156 5.149 227 6.170 5.168 815 2003......... 5.149 6.819 45 5.168 6.855 449 9.094 12.075 100 2004......... 6.819 7.991 45 6.855 8.045 570 12.075 14.186 199 2005......... 7.991 9.537 62 8.045 9.615 610 14.186 16.972 185 2006......... 9.537 11.144 48 9.615 11.253 619 16.972 19.882 186 2007......... 11.144 13.137 37 11.253 13.285 582 19.882 23.496 173 ------------- ------ ------ ---- ------ ------ ----- ------ ------ --- Delaware VIP Capital Reserves 2005......... N/A N/A N/A N/A N/A N/A 9.971 9.927 3 2006......... N/A N/A N/A N/A N/A N/A 9.927 10.197 14 2007......... N/A N/A N/A N/A N/A N/A 10.197 10.466 13 ------------- ------ ------ ---- ------ ------ ----- ------ ------ --- Delaware VIP Diversified Income Series 2004......... 10.197 10.862 2 10.207 10.872 8 10.080 10.878 18 2005......... 10.862 10.605 4 10.872 10.631 48 10.878 10.648 55 2006......... 10.605 11.204 4 10.631 11.248 53 10.648 11.277 51 2007......... 11.204 11.820 4 11.248 11.884 82 11.277 11.927 49 ------------- ------ ------ ---- ------ ------ ----- ------ ------ --- Delaware VIP Emerging Markets Series(4) 2004......... N/A N/A N/A 14.457 19.360 7 10.243 13.572 3 2005......... N/A N/A N/A 19.360 24.206 29 13.572 16.986 77 2006......... 31.089 36.526 1** 24.206 30.194 40 16.986 21.209 109 2007......... 36.526 49.690 1* 30.194 41.137 53 21.209 28.925 104 ------------- ------ ------ ---- ------ ------ ----- ------ ------ ---
A-2
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ---------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of -------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- -------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP High Yield Series 2001......... 10.000 10.302(1) 1 10.000 9.943(2) 13 8.951 8.406 2002......... 10.302 10.275 14 9.943 9.922 9 8.406 8.392 2003......... 10.275 12.966 19 9.922 12.527 8 8.392 10.601 2004......... 12.966 14.506 23 12.527 14.022 9 10.601 11.872 2005......... 14.506 14.709 26 14.022 14.225 9 11.872 12.050 2006......... 14.709 16.192 13 14.225 15.667 9 12.050 13.278 2007......... 16.192 16.292 8 15.667 15.771 4 13.278 13.373 ------------- ------ -------- -- ------ -------- -- ------ ------ Delaware VIP REIT Series 2001......... 10.000 10.697(1) 1** 10.000 10.378(2) 3 10.698 11.418 2002......... 10.697 10.954 32 10.378 10.634 10 11.418 11.705 2003......... 10.954 14.373 37 10.634 13.960 35 11.705 15.374 2004......... 14.373 18.487 38 13.960 17.964 36 15.374 19.794 2005......... 18.487 19.383 32 17.964 18.844 35 19.794 20.775 2006......... 19.383 25.166 28 18.844 24.479 31 20.775 27.000 2007......... 25.166 21.191 21 24.479 20.623 26 27.000 22.758 ------------- ------ -------- -- ------ -------- -- ------ ------ Delaware VIP Small Cap Value Series 2001......... 10.000 11.788(1) 1 10.000 10.978(2) 6 11.835 12.981 2002......... 11.788 10.904 32 10.978 10.160 15 12.981 12.019 2003......... 10.904 15.157 40 10.160 14.129 32 12.019 16.723 2004......... 15.157 18.018 42 14.129 16.805 36 16.723 19.901 2005......... 18.018 19.297 36 16.805 18.007 35 19.901 21.334 2006......... 19.297 21.941 40 18.007 20.485 33 21.334 24.282 2007......... 21.941 20.056 33 20.485 18.734 28 24.282 22.218 ------------- ------ -------- -- ------ -------- -- ------ ------ Delaware VIP Trend Series 2001......... 10.000 12.780(1) 1 10.000 12.207(4) 4 7.756 6.440 2002......... 12.780 10.023 7 12.207 9.579 10 6.440 5.056 2003......... 10.023 13.256 4 9.579 12.675 7 5.056 6.694 2004......... 13.256 14.609 18 12.675 13.975 8 6.694 7.384 2005......... 14.609 15.138 17 13.975 14.489 8 7.384 7.660 2006......... 15.138 15.943 17 14.489 15.267 7 7.660 8.075 2007......... 15.943 17.279 15 15.267 16.555 3 8.075 8.760 ------------- ------ -------- -- ------ -------- -- ------ ------ Delaware VIP US Growth Series 2001......... 10.000 11.635(1) 1** 10.000 11.636(1) 1** 10.000 11.638(1) 2002......... 11.635 8.074 0 11.636 8.078 0 11.638 8.084 2003......... N/A N/A N/A 8.979 9.785 4 N/A N/A 2004......... 9.118 9.892 1** 9.785 9.896 5 N/A N/A 2005......... N/A N/A N/A 9.896 11.115 5 N/A N/A 2006......... N/A N/A N/A 11.115 11.136 2 N/A N/A 2007......... N/A N/A N/A 11.136 12.285 2 N/A N/A ------------- ------ -------- ---- ------ -------- -- ------ -------- Delaware VIP Value Series 2001......... 10.000 11.090(1) 1** 10.000 10.312(2) 2 11.551 10.886 2002......... 11.090 8.834 3 10.312 8.219 1 10.886 8.681 2003......... 8.834 11.105 3 8.219 10.336 3 8.681 10.922 2004......... 11.105 12.485 3 10.336 11.627 3 10.922 12.292 2005......... 12.485 12.959 2 11.627 12.075 3 12.292 12.772 2006......... 12.959 15.741 3 12.075 14.674 3 12.772 15.530 2007......... 15.741 14.982 2 14.674 13.974 3 15.530 14.796 ------------- ------ -------- ---- ------ -------- -- ------ -------- DWS VIP Equity 500 Index 2001......... 10.000 11.273(1) 1** 10.000 11.275(1) 11 8.982 7.747 2002......... 11.273 8.592 1 11.275 8.598 1 7.747 5.911 2003......... 8.592 10.804 1 8.598 10.818 1 5.911 7.440 2004......... 10.804 11.724 1 10.818 11.744 1 7.440 8.081 2005......... 11.724 12.041 1 11.744 12.068 2 8.081 8.308 2006......... 12.041 13.649 1 12.068 13.686 2 8.308 9.426 2007......... 13.649 14.101 2 13.686 14.146 2 9.426 9.749 ------------- ------ -------- ---- ------ -------- -- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP High Yield Series 2001......... 68 8.959 8.426 149 2002......... 78 8.426 8.425 224 2003......... 14 8.425 10.658 714 10.322 13.071 75 2004......... 15 10.658 11.953 340 13.071 14.675 90 2005......... 12 11.953 12.151 281 14.675 14.932 78 2006......... 11 12.151 13.409 248 14.932 16.495 76 2007......... 10 13.409 13.526 129 16.495 16.655 72 ------------- -- ------ ------ --- ------ ------ -- Delaware VIP REIT Series 2001......... 60 10.704 11.442 112 2002......... 93 11.442 11.748 138 2003......... 12 11.748 15.453 97 11.006 14.491 39 2004......... 11 15.453 19.926 110 14.491 18.704 53 2005......... 10 19.926 20.944 102 18.704 19.679 43 2006......... 8 20.944 27.260 95 19.679 25.640 41 2007......... 7 27.260 23.012 67 25.640 21.666 34 ------------- -- ------ ------ --- ------ ------ -- Delaware VIP Small Cap Value Series 2001......... 81 11.840 13.006 114 2002......... 136 13.006 12.061 242 2003......... 28 12.061 16.806 108 10.954 15.280 25 2004......... 26 16.806 20.029 109 15.280 18.229 74 2005......... 24 20.029 21.504 110 18.229 19.590 81 2006......... 18 21.504 24.512 100 19.590 22.353 89 2007......... 13 24.512 22.462 80 22.353 20.504 40 ------------- --- ------ ------ --- ------ ------ -- Delaware VIP Trend Series 2001......... 88 7.762 6.455 333 2002......... 162 6.455 5.075 494 2003......... 41 5.075 6.729 250 10.070 13.365 28 2004......... 43 6.729 7.434 227 13.365 14.780 55 2005......... 42 7.434 7.723 199 14.780 15.370 28 2006......... 25 7.723 8.154 181 15.370 16.244 22 2007......... 23 8.154 8.859 109 16.244 17.666 21 ------------- --- ------ ------ --- ------ ------ -- Delaware VIP US Growth Series 2001......... 1** 10.000 11.643(1) 1** 2002......... 0 11.643 8.101 1 2003......... N/A 8.101 9.830 32 8.110 9.851 15 2004......... N/A 9.830 9.962 21 9.851 9.993 16 2005......... N/A 9.962 11.211 12 9.993 11.257 18 2006......... N/A 11.211 11.254 11 11.257 11.313 11 2007......... N/A 11.254 12.440 8 11.313 12.517 11 ------------- ---- ------ -------- --- ------ ------ -- Delaware VIP Value Series 2001......... 12 11.556 10.908 58 2002......... 9 10.908 8.712 85 2003......... 5 8.712 10.978 66 8.875 11.195 1 2004......... 6 10.978 12.373 82 11.195 12.631 10 2005......... 7 12.373 12.876 92 12.631 13.157 32 2006......... 6 12.876 15.678 83 13.157 16.037 18 2007......... 6 15.678 14.960 66 16.037 15.317 14 ------------- ---- ------ -------- --- ------ ------ -- DWS VIP Equity 500 Index 2001......... 34 8.987 7.763 198 2002......... 37 7.763 5.932 257 2003......... 8 5.932 7.478 115 8.631 10.891 4 2004......... 9 7.478 8.135 132 10.891 11.859 4 2005......... 7 8.135 8.376 133 11.859 12.223 7 2006......... 6 8.376 9.517 106 12.223 13.903 4 2007......... 6 9.517 9.857 92 13.903 14.414 2 ------------- ---- ------ -------- --- ------ ------ --
A-3
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) DWS VIP Small Cap Index 2001......... 10.000 12.107(1) 1** 10.000 12.109(1) 1** 10.000 12.110(1) 2002......... 12.107 9.433 1** 12.109 9.438 0 12.110 9.445 2003......... 9.433 13.553 4 N/A N/A N/A 9.445 13.583 2004......... 13.553 15.659 4 N/A N/A N/A 13.583 15.710 2005......... 15.659 16.019 4 N/A N/A N/A 15.710 16.087 2006......... 16.019 18.467 5 N/A N/A N/A 16.087 18.564 2007......... 18.467 17.775 3 N/A N/A N/A 18.564 17.886 ------------- ------ -------- - ------ -------- ---- ------ -------- Fidelity VIP Contrafund Portfolio 2001......... 10.000 10.931(1) 1** 10.000 10.934(1) 1** 10.000 10.934(1) 2002......... 10.931 9.694 15 10.934 9.702 1 10.934 9.708 2003......... 9.694 12.194 15 9.702 12.210 7 9.708 12.223 2004......... 12.194 13.778 3 12.210 13.803 7 12.223 13.825 2005......... 13.778 15.771 3 13.803 15.808 8 13.825 15.841 2006......... 15.771 17.243 17 15.808 17.292 12 15.841 17.337 2007......... 17.243 19.846 18 17.292 19.912 22 17.337 19.974 ------------- ------ -------- -- ------ -------- ---- ------ -------- Fidelity VIP Equity-Income Portfolio 2001......... 10.000 11.088(1) 1 10.000 10.285(2) 6 10.854 10.103 2002......... 11.088 9.013 4 10.285 8.364 12 10.103 8.221 2003......... 9.013 11.499 3 8.364 10.677 10 8.221 10.499 2004......... 11.499 12.550 3 10.677 11.659 11 10.499 11.470 2005......... 12.550 13.000 3 11.659 12.082 7 11.470 11.892 2006......... 13.000 15.297 3 12.082 14.225 8 11.892 14.008 2007......... 15.297 15.200 1 14.225 14.142 8 14.008 13.933 ------------- ------ -------- -- ------ -------- ---- ------ -------- Fidelity VIP Growth Portfolio 2001......... 10.000 11.764(1) 1 10.000 10.687(2) 6 8.354 6.739 2002......... 11.764 8.045 5 10.687 7.312 3 6.739 4.613 2003......... 8.045 10.463 1 N/A N/A N/A 4.613 6.006 2004......... 10.463 10.587 1 N/A N/A N/A 6.006 6.083 2005......... 10.587 10.959 1 9.632 9.975 1** 6.083 6.303 2006......... 10.959 11.459 1 9.975 10.436 1** 6.303 6.597 2007......... 11.459 14.241 1 10.436 12.976 1* N/A N/A ------------- ------ -------- -- ------ -------- ---- ------ -------- Fidelity VIP Mid Cap 2005......... N/A N/A N/A 10.725 11.551 1** N/A N/A 2006......... 12.433 12.736 10 11.551 12.746 1** 12.135 12.756 2007......... 12.736 14.413 5 N/A N/A N/A 12.756 14.450 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Fidelity VIP Overseas Portfolio 2001......... 10.000 10.892(1) 1** 10.000 10.895(1) 1** 8.595 6.655 2002......... 10.892 8.500 1** 10.895 8.507 0 6.655 5.199 2003......... 8.500 11.929 0 9.708 11.948 2 5.199 7.304 2004......... 11.929 13.263 1 11.948 13.290 3 7.304 8.129 2005......... 13.263 15.458 1** 13.290 15.497 3 8.129 9.483 2006......... 15.458 17.863 1** 15.497 17.917 2 9.483 10.969 2007......... 17.863 20.516 1* 17.917 20.588 2 10.969 12.611 ------------- ------ -------- ---- ------ -------- ---- ------ -------- FTVIPT Franklin Income Securities 2006......... 10.619 11.205 3 N/A N/A N/A 11.202 11.212 2007......... 11.205 11.407 21 11.448 11.416 1 11.212 11.425 ------------- ------ -------- ---- ------ -------- ---- ------ -------- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2001......... 10.000 12.288(1) 1** 10.000 12.289(1) 2 8.035 6.689 2002......... 12.288 8.598 5 12.289 8.603 3 6.689 4.685 2003......... N/A N/A 0 8.603 11.592 3 4.685 6.315 2004......... N/A N/A N/A 11.592 12.685 3 6.315 6.914 2005......... 11.779 13.032 1 12.685 13.048 2 6.914 7.116 2006......... 13.032 13.899 1 13.048 13.923 2 7.116 7.597 2007......... 13.899 15.170 1 13.923 15.204 2 7.597 8.300 ------------- ------ -------- ---- ------ -------- ---- ------ -------- FTVIPT Mutual Shares Securities 2006......... N/A N/A N/A N/A N/A N/A N/A N/A 2007......... 11.517 11.421 6 N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) DWS VIP Small Cap Index 2001......... 1** 10.000 12.115(1) 2 2002......... 3 12.115 9.463 16 2003......... 2 9.463 13.631 28 9.475 13.661 3 2004......... 3 13.631 15.788 48 13.661 15.840 15 2005......... 3 15.788 16.192 46 15.840 16.261 11 2006......... 1** 16.192 18.713 39 16.261 18.811 10 2007......... 1* 18.713 18.057 36 18.811 18.170 10 ------------- - ------ -------- -- ------ ------ -- Fidelity VIP Contrafund Portfolio 2001......... 1** 10.000 10.938(1) 2 2002......... 24 10.938 9.726 26 2003......... 24 9.726 12.264 68 9.737 12.291 14 2004......... 27 12.264 13.892 102 12.291 13.937 62 2005......... 26 13.892 15.941 145 13.937 16.008 78 2006......... 16 15.941 17.473 152 16.008 17.564 81 2007......... 14 17.473 20.161 137 17.564 20.286 70 ------------- -- ------ -------- --- ------ ------ -- Fidelity VIP Equity-Income Portfolio 2001......... 51 10.860 10.124 143 2002......... 70 10.124 8.250 181 2003......... 20 8.250 10.552 117 9.056 11.595 7 2004......... 19 10.552 11.545 134 11.595 12.699 67 2005......... 21 11.545 11.989 117 12.699 13.200 39 2006......... 16 11.989 14.143 111 13.200 15.587 36 2007......... 15 14.143 14.088 100 15.587 15.543 33 ------------- -- ------ -------- --- ------ ------ -- Fidelity VIP Growth Portfolio 2001......... 23 8.360 6.754 99 2002......... 20 6.754 4.630 148 2003......... 3 4.630 6.037 101 8.083 10.549 9 2004......... 1 6.037 6.123 86 10.549 10.711 17 2005......... 1 6.123 6.355 92 10.711 11.126 20 2006......... 1 6.355 6.661 82 11.126 11.675 22 2007......... N/A 6.661 8.299 56 11.675 14.560 18 ------------- ---- ------ -------- --- ------ ------ -- Fidelity VIP Mid Cap 2005......... N/A 10.237 11.564 31 10.182 11.571 16 2006......... 1** 11.564 12.786 46 11.571 12.806 48 2007......... 1* 12.786 14.506 45 12.806 14.543 39 ------------- ---- ------ -------- --- ------ ------ -- Fidelity VIP Overseas Portfolio 2001......... 8 8.601 6.670 27 2002......... 7 6.670 5.218 36 2003......... 1 5.219 7.342 128 8.540 12.028 35 2004......... 1 7.342 8.184 93 12.028 13.419 21 2005......... 4 8.184 9.562 66 13.419 15.695 29 2006......... 2 9.562 11.077 63 15.695 18.200 30 2007......... 1 11.077 12.754 54 18.200 20.976 25 ------------- ---- ------ -------- --- ------ ------ -- FTVIPT Franklin Income Securities 2006......... 1 10.149 11.222 5 10.853 11.229 1** 2007......... 3 11.222 11.453 31 11.229 11.471 84 ------------- ---- ------ -------- --- ------ ------ -- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2001......... 19 8.042 6.704 150 2002......... 40 6.704 4.702 270 2003......... 10 4.702 6.348 151 8.637 11.672 4 2004......... 7 6.348 6.961 139 11.672 12.811 32 2005......... 6 6.961 7.175 126 12.811 13.218 17 2006......... 5 7.175 7.671 114 13.218 14.146 17 2007......... 1 7.671 8.394 86 14.146 15.494 15 ------------- ---- ------ -------- --- ------ ------ -- FTVIPT Mutual Shares Securities 2006......... N/A 10.145 11.267 12 10.334 11.274 2 2007......... N/A 11.267 11.467 21 11.274 11.486 8 ------------- ---- ------ -------- --- ------ ------ --
A-4
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Templeton Global Income Securities 2005......... 9.992 9.859 5 N/A N/A N/A 9.822 9.864 2006......... 9.859 10.909 6 N/A N/A N/A 9.864 10.926 2007......... 10.909 11.881 9 N/A N/A N/A 10.926 11.912 ------------- ------ ------ - -- ---- --- ------ ------ FTVIPT Templeton Growth Securities Fund 2001......... 10.000 11.163(1) 1** 10.000 11.165(1) 1** 10.197 9.884 2002......... 11.163 8.928 8 11.165 8.933 3 9.884 7.912 2003......... 8.928 11.575 10 8.933 11.588 5 7.912 10.269 2004......... 11.575 13.177 8 11.588 13.198 4 10.269 11.702 2005......... 13.177 14.075 9 13.198 14.105 1 11.702 12.512 2006......... 14.075 16.822 8 14.105 16.866 1** 12.512 14.969 2007......... 16.822 16.893 11 16.866 16.945 1* 14.969 15.047 ------------- ------ -------- -- ------ -------- ---- ------ ------ Janus Aspen Balanced Portfolio 2001......... 10.000 10.654(1) 1** 10.000 10.657(1) 1** 10.000 10.658(1) 2002......... 10.654 9.758 1** 10.657 9.768 2 10.658 9.770 2003......... 9.758 10.889 1 9.768 10.905 3 9.770 10.912 2004......... 10.889 11.570 1 10.905 11.593 3 10.912 11.606 2005......... 11.570 12.222 1** 11.593 12.252 4 11.606 12.272 2006......... 12.222 13.240 1** 12.252 13.280 4 12.272 13.309 2007......... 13.240 14.328 1* 13.280 14.378 6 13.309 14.416 ------------- ------ -------- -- ------ -------- ---- ------ -------- Janus Aspen Mid Cap Growth Portfolio 2001......... 10.000 11.377(1) 1** 10.000 11.379(1) 1** 10.000 11.382(1) 2002......... 11.377 8.023 0 11.379 8.028 0 11.382 8.032 2003......... N/A N/A N/A 9.823 10.626 1 8.032 10.632 2004......... N/A N/A N/A 10.626 12.567 1 10.632 12.581 2005......... N/A N/A N/A 12.567 13.820 1 12.581 13.842 2006......... N/A N/A N/A 13.820 15.372 1 13.842 15.404 2007......... N/A N/A N/A 15.372 18.371 1 15.404 18.419 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Janus Aspen Worldwide Growth Portfolio 2001......... 10.000 11.502(1) 1** 10.000 11.505(1) 1** 10.000 11.507(1) 2002......... 11.502 8.383 18 11.505 8.390 0 11.507 8.396 2003......... 8.383 10.173 17 N/A N/A N/A 8.396 10.199 2004......... 10.173 10.434 5 N/A N/A N/A 10.199 10.470 2005......... 10.434 10.807 4 N/A N/A N/A 10.470 10.856 2006......... 10.807 12.506 4 N/A N/A N/A 10.856 12.575 2007......... 12.506 13.419 4 N/A N/A N/A 12.575 13.507 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Core Fund(5) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Growth Fund(6) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Growth Opportunities(7) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Money Market Fund 2001......... 10.000 10.017(1) 1** 10.000 10.019(1) 1** 10.206 10.427 2002......... 10.017 9.967 39 10.019 9.976 23 10.427 10.385 2003......... 9.967 9.846 14 9.976 9.860 3 10.385 10.269 2004......... 9.846 9.746 5 9.860 9.764 4 10.269 10.175 2005......... 9.746 9.829 6 9.764 9.852 4 10.175 10.272 2006......... 9.829 10.096 19 9.852 10.124 1 10.272 10.561 2007......... 10.096 10.397 26 10.124 10.432 6 10.561 10.888 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Baron Growth Opportunities(8) 2006......... N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A 11.710 10.774 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Capital Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Cohen & Steers Global Real Estate 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Templeton Global Income Securities 2005......... 1 9.944 9.873 12 9.763 9.879 7 2006......... 1 9.873 10.952 27 9.879 10.969 28 2007......... 1 10.952 11.958 33 10.969 11.988 26 ------------- - ------ ------ -- ------ ------ -- FTVIPT Templeton Growth Securities Fund 2001......... 19 10.204 9.905 44 2002......... 35 9.905 7.941 49 2003......... 20 7.941 10.322 32 8.969 11.670 11 2004......... 18 10.322 11.780 42 11.670 13.332 62 2005......... 17 11.780 12.614 80 13.332 14.290 117 2006......... 16 12.614 15.114 87 14.290 17.139 142 2007......... 14 15.114 15.215 79 17.139 17.271 148 ------------- -- ------ ------ -- ------ ------ --- Janus Aspen Balanced Portfolio 2001......... 1** 10.000 10.661(1) 1** 2002......... 22 10.661 9.786 19 2003......... 22 9.786 10.947 59 9.800 10.973 5 2004......... 24 10.947 11.660 51 10.973 11.701 6 2005......... 22 11.660 12.348 43 11.701 12.403 10 2006......... 18 12.348 13.411 35 12.403 13.484 8 2007......... 16 13.411 14.549 34 13.484 14.643 8 ------------- -- ------ -------- -- ------ ------ --- Janus Aspen Mid Cap Growth Portfolio 2001......... 1** 10.000 11.386(1) 1** 2002......... 1 11.386 8.047 6 2003......... 1 8.047 10.668 7 N/A N/A N/A 2004......... 4 10.668 12.642 7 10.692 12.683 2 2005......... 3 12.642 13.930 7 12.683 13.990 7 2006......... 1 13.930 15.525 6 13.990 15.608 7 2007......... 1 15.525 18.592 7 15.608 18.709 1 ------------- -- ------ -------- -- ------ ------ ---- Janus Aspen Worldwide Growth Portfolio 2001......... 1** 10.000 11.512(1) 1** 2002......... 1 11.512 8.412 14 2003......... 1 8.412 10.234 12 8.422 10.256 2 2004......... 1 10.234 10.522 11 10.256 10.556 2 2005......... 1 10.522 10.926 10 N/A N/A N/A 2006......... 1 10.926 12.675 9 N/A N/A N/A 2007......... 1 12.675 13.635 8 N/A N/A N/A ------------- -- ------ -------- -- ------ ------ ---- Lincoln VIP Core Fund(5) 2005......... N/A 10.085 10.245 1** N/A N/A N/A 2006......... N/A 10.245 11.454 8 10.718 11.472 1** ------------- ---- ------ -------- -- ------ ------ ---- Lincoln VIP Growth Fund(6) 2005......... N/A 10.182 10.818 1 N/A N/A N/A 2006......... N/A 10.818 11.271 1 N/A N/A N/A ------------- ---- ------ -------- -- ------ ------ ---- Lincoln VIP Growth Opportunities(7) 2005......... N/A 10.923 11.440 1** N/A N/A N/A 2006......... N/A 11.440 12.366 1 N/A N/A N/A ------------- ---- ------ -------- -- ------ ------ ---- Lincoln VIP Money Market Fund 2001......... 227 10.212 10.448 2,634 2002......... 195 10.448 10.422 6,301 2003......... 47 10.422 10.321 575 10.012 9.925 221 2004......... 9 10.321 10.241 587 9.925 9.858 265 2005......... 16 10.241 10.355 451 9.858 9.977 262 2006......... 46 10.355 10.662 332 9.977 10.284 235 2007......... 49 10.662 11.009 303 10.284 10.628 200 ------------- ---- ------ -------- ----- ------ ------ ---- Lincoln VIPT Baron Growth Opportunities(8) 2006......... N/A 9.708 10.616 1* N/A N/A N/A 2007......... 1 10.616 10.800 1 N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ ---- Lincoln VIPT Capital Growth 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ ---- Lincoln VIPT Cohen & Steers Global Real Estate 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ ----
A-5
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT Delaware Bond 2001......... 10.000 10.113(1) 6 10.000 10.093(2) 24 10.600 11.364 2002......... 10.113 10.931 116 10.093 10.915 38 11.364 12.295 2003......... 10.931 11.506 153 10.915 11.495 65 12.295 12.955 2004......... 11.506 11.888 82 11.495 11.883 79 12.955 13.399 2005......... 11.888 11.972 68 11.883 11.973 73 13.399 13.507 2006......... 11.972 12.301 63 11.973 12.307 62 13.507 13.892 2007......... 12.301 12.726 54 12.307 12.740 51 13.892 14.387 ------------- ------ -------- --- ------ -------- -- ------ ------ Lincoln VIPT Delaware Growth and Income 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ ------ Lincoln VIPT Delaware Social Awareness 2001......... 10.000 12.098(3) 1** 10.000 11.506(1) 1** 10.000 12.101(3) 2002......... 12.098 9.242 0 11.506 8.794 0 12.101 9.254 2003......... N/A N/A N/A 10.093 11.385 3 N/A N/A 2004......... N/A N/A N/A 11.385 12.596 4 N/A N/A 2005......... N/A N/A N/A 12.596 13.852 4 N/A N/A 2006......... N/A N/A N/A 13.852 15.272 1 N/A N/A 2007......... N/A N/A N/A 15.272 15.437 1 N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Delaware Special Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT FI Equity-Income 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Janus Capital Appreciation 2001......... 10.000 11.615(1) 1** 10.000 11.616(1) 1** 10.000 11.618(1) 2002......... 11.615 8.321 0 11.616 8.325 0 11.618 8.332 2003......... N/A N/A N/A N/A N/A N/A 8.332 10.841 2004......... N/A N/A N/A N/A N/A N/A 10.841 11.210 2005......... N/A N/A N/A 10.950 11.464 1 11.210 11.472 2006......... N/A N/A N/A 11.464 12.342 1 11.472 12.357 2007......... N/A N/A N/A 12.342 14.590 1 12.357 14.615 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Marsico International Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT MFS Value 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Mid-Cap Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Mid-Cap Value 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Mondrian International Value 2001......... 10.000 11.018(1) 1** 10.000 11.021(1) 1** 10.000 11.023(1) 2002......... 11.018 9.644 1 11.021 9.651 1 11.023 9.659 2003......... 9.644 13.400 1 9.651 13.417 4 9.659 13.434 2004......... 13.400 15.901 1 13.417 15.928 5 13.434 15.957 2005......... 15.901 17.559 1 15.928 17.598 5 15.957 17.639 2006......... 17.559 22.398 2 17.598 22.459 2 17.639 22.523 2007......... 22.398 24.501 2 22.459 24.580 2 22.523 24.662 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT S&P 500 Index 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Small Cap Index 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT T. Rowe Price Growth Stock 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT Delaware Bond 2001......... 263 10.606 11.387 635 2002......... 402 11.387 12.338 1,126 2003......... 75 12.338 13.020 793 10.980 11.599 297 2004......... 65 13.020 13.486 879 11.599 12.026 384 2005......... 48 13.486 13.616 818 12.026 12.154 368 2006......... 42 13.616 14.024 713 12.154 12.531 324 2007......... 36 14.024 14.546 569 12.531 13.010 341 ------------- --- ------ ------ ----- ------ ------ --- Lincoln VIPT Delaware Growth and Income 2005......... N/A 10.056 10.364 2 N/A N/A N/A 2006......... N/A 10.364 11.426 2 N/A N/A N/A 2007......... N/A 11.426 11.897 2 N/A N/A N/A ------------- ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Delaware Social Awareness 2001......... 1** 10.000 12.107(3) 1** 2002......... 0 12.107 9.273 2 2003......... N/A 9.273 12.027 35 8.827 11.460 19 2004......... N/A 12.027 13.333 47 11.460 12.717 30 2005......... N/A 13.333 14.692 37 12.717 14.028 47 2006......... N/A 14.692 16.231 36 14.028 15.512 39 2007......... N/A 16.231 16.439 22 15.512 15.726 39 ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Delaware Special Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT FI Equity-Income 2005......... N/A 10.029 10.472 2 10.460 10.480 3 2006......... N/A 10.472 11.433 2 10.480 11.453 8 2007......... N/A 11.433 11.706 2 11.453 11.739 8 ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Janus Capital Appreciation 2001......... 1** 10.000 11.623(1) 1** 2002......... 1** 11.623 8.348 2 2003......... 1 8.348 10.877 4 N/A N/A N/A 2004......... 1 10.877 11.264 4 10.901 11.300 2 2005......... 2 11.264 11.545 8 11.300 11.594 9 2006......... 1 11.545 12.455 7 11.594 12.520 9 2007......... 1 12.455 14.752 7 12.520 14.844 4 ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Marsico International Growth 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT MFS Value 2007......... N/A 9.834 9.707 2 N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Mid-Cap Growth 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Mid-Cap Value 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Mondrian International Value 2001......... 1** 10.000 11.026(1) 1** 2002......... 2 11.026 9.675 16 2003......... 2 9.675 13.477 65 9.686 13.506 31 2004......... 2 13.477 16.032 71 13.506 16.083 44 2005......... 4 16.032 17.748 57 16.083 17.822 46 2006......... 4 17.748 22.695 55 17.822 22.814 35 2007......... 2 22.695 24.889 41 22.814 25.043 35 ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT S&P 500 Index 2007......... N/A 11.442 11.320 6 11.464 11.350 1* ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT Small Cap Index 2007......... N/A 9.451 9.144 8 N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ --- Lincoln VIPT T. Rowe Price Growth Stock 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ----- ------ ------ ---
A-6
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2001......... 10.000 12.405(1) 1** 10.000 12.407(1) 1** 10.000 12.408(1) 2002......... 12.405 8.487 0 12.407 8.493 0 12.408 8.491 2003......... N/A N/A N/A N/A N/A N/A 8.491 11.060 2004......... N/A N/A N/A N/A N/A N/A N/A N/A 2005......... N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Templeton Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT UBS Global Asset Allocation 2001......... 10.000 11.374(3) 1** 10.000 10.964(1) 1** 10.000 11.376(3) 2002......... 11.374 9.818 1** 10.964 9.470 0 11.376 9.833 2003......... 9.818 11.599 0 N/A N/A N/A 9.833 11.627 2004......... 11.599 12.921 16 N/A N/A N/A 11.627 12.967 2005......... 12.921 13.541 19 N/A N/A N/A 12.967 13.602 2006......... 13.541 15.213 20 N/A N/A N/A 13.602 15.297 2007......... 15.213 15.878 32 N/A N/A N/A 15.297 15.982 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Value Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire 2010 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire 2020 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire 2030 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire 2040 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire Aggressive Profile 2005......... N/A N/A N/A 10.927 10.869 1 N/A N/A 2006......... N/A N/A N/A 10.869 12.404 1 N/A N/A 2007......... N/A N/A N/A 12.404 13.485 1 N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire Conservative Profile 2005......... 10.073 10.237 7 N/A N/A N/A 10.153 10.243 2006......... N/A N/A N/A N/A N/A N/A 10.243 10.972 2007......... N/A N/A N/A N/A N/A N/A 10.972 11.585 ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire Moderate Profile 2005......... N/A N/A N/A 10.062 10.457 8 10.006 10.460 2006......... N/A N/A N/A 10.457 11.474 8 10.460 11.483 2007......... 11.978 12.261 5 11.474 12.277 8 N/A N/A ------------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005......... N/A N/A N/A 10.310 10.634 2 10.000 10.637 2006......... N/A N/A N/A 10.634 11.885 2 10.637 11.895 2007......... N/A N/A N/A N/A N/A N/A 11.895 12.797 ------------- ------ -------- ---- ------ -------- ---- ------ -------- MFS VIT Core Equity 2001......... 10.000 11.884(1) 1 10.000 11.886(1) 1** 10.000 11.888(1) 2002......... 11.884 8.181 1** 11.886 8.186 0 11.888 8.192 2003......... 8.181 10.204 0 N/A N/A N/A 8.192 10.227 2004......... 10.204 11.221 1** N/A N/A N/A 10.227 11.259 2005......... 11.221 11.173 1** N/A N/A N/A 11.259 11.220 2006......... 11.173 12.442 1** N/A N/A N/A 11.220 12.508 2007......... N/A N/A N/A N/A N/A N/A 12.508 13.621 ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2001......... 1** 10.000 12.414(1) 1** 2002......... 1** 12.414 8.515 0 2003......... 0 N/A N/A N/A 9.909 11.132 0 2004......... N/A N/A N/A N/A 11.132 12.458 1** 2005......... N/A 11.489 13.418 1** 12.458 13.470 3 2006......... N/A 13.418 14.422 1** 13.470 14.493 3 2007......... N/A 14.422 16.113 1 14.493 16.209 3 ------------- ---- ------ -------- ---- ------ ------ - Lincoln VIPT Templeton Growth 2007......... N/A 10.303 9.792 1 N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT UBS Global Asset Allocation 2001......... 1** 10.000 11.380(3) 1** 2002......... 1** 11.380 9.848 1 2003......... 1 9.848 11.664 30 9.506 11.270 3 2004......... 1 11.664 13.027 35 11.270 12.599 13 2005......... 6 13.027 13.685 65 12.599 13.249 53 2006......... 1** 13.685 15.414 63 13.249 14.938 80 2007......... 1* 15.414 16.128 52 14.938 15.646 67 ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Value Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire 2010 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire 2020 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire 2030 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire 2040 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire Aggressive Profile 2005......... N/A 10.000 10.881 108 10.155 10.888 34 2006......... N/A 10.881 12.443 107 10.888 12.463 46 2007......... N/A 12.443 13.555 90 12.463 13.590 46 ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire Conservative Profile 2005......... 5 N/A N/A N/A 10.012 10.257 325 2006......... 7 10.282 10.998 16 10.257 11.015 338 2007......... 8 10.998 11.630 16 11.015 11.660 336 ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire Moderate Profile 2005......... 6 10.008 10.469 18 10.000 10.475 6 2006......... 7 10.469 11.510 43 10.475 11.528 64 2007......... N/A 11.510 12.340 38 11.528 12.372 70 ------------- ---- ------ -------- ---- ------ ------ ---- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005......... 6 N/A N/A N/A 10.122 10.652 20 2006......... 8 11.223 11.923 33 10.652 11.941 83 2007......... 11 11.923 12.847 27 11.941 12.880 82 ------------- ---- ------ -------- ---- ------ ------ ---- MFS VIT Core Equity 2001......... 1** 10.000 11.893(1) 1** 2002......... 1 11.893 8.208 19 2003......... 2 8.208 10.263 18 8.218 10.285 2 2004......... 1 10.263 11.315 18 10.285 11.351 2 2005......... 1 11.315 11.293 15 11.351 11.340 1 2006......... 1 11.293 12.608 14 11.340 12.673 1 2007......... 1 12.608 13.750 13 N/A N/A N/A ------------- ---- ------ -------- ---- ------ ------ ----
A-7
with EEB and Step-Up with EEB with Step-Up ----------------------------------------- ----------------------------------------- --------------------------- Accumulation unit value Accumulation unit value Accumulation unit value --------------------------- Number of --------------------------- Number of --------------------------- Beginning End of accumulation Beginning End of accumulation Beginning End of of period period units of period period units of period period ----------- --------------- ------------- ----------- --------------- ------------- ----------- --------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Emerging Growth Series 2001......... 10.000 12.125(1) 1** 10.000 11.039(2) 4 8.165 5.323 2002......... 12.125 7.869 1 11.039 7.168 1** 5.323 3.458 2003......... 7.869 10.032 1 7.168 9.143 4 3.458 4.413 2004......... 10.032 11.095 1 9.143 10.117 4 4.413 4.886 2005......... 11.095 11.857 1** 10.117 10.818 4 4.886 5.227 2006......... 11.857 12.520 1** 10.818 11.428 4 5.227 5.524 2007......... 12.520 14.849 1* 11.428 13.560 4 5.524 6.558 ------------- ------ -------- - ------ -------- - ----- ----- MFS VIT Total Return Series 2001......... 10.000 10.629(1) 1 10.000 10.630(1) 8 11.123 10.927 2002......... 10.629 9.871 29 10.630 9.877 18 10.927 10.158 2003......... 9.871 11.235 45 9.877 11.248 64 10.158 11.573 2004......... 11.235 12.240 51 11.248 12.259 74 11.573 12.620 2005......... 12.240 12.321 40 12.259 12.347 66 12.620 12.717 2006......... 12.321 13.495 36 12.347 13.530 63 12.717 13.942 2007......... 13.495 13.762 36 13.530 13.805 56 13.942 14.232 ------------- ------ -------- -- ------ -------- -- ------ ------ MFS VIT Utilities Series 2001......... 10.000 9.842(1) 1** 10.000 9.355(2) 18 9.892 7.340 2002......... 9.842 7.445 0 9.355 7.080 3 7.340 5.558 2003......... N/A N/A N/A 7.080 9.423 2 5.558 7.401 2004......... N/A N/A N/A 9.423 12.012 2 7.401 9.439 2005......... 13.047 14.432 1** 12.012 13.745 2 9.439 10.807 2006......... 14.432 18.544 1 13.745 17.671 3 10.807 13.900 2007......... 18.544 23.210 1 17.671 22.128 5 13.900 17.415 ------------- ------ -------- ---- ------ -------- -- ------ ------ Neuberger Berman AMT Mid-Cap Growth Portfolio 2001......... 10.000 11.996(1) 1** 10.000 11.997(1) 1** 10.000 11.999(1) 2002......... 11.996 8.316 16 11.997 8.320 1 11.999 8.326 2003......... 8.316 10.450 14 8.320 10.461 5 8.326 10.473 2004......... 10.450 11.926 2 10.461 11.944 5 10.473 11.964 2005......... 11.926 13.309 2 11.944 13.336 5 11.964 13.365 2006......... 13.309 14.978 4 13.336 15.016 5 13.365 15.056 2007......... 14.978 18.006 2 15.016 18.061 4 15.056 18.119 ------------- ------ -------- ---- ------ -------- -- ------ -------- Neuberger Berman AMT Regency Portfolio 2001......... 10.000 11.144(1) 1** 10.000 11.146(1) 1** 10.000 11.147(1) 2002......... 11.144 9.780 0 11.146 9.783 1 11.147 9.792 2003......... 9.419 13.045 1 9.783 13.047 2 9.387 13.075 2004......... 13.045 15.662 1** 13.047 15.672 3 13.075 15.713 2005......... 15.662 17.211 5 15.672 17.231 3 15.713 17.285 2006......... 17.211 18.773 5 17.231 18.803 2 17.285 18.872 2007......... 18.773 19.028 1 18.803 19.068 1 18.872 19.148 ------------- ------ -------- ---- ------ -------- -- ------ -------- Putnam VT Growth and Income Fund 2001......... 10.000 10.856(1) 1** 10.000 10.858(1) 1** 10.000 10.859(1) 2002......... 10.856 8.628 1 10.858 8.636 0 10.859 8.641 2003......... 8.628 10.783 1 8.986 10.801 1 8.641 10.810 2004......... 10.783 11.756 2 10.801 11.782 1 10.810 11.797 2005......... 11.756 12.138 1** 11.782 12.170 1 11.797 12.192 2006......... 12.138 13.805 1** 12.170 13.848 1 12.192 13.880 2007......... 13.805 12.727 1* 13.848 12.773 4 13.880 12.809 ------------- ------ -------- ---- ------ -------- -- ------ -------- Putnam VT Health Sciences Fund 2001......... 10.000 10.560(1) 1** 10.000 10.564(1) 1** 10.000 10.564(1) 2002......... 10.560 8.255 2 10.564 8.261 0 10.564 8.264 2003......... 8.255 9.590 2 N/A N/A N/A 8.264 9.610 2004......... 9.590 10.079 4 N/A N/A N/A 9.610 10.111 2005......... 10.079 11.195 2 N/A N/A N/A 10.111 11.241 2006......... 11.195 11.291 2 N/A N/A N/A 11.241 11.349 2007......... 11.291 11.012 2 N/A N/A N/A 11.349 11.079 ------------- ------ -------- ---- ------ -------- ---- ------ -------- with Step-Up with GOP ------------- ---------------------------------- Accumulation unit Accumulation unit value value Number of --------------------------- Number of -------------------- Number of accumulation Beginning End of accumulation Beginning End of accumulation units of period period units of period period units ------------- ----------- --------------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Emerging Growth Series 2001......... 38 8.170 5.334 121 2002......... 35 5.334 3.471 140 2003......... 1 3.471 4.436 29 7.904 10.112 2 2004......... 1 4.436 4.918 29 10.112 11.223 2 2005......... 1 4.918 5.269 21 11.223 12.037 2 2006......... 1 5.269 5.578 22 12.037 12.754 2 2007......... 1 5.578 6.632 19 12.754 15.179 2 ------------- -- ----- ----- --- ------ ------ - MFS VIT Total Return Series 2001......... 90 11.128 10.948 358 2002......... 212 10.948 10.193 550 2003......... 59 10.193 11.631 293 9.918 11.328 45 2004......... 72 11.631 12.702 445 11.328 12.384 143 2005......... 54 12.702 12.819 481 12.384 12.510 171 2006......... 39 12.819 14.075 419 12.510 13.750 160 2007......... 31 14.075 14.389 338 13.750 14.071 133 ------------- --- ------ ------ --- ------ ------ --- MFS VIT Utilities Series 2001......... 88 9.898 7.356 288 2002......... 61 7.356 5.579 202 2003......... 8 5.579 7.439 43 7.478 9.983 16 2004......... 8 7.439 9.502 55 9.983 12.763 20 2005......... 8 9.502 10.895 57 12.763 14.649 42 2006......... 15 10.895 14.035 65 14.649 18.890 43 2007......... 6 14.035 17.610 56 18.890 23.725 37 ------------- --- ------ ------ --- ------ ------ --- Neuberger Berman AMT Mid-Cap Growth Portfolio 2001......... 1** 10.000 12.004(1) 1** 2002......... 8 12.004 8.343 20 2003......... 9 8.343 10.510 56 8.353 10.534 25 2004......... 7 10.510 12.024 65 10.534 12.063 36 2005......... 6 12.024 13.453 69 12.063 13.510 20 2006......... 5 13.453 15.177 61 13.510 15.256 14 2007......... 4 15.177 18.292 57 15.256 18.406 14 ------------- --- ------ -------- --- ------ ------ --- Neuberger Berman AMT Regency Portfolio 2001......... 1** 10.000 11.150(1) 1** 2002......... 0 11.150 9.809 18 2003......... 1 9.809 13.107 55 9.823 13.139 25 2004......... 1** 13.107 15.776 58 13.139 15.830 29 2005......... 1 15.776 17.380 52 15.830 17.457 28 2006......... 1 17.380 19.005 49 17.457 19.108 25 2007......... 1 19.005 19.311 38 19.108 19.435 24 ------------- --- ------ -------- --- ------ ------ --- Putnam VT Growth and Income Fund 2001......... 1** 10.000 10.862(1) 1** 2002......... 4 10.862 8.654 8 2003......... 4 8.654 10.844 20 8.668 10.871 2 2004......... 4 10.844 11.851 20 10.871 11.894 6 2005......... 2 11.851 12.267 19 11.894 12.323 4 2006......... 2 12.267 13.986 17 12.323 14.064 4 2007......... 2 13.986 12.926 15 14.064 13.011 4 ------------- --- ------ -------- --- ------ ------ --- Putnam VT Health Sciences Fund 2001......... 1** 10.000 10.567(1) 1** 2002......... 2 10.567 8.279 5 2003......... 2 8.279 9.641 29 8.291 9.664 4 2004......... 2 9.641 10.159 33 9.664 10.193 4 2005......... 2 10.159 11.311 31 10.193 11.361 4 2006......... 2 11.311 11.437 34 11.361 11.499 3 2007......... 2 11.437 11.182 35 11.499 11.254 2 ------------- --- ------ -------- --- ------ ------ ---
** All numbers less than 500 were rounded up to one. (1) Commenced business on 9/19/01 with an initial unit value of $10. (2) Commenced business on 9/10/01 with an initial unit value of $10. (3) Commenced business on 9/21/01 with an initial unit value of $10. A-8 (4) Commenced business on 9/17/01 with an initial unit value of $10. (5) Effective April 30, 2007, the Lincoln Core Fund was reorganized into the LVIP S&P 500 Index Fund, a series of Lincoln Variable Insurance Products Trust. (6) Effective April 30, 2007, the Lincoln Growth Fund, was reorganized into the LVIP Janus Capital Appreciation Fund, a series of Lincoln Variable Insurance Products Trust. (7) Effective June 11, 2007, the Lincoln Growth Opportunities Fund was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. (8)Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund. A-9 [THIS PAGE INTENTIONALLY LEFT BLANK] 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.
1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) LINCOLN LIFETIME INCOME(SM) ADVANTAGE GUARANTEED INCOME LINCOLN BENEFIT LINCOLN LIFETIME SMART INCOME(SM) 3) i4LIFE(R) SECURITY(R) ADVANTAGE ADVANTAGE LINCOLN ADVANTAGE (WITH OR GUARANTEED SMART 1-YR. WITHOUT INCOME SECURITY(R) AUTOMATIC LINCOLN BENEFIT ADVANTAGE STEP-UP LIFETIME (VERSION 2) 5-YR. (PRIOR INCOME(SM) (PRIOR ELECTIVE VERSIONS ADVANTAGE i4LIFE(R) 4LATER(R) VERSIONS STEP-UP MAY VARY) PLUS) ADVANTAGE ADVANTAGE MAY VARY) ------------------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to Designed to Designed to Designed to Designed to Designed to use guarantee that at guarantee that if guarantee that if provide an guarantee today a the Income Base least the entire you make your you make your income program future minimum established under amount of your first withdrawal first withdrawal that combines payout floor for 4LATER(R) purchase payments on or after the on or after the variable lifetime i4LIFE(R) Advantage (if will be returned date you reach date you reach income payments Advantage regular 4LATER(R) to you through age 65, you are age 59 1/2 (age and a death income payments, Advantage periodic guaranteed 65 under Joint benefit with the regardless of Guaranteed Income withdrawals, income Life), you are ability to make investment Benefit is regardless of the for your life guaranteed income withdrawals performance, by elected) or the investment (and your for your life during a defined providing an Guaranteed Amount performance of spouse's, under (and your period. Income Base under LINCOLN the contract. Joint Life spouse's, under . during the Lifetime version), even Joint Life accumulation INCOME(SM) after the entire version). period that can Advantage (if amount of . be used to LINCOLN LIFETIME purchase payments LINCOLN LIFETIME establish in the INCOME(SM) has been returned INCOME(SM) future a Advantage to you through Advantage Plus is Guaranteed Income Guaranteed Income periodic designed to Benefit with Benefit is withdrawals. If guarantee that i4LIFE(R) elected) or the lifetime contract value Advantage. Account Value* withdrawals are will not be less . established under not in effect, than the initial i4LIFE(R) you may make purchase payment Advantage (if periodic (or contract i4LIFE(R) withdrawals of value on rider Advantage the Guaranteed date) at the end Guaranteed Income Amount. of a 7-year Benefit is period IF you elected) to make no provide a minimum withdrawals and payout floor for cancel the i4LIFE(R) LINCOLN LIFETIME Advantage regular INCOME(SM) income payments, Advantage at that regardless of time. investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage 2. Current Fee 0.45% of 0.65% (Single 0.75% of Varies based on 0.50% of Income 0.50% added to Guaranteed Amount Life) or 0.80% Guaranteed Amount product and death Base the i4LIFE(R) (Joint Life) of benefit option Advantage charge Guaranteed (0.90% with Amount LINCOLN LIFETIME (assessed as a % (assessed as a % INCOME(SM) of account value, of account value, Advantage Plus) and only during and only during annuity payout annuity payout phase) phase) 3. Guaranteed 0.95% of 1.50% of 1.50% of Same as current 1.50% of Income 1.50% added to Maximum Fee Guaranteed Amount Guaranteed Amount Guaranteed Amount fee Base the i4LIFE(R) Advantage charge (assessed as a % of account value, and only during annuity payout phase)
4. Withdrawals Yes-7% annually Yes-5% annually Yes-5% annually Yes, during Yes, only after No Permitted Access Period you elect Withdrawals i4LIFE(R) negate LINCOLN Advantage Lifetime INCOME(SM) Advantage Plus 5. Payments for Life No Yes (if Yes (if Yes (if If elect Yes (if conditions are conditions are conditions are i4LIFE(R) conditions are met) met) met) Advantage met) 6. Potential Increases Purchase Payments Purchase Payments Purchase Payments N/A Purchase Payments Automatic 3-Year to Guaranteed Step-Ups Amount, Income Optional 5-Year Automatic Annual 5% Enhancements 15% Enhancements Base, or Step-Ups Step-Ups (every 3 years) (if conditions Guaranteed Income Automatic Annual are met) Benefit (as (if conditions (if conditions Step-Ups Resets to applicable) are met) are met) contract value 200% Step-Up (if conditions (if conditions are met) are met) 7. Investment Option 1 Option 1 Option 2 None Option 1 Option 1 Requirements Option 2 for LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit 8. Ability to Make Yes Yes, after the Yes--may impact No (non-qualified Yes No Additional first rider the charge contracts) Purchase anniversary, if Payments if cumulative Yes, during Contract Value is payments are over Access Period, greater than zero $100,000 and unless 4LATER(R) prior Home Office Advantage approval is Guaranteed provided Income Benefit or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) 9. Spousal Yes Yes No No Yes (prior to No Continuation Periodic Income Commencement Date) 10. Ability to Cancel Yes, after 5 Yes, after 5 Yes, after 7 No (non-qualified Yes, after 3 Yes, after 3 Rider years following years following Years contracts) years following years following the later of the later of the later of the later of rider effective rider effective Yes, at any time rider effective rider effective date or date or (qualified date or most date or most contractowner- contractowner- contracts) recent Reset recent Reset (if elected step-up elected step-up 4LATER(R) Advantage Guaranteed Income Benefit or LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit is elected) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) 11. Nursing Home No No Yes No No No Benefit 12. May Elect Other No No No Limited to No (prior to the Limited to Living Benefit Guaranteed Income Periodic Income i4LIFE(R) Riders Benefit Commencement Advantage Date)
Lincoln ChoicePlus IISM Access 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 ChoicePlus IISM Access prospectus of Lincoln Life Variable Annuity Account N dated April 30, 2008. You may obtain a copy of the Lincoln ChoicePlus IISM Access prospectus on request and without charge. Please write Lincoln Life Customer Service, The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, 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 Advertising B-5 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is April 30, 2008. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm The financial statements of the VAA and the consolidated financial statements of Lincoln Life appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, 2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as set forth in their reports, also appearing in this SAI and in the Registration Statement. The financial statements audited by Ernst & Young LLP have been included herein in reliance on their 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 Mellon Bank, N.A., 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, our affiliate. 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. Lincoln Life (prior to May 1, 2007) and LFD (on or after May 1, 2007) acting as Principal Underwriter paid, $115,249,891, $162,288,944 and $223,104,195 to LFA and Selling Firms in 2005, 2006 and 2007, 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%
Formula (1 + Index A)n ------------------------------ -1 (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment 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 INTEREST ADJUSTMENT 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% 15-year Access Period 30-Year Access Period Regular Income Payment .............. $ 10,813.44 $10,004.94
A 10% withdrawal from the account value will reduce the regular income payments by 10% to $9,732.10 with the 15-year access period and $9,004.45 with the 30-year access period. At the end of the 15-year access period, the remaining account value of $135,003.88 (assuming no withdrawals) will be used to continue the $10,813.44 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. Advertising The Lincoln National Life Insurance Company (Lincoln Life) is ranked and rated by independent financial rating services, including Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The purpose of these ratings is to reflect the financial strength or claims-paying ability of Lincoln Life. The ratings are not intended to reflect the investment experience or financial strength of the VAA. B-5 We may advertise these ratings from time to time. In addition, 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. More About the S&P 500 Index. Investors look to indexes as a standard of market performance. Indexes are model portfolios, that is, 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 seeks to approximate as closely as possible, before fees and expenses, the total return of the S&P 500 Index. To accomplish this objective the fund's sub-adviser, SSgA Funds Management, Inc. ("SFM"), attempts to buy and sell all of the index's securities in the same proportion as they are reflected in the S&P 500 Index, although the fund reserves the right not to invest in every security in the S&P 500 Index if it is not practical to do so under the circumstances. SFM does not seek to beat the S&P 500 Index and does not seek temporary defensive positions when markets appear to be overvalued. SFM makes no attempt to apply economic, financial or market analysis when managing the fund. Including a security among the fund's holdings implies no opinion as to its attractiveness as an investment. The fund may invest in stock index futures and options on stock index futures as a substitute for a comparable market position in the underlying securities. A stock index future obligates one party to deliver (and the other party to take), effectively, an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. Instead, the buyer and seller settle the difference in cash between the contract price and the market price on the agreed upon date. The buyer pays the difference if the actual price is lower than the contract price and the seller pays the difference if the actual price is higher. There can be no assurance that a liquid market will exist at the time when the fund seeks to close out a futures contract or a futures option position. Lack of a liquid market may prevent liquidation of an unfavorable position. The 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, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts. 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 $2,000 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. 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. Cross Reinvestment Program/Earnings Sweep Program - Under this option, account value in a designated variable subaccount of the contract that exceeds a certain baseline amount is automatically transferred to another specific variable subaccount(s) of the contract at specific intervals. You may elect to participate in the cross reinvestment program at the time of application or at any time before the annuity commencement date by sending a written request to us or by telephone if we have your telephone authorization on file. You designate the holding account, the receiving account(s), and the baseline amount. Cross reinvestment will continue until we receive authorization to terminate the program. The minimum holding account value required to establish cross-reinvestment is $10,000. A transfer under this program is not considered a transfer for purposes of limiting the number of transfers that may be made. We reserve the right to discontinue this service at any time. 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. Once the portfolio rebalancing option is activated, any variable subaccount transfers executed outside of the portfolio rebalancing program will terminate the portfolio rebalancing program. Any subsequent purchase payment or withdrawal that modifies the account balance within each variable subaccount may also cause termination of the portfolio rebalancing program. Any such termination will be confirmed to 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 Financial statements of the VAA and the consolidated financial statements of Lincoln Life appear on the following pages. B-7 Prospectus 3 Lincoln ChoicePlus AssuranceSM (C Share) 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 46802-7866 www.LFG.com 1-888-868-2583 This prospectus describes the individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). It is primarily for use with nonqualified plans and qualified retirement plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a variable or fixed amount, if available, or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. In the alternative, you generally may choose to receive a death benefit upon the death of the annuitant. The minimum initial purchase payment for the contract is $10,000. Additional purchase payments may be made to the contract and must be at least $100 per payment ($25 if transmitted electronically), and at least $300 annually. Except as noted below, you choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. Your contract may not offer a fixed account or if permitted by your contract, we may discontinue accepting purchase payments or transfers into the fixed side of the contract at any time. If your purchase payments are in the fixed account, we guarantee 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. Currently, there is no fixed account offered in this product. 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: AIM Variable Insurance Funds (Series II): AIM V.I. Capital Appreciation Fund* AIM V.I. Core Equity Fund* AIM V.I. International Growth Fund* AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Technology Portfolio AllianceBernstein VPS Growth and Income Portfolio AllianceBernstein VPS International Value Portfolio AllianceBernstein VPS Large Cap Growth Portfolio* AllianceBernstein VPS Small/Mid Cap Value Portfolio American Century Investments Variable Products (Class II): American Century Investments VP Inflation Protection Fund American Funds Insurance SeriesSM (Class 2): American Funds Global Growth Fund American Funds Global Small Capitalization Fund American Funds Growth Fund American Funds Growth-Income Fund American Funds International Fund 1 Delaware VIP Trust (Service Class): Delaware VIP Capital Reserves Series Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP High Yield Series Delaware VIP REIT Series* Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP U.S. Growth Series Delaware VIP Value Series DWS Investments VIT Funds (Class B): DWS Equity 500 Index VIP* DWS Small Cap Index VIP* Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund Portfolio Fidelity (Reg. TM) VIP Equity-Income Portfolio* Fidelity (Reg. TM) VIP Growth Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Fidelity (Reg. TM) VIP Overseas Portfolio Franklin Templeton Variable Insurance Products Trust (Class 2): FTVIPT Franklin Income Securities Fund FTVIPT Franklin Small-Mid Cap Growth Securities Fund FTVIPT Mutual Shares Securities Fund FTVIPT Templeton Global Income Securities Fund FTVIPT Templeton Growth Securities Fund* Janus Aspen Series (Service Class): Janus Aspen Balanced Portfolio* Janus Aspen Mid Cap Growth Portfolio* Janus Aspen Worldwide Growth Portfolio* Lincoln Variable Insurance Products Trust (Service Class): LVIP Baron Growth Opportunities Fund LVIP Capital Growth Fund LVIP Cohen & Steers Global Real Estate Fund LVIP Columbia Value Opportunities Fund (formerly Value Opportunities Fund) LVIP Delaware Bond Fund LVIP Delaware Growth and Income Fund LVIP Delaware Social Awareness Fund LVIP Delaware Special Opportunities Fund LVIP FI Equity-Income Fund* LVIP Janus Capital Appreciation Fund LVIP Marsico 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 Developed International 150 Fund* LVIP SSgA Emerging Markets 100 Fund* LVIP SSgA International Index Fund* LVIP SSgA Large Cap 100 Fund* LVIP SSgA Small/Mid Cap 200 Fund* LVIP SSgA S&P 500 Index Fund** (formerly S&P 500 Index Fund) LVIP SSgA Small-Cap Index Fund (formerly Small-Cap Index Fund) LVIP T. Rowe Price Growth Stock Fund LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP Templeton Growth Fund LVIP Turner Mid-Cap Growth Fund (formerly Mid-Cap Growth Fund) LVIP UBS Global Asset Allocation Fund LVIP Wilshire 2010 Profile Fund LVIP Wilshire 2020 Profile Fund LVIP Wilshire 2030 Profile Fund LVIP Wilshire 2040 Profile Fund LVIP Wilshire Aggressive Profile Fund LVIP Wilshire Conservative Profile Fund LVIP Wilshire Moderate Profile Fund LVIP Wilshire Moderately Aggressive Profile Fund MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Core Equity Series* MFS (Reg. TM) VIT Growth Series* (formerly Emerging Growth Series) MFS (Reg. TM) VIT Total Return Series MFS (Reg. TM) VIT Utilities Series Neuberger Berman Advisers Management Trust (I Class): Neuberger Berman AMT Mid-Cap Growth Portfolio* Neuberger Berman AMT Regency Portfolio* Putnam Variable Trust (Class IB): Putnam VT Growth & Income Fund* Putnam VT Health Sciences Fund* * Not all funds are available in all contracts. Refer to Description of Funds for specific information regarding the availability of funds. **"S&P 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing the product. (Please see the Statement of Additional Information which sets forth additional disclaimers and limitations of liability on behalf of S&P.) This prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectuses for the funds that accompany this prospectus, and keep all prospectuses for future reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI is incorporated by reference into this prospectus and is legally part of this prospectus. For a free copy of the SAI, write: The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, 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. April 30, 2008 2 Table of Contents
Item Page Special Terms 4 Expense Tables 5 Summary of Common Questions 13 The Lincoln National Life Insurance Company 15 Variable Annuity Account (VAA) 15 Investments of the Variable Annuity Account 16 Charges and Other Deductions 21 The Contracts 25 Purchase Payments 26 Persistency Credits 26 Transfers On or Before the Annuity Commencement Date 27 Surrenders and Withdrawals 30 Death Benefit 32 Investment Requirements - Option 1 36 Investment Requirements - Option 2 37 Lincoln Lifetime IncomeSM Advantage 38 Lincoln SmartSecurity (Reg. TM) Advantage 47 i4LIFE (Reg. TM) Advantage 53 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 58 4LATER (Reg. TM) Advantage 60 Annuity Payouts 64 Fixed Side of the Contract 66 Distribution of the Contracts 69 Federal Tax Matters 70 Additional Information 74 Voting Rights 74 Return Privilege 74 Other Information 75 Legal Proceedings 75 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 76 Appendix A - Condensed Financial Information A-1 Appendix B - Condensed Financial Information B-1
3 Special Terms In this prospectus, the following terms have the indicated meanings: 4LATER (Reg. TM) Advantage or 4LATER (Reg. TM) - An option that provides an Income Base during the accumulation period, which can be used to establish a Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage in the future. Account or variable annuity account (VAA) - The segregated investment account, Account N, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date. 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. Guaranteed Income Benefits - Options that each provide a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. 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 - Provides minimum guaranteed lifetime periodic withdrawals that may increase. The Lincoln Lifetime IncomeSM Advantage Plus may provide an amount equal to the excess of the initial Guaranteed Amount over the current contract value. Lincoln SmartSecurity (Reg. TM) Advantage - Provides minimum guaranteed periodic withdrawals (for life, if the 1 Year Automatic Step-Up option is chosen), 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 Smart Security (Reg. TM) Advantage, Lincoln Lifetime Income AdvantageSM, 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit). Persistency credit - The additional amount credited to the contract after the seventh contract anniversary. 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 is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 4 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 the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: We may apply the interest adjustment to amounts being withdrawn, surrendered or transferred from a guaranteed period account only (except for dollar cost averaging, portfolio rebalancing and cross-reinvestment, withdrawals up to the annual withdrawal limit under the Lincoln SmartSecurity (Reg. TM) Advantage and regular income payments under i4LIFE (Reg. TM) Advantage). See Fixed Side of the Contract. 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. Annual Account Fee: $35* Separate Account Annual Expenses (as a percentage of average daily net assets in the subaccounts):
With Estate Enhanced Guaranteed Guarantee of Enhancement Minimum death Principal death Account Benefit Rider (EEB) benefit (EGMDB) benefit Value death benefit --------------------- --------------------- ----------------- -------------------- o Mortality and expense risk charge 2.05% 1.85% 1.60% 1.55% o Administrative charge 0.10% 0.10% 0.10% 0.10% ---- ---- ---- ---- o Total annual charge for each subaccount 2.15% 1.95% 1.70% 1.65%
*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. **For contracts purchased before June 6, 2005 (or later in those states that have not approved the contract changes), the total annual charges are as follows: EEB 1.85%; EGMDB 1.65%; Guarantee of Principal 1.55%; Account Value N/A. In the event of a subsequent death benefit change, the charge will be based on the charges in effect at the time the contract was purchased. Optional Rider Charges: Lincoln Lifetime IncomeSMAdvantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.75% o Additional charge for Lincoln Lifetime IncomeSM Advantage Plus* 0.15%
*The annual percentage charge is assessed against the Guaranteed Amount (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. These changes to the Guaranteed Amount are discussed below. This charge is deducted from the contract value on a quarterly basis. See Charges and Other Deductions for further information. Lincoln SmartSecurity (Reg. TM) Advantage:
o Guaranteed maximum annual percentage charge* o Current annual percentage charge* Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Advantage - 5 Year Elective Step-Up option Step-Up option Step-Up option - Single Life (and prior version) - Joint Life --------------------------------- ----------------------------------- -------------------------------- o 0.95% 1.50% 1.50% o 0.45% 0.65% 0.80%
*The annual percentage charge is assessed against 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 for further information. 5 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* 0.50%
*The annual percentage charge for the 4LATER (Reg. TM) Advantage is multiplied by the Income Base (initial purchase payment or contract value at the time of election) as increased for subsequent purchase payments, automatic 15% Enhancements, and Resets and decreased for withdrawals. The 4LATER (Reg. TM) charge is deducted from the subaccounts on a quarterly basis. The next table describes charges that apply only when i4LIFE (Reg. TM) Advantage is in effect. The charge for any Guaranteed Income Benefit, if elected, is added to the i4LIFE (Reg. TM) Advantage charge and the total is deducted from your average daily account value. i4LIFE (Reg. TM) Advantage Payout Phase (On and After the Periodic Income Commencement Date): i4LIFE (Reg. TM) Advantage (as a daily percentage of average account value):
Enhanced Guaranteed Guarantee of Minimum Death Principal Death Benefit (EGMDB) Benefit Account Value Death Benefit --------------------- ---------------- ---------------------------- o Annual charge* 2.35% 2.10% 2.05%
*During the Lifetime Income Period, the charge will be the same rate as the i4LIFE (Reg. TM) Advantage Account Value Death Benefit. Optional Rider Charges : i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
4LATERSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit (as a daily percentage of average account value): o Guaranteed maximum annual percentage charge 1.50% o Current annual percentage charge 0.50%
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 2.35% with the 4LATERSM Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.85%. The next table describes the separate account annual expenses you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
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, 2007. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Maximum Minimum --------- -------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses): 6.31% 0.52% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.73% 0.52%
* 38 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, 2009. 6 The following table shows the expenses charged by each fund for the year ended December 31, 2007: (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) + AIM V.I. Capital Appreciation Fund (Series II)(1) 0.61 % 0.25 % 0.27 % AIM V.I. Core Equity Fund (Series II Shares)(2) 0.60 0.25 0.28 AIM V.I. International Growth Fund (Series II)(2) 0.71 0.25 0.36 AllianceBernstein VPS Global Technology Portfolio (Class B) 0.75 0.25 0.17 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.55 0.25 0.04 AllianceBernstein VPS International Value Portfolio (Class B) 0.75 0.25 0.06 AllianceBernstein VPS Large Cap Growth Portfolio (Class B) 0.75 0.25 0.07 AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B) 0.75 0.25 0.08 American Century VP Inflation Protection Fund (Class II)(3)(4) 0.49 0.25 0.01 American Funds Global Growth Fund (Class 2)* 0.53 0.25 0.02 American Funds Global Small Capitalization Fund (Class 2)* 0.70 0.25 0.03 American Funds Growth Fund (Class 2)* 0.32 0.25 0.01 American Funds Growth-Income Fund (Class 2)* 0.26 0.25 0.01 American Funds International Fund (Class 2)* 0.49 0.25 0.03 Delaware VIP Capital Reserves Series (Service Class)(5) 0.50 0.30 0.18 Delaware VIP Diversified Income Series (Service Class) (6) 0.64 0.30 0.09 Delaware VIP Emerging Markets Series (Service Class)(7) 1.25 0.30 0.23 Delaware VIP High Yield Series (Service Class)(8) 0.65 0.30 0.10 Delaware VIP REIT Series (Service Class)(9) 0.73 0.30 0.10 Delaware VIP Small Cap Value Series (Service Class)(10) 0.71 0.30 0.10 Delaware VIP Trend Series (Service Class)(11) 0.75 0.30 0.11 Delaware VIP U.S. Growth Series (Service Class)(12) 0.65 0.30 0.09 Delaware VIP Value Series (Service Class)(13) 0.64 0.30 0.09 DWS Equity 500 Index VIP (Class B)(14)(15) 0.19 0.25 0.12 DWS Small Cap Index VIP (Class B)(15) 0.35 0.25 0.15 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(16) 0.56 0.25 0.09 Fidelity VIP Equity-Income Portfolio (Service Class 2) 0.46 0.25 0.09 Fidelity (Reg. TM) VIP Growth Portfolio (Service Class 2)(17) 0.56 0.25 0.09 Fidelity (Reg. TM) VIP Mid Cap Portfolio (Service Class 2)(18) 0.56 0.25 0.10 Fidelity (Reg. TM) VIP Overseas Portfolio (Service Class 2)(19) 0.71 0.25 0.14 FTVIPT Franklin Income Sercurities Fund (Class 2) 0.45 0.25 0.02 FTVIPT Franklin Small-Mid Cap Growth Securities Fund (Class 2)(20) 0.47 0.25 0.28 FTVIPT Mutual Shares Securities Fund (Class 2) 0.59 0.25 0.13 FTVIPT Templeton Global Income Sercurities Fund (Class 2) 0.50 0.25 0.14 FTVIPT Templeton Growth Securities Fund (Class 2) 0.73 0.25 0.03 Janus Aspen Balanced Portfolio (Service Class)(21)(22) 0.55 0.25 0.02 Janus Aspen Mid Cap Growth Portfolio (Service Class)(21)(22) 0.64 0.25 0.04 Janus Aspen Worldwide Growth Portfolio (Service Class)(21)(22)(23) 0.65 0.25 0.02 LVIP Baron Growth Opportunities Fund (Service Class)(24) 1.00 0.25 0.08 LVIP Capital Growth Fund (Service Class)(25) 0.73 0.25 0.07 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) AIM V.I. Capital Appreciation Fund (Series II)(1) 0.00 % 1.13 % AIM V.I. Core Equity Fund (Series II Shares)(2) 0.02 1.15 -0.01 % 1.14 % AIM V.I. International Growth Fund (Series II)(2) 0.01 1.33 -0.01 1.32 AllianceBernstein VPS Global Technology Portfolio (Class B) 0.00 1.17 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.00 0.84 AllianceBernstein VPS International Value Portfolio (Class B) 0.00 1.06 AllianceBernstein VPS Large Cap Growth Portfolio (Class B) 0.00 1.07 AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B) 0.00 1.08 American Century VP Inflation Protection Fund (Class II)(3)(4) 0.00 0.75 American Funds Global Growth Fund (Class 2)* 0.00 0.80 American Funds Global Small Capitalization Fund (Class 2)* 0.00 0.98 American Funds Growth Fund (Class 2)* 0.00 0.58 American Funds Growth-Income Fund (Class 2)* 0.00 0.52 American Funds International Fund (Class 2)* 0.00 0.77 Delaware VIP Capital Reserves Series (Service Class)(5) 0.00 0.98 -0.11 0.87 Delaware VIP Diversified Income Series (Service Class) (6) 0.00 1.03 -0.05 0.98 Delaware VIP Emerging Markets Series (Service Class)(7) 0.00 1.78 -0.05 1.73 Delaware VIP High Yield Series (Service Class)(8) 0.00 1.05 -0.06 0.99 Delaware VIP REIT Series (Service Class)(9) 0.00 1.13 -0.05 1.08 Delaware VIP Small Cap Value Series (Service Class)(10) 0.00 1.11 -0.05 1.06 Delaware VIP Trend Series (Service Class)(11) 0.00 1.16 -0.05 1.11 Delaware VIP U.S. Growth Series (Service Class)(12) 0.00 1.04 -0.05 0.99 Delaware VIP Value Series (Service Class)(13) 0.00 1.03 -0.05 0.98 DWS Equity 500 Index VIP (Class B)(14)(15) 0.00 0.56 -0.03 0.53 DWS Small Cap Index VIP (Class B)(15) 0.00 0.75 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(16) 0.00 0.90 Fidelity VIP Equity-Income Portfolio (Service Class 2) 0.00 0.80 Fidelity (Reg. TM) VIP Growth Portfolio (Service Class 2)(17) 0.00 0.90 Fidelity (Reg. TM) VIP Mid Cap Portfolio (Service Class 2)(18) 0.00 0.91 Fidelity (Reg. TM) VIP Overseas Portfolio (Service Class 2)(19) 0.00 1.10 FTVIPT Franklin Income Sercurities Fund (Class 2) 0.00 0.72 FTVIPT Franklin Small-Mid Cap Growth Securities Fund (Class 2)(20) 0.01 1.01 -0.01 1.00 FTVIPT Mutual Shares Securities Fund (Class 2) 0.00 0.97 FTVIPT Templeton Global Income Sercurities Fund (Class 2) 0.00 0.89 FTVIPT Templeton Growth Securities Fund (Class 2) 0.00 1.01 Janus Aspen Balanced Portfolio (Service Class)(21)(22) 0.00 0.82 Janus Aspen Mid Cap Growth Portfolio (Service Class)(21)(22) 0.00 0.93 Janus Aspen Worldwide Growth Portfolio (Service Class)(21)(22)(23) 0.00 0.92 LVIP Baron Growth Opportunities Fund (Service Class)(24) 0.00 1.33 -0.04 1.29 LVIP Capital Growth Fund (Service Class)(25) 0.00 1.05 -0.02 1.03
7
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + LVIP Cohen & Steers Global Real Estate Fund (Service Class)(26)(27) 0.95 % 0.25 % 0.15 % LVIP Columbia Value Opportunities Fund (Service Class)(28) 1.05 0.25 0.12 LVIP Delaware Bond Fund (Service Class) 0.34 0.35 0.06 LVIP Delaware Growth and Income Fund (Service Class) 0.33 0.35 0.07 LVIP Delaware Social Awareness Fund (Service Class) 0.35 0.35 0.06 LVIP Delaware Special Opportunities Fund (Service Class) 0.37 0.35 0.07 LVIP FI Equity-Income Fund (Service Class)(29) 0.73 0.25 0.08 LVIP Janus Capital Appreciation Fund (Service Class)(30) 0.74 0.25 0.08 LVIP Marsico International Growth Fund (Service Class)(31) 0.93 0.25 0.11 LVIP MFS Value Fund (Service Class)(32) 0.70 0.25 0.08 LVIP Mid-Cap Value Fund (Service Class)(33) 0.93 0.25 0.10 LVIP Mondrian International Value Fund (Service Class) 0.68 0.25 0.12 LVIP Money Market Fund (Service Class) 0.37 0.25 0.07 LVIP SSgA Bond Index Fund (Service Class)(34) 0.40 0.25 0.13 LVIP SSgA Developed International 150 Fund (Service Class)(35) 0.75 0.25 0.17 LVIP SSgA Emerging Markets 100 Fund (Service Class)(36) 1.09 0.25 0.36 LVIP SSgA International Index Fund (Service Class)(37) 0.40 0.25 0.24 LVIP SSgA Large Cap 100 Fund (Service Class)(38) 0.52 0.25 0.12 LVIP SSgA Small/Mid Cap 200 Fund (Service Class)(39) 0.69 0.25 0.12 LVIP SSgA S&P 500 Index Fund (Service Class)(40) 0.24 0.25 0.08 LVIP SSgA Small-Cap Index Fund (Service Class)(41) 0.32 0.25 0.16 LVIP T. Rowe Price Growth Stock Fund (Service Class)(42) 0.74 0.25 0.09 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class) 0.73 0.25 0.09 LVIP Templeton Growth Fund (Service Class)(43)(44) 0.74 0.25 0.10 LVIP Turner Mid-Cap Growth Fund (Service Class)(45)(46) 0.89 0.25 0.17 LVIP UBS Global Asset Allocation Fund (Service Class)(47) 0.73 0.25 0.14 LVIP Wilshire 2010 Profile Fund (Service Class)(48)(49) 0.25 0.25 3.18 LVIP Wilshire 2020 Profile Fund (Service Class)(48)(49) 0.25 0.25 1.45 LVIP Wilshire 2030 Profile Fund (Service Class)(48)(49) 0.25 0.25 2.61 LVIP Wilshire 2040 Profile Fund (Service Class)(48)(49) 0.25 0.25 4.89 LVIP Wilshire Aggressive Profile Fund (Service Class)(48)(49) 0.25 0.25 0.09 LVIP Wilshire Conservative Profile Fund (Service Class)(48)(49) 0.25 0.25 0.08 LVIP Wilshire Moderate Profile Fund (Service Class)(48)(49) 0.25 0.25 0.04 LVIP Wilshire Moderately Aggressive Profile Fund (Service Class)(48)(49) 0.25 0.25 0.04 MFS (Reg. TM) VIT Core Equity Fund (Service Class)(50)(51)(52) 0.75 0.25 0.27 MFS (Reg. TM) VIT Growth Fund (Service Class)(50)(52) 0.75 0.25 0.12 MFS (Reg. TM) VIT Total Return Series (Service Class)(50)(52)(53) 0.75 0.25 0.08 MFS (Reg. TM) VIT Utilities Series (Service Class)(50)(52)(54) 0.75 0.25 0.10 Neuberger Berman AMT Mid-Cap Growth Portfolio (I Class)(55) 0.82 0.00 0.07 Neuberger Berman AMT Regency Portfolio (I Class)(55) 0.84 0.00 0.11 Putnam VT Growth & Income Fund (Class 1B)(56) 0.50 0.25 0.05 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 Cohen & Steers Global Real Estate Fund (Service Class)(26)(27) 0.00 % 1.35 % -0.25 % 1.10 % LVIP Columbia Value Opportunities Fund (Service Class)(28) 0.00 1.42 LVIP Delaware Bond Fund (Service Class) 0.00 0.75 LVIP Delaware Growth and Income Fund (Service Class) 0.00 0.75 LVIP Delaware Social Awareness Fund (Service Class) 0.00 0.76 LVIP Delaware Special Opportunities Fund (Service Class) 0.00 0.79 LVIP FI Equity-Income Fund (Service Class)(29) 0.00 1.06 -0.07 0.99 LVIP Janus Capital Appreciation Fund (Service Class)(30) 0.00 1.07 -0.13 0.94 LVIP Marsico International Growth Fund (Service Class)(31) 0.00 1.29 -0.01 1.28 LVIP MFS Value Fund (Service Class)(32) 0.00 1.03 LVIP Mid-Cap Value Fund (Service Class)(33) 0.00 1.28 LVIP Mondrian International Value Fund (Service Class) 0.00 1.05 LVIP Money Market Fund (Service Class) 0.00 0.69 LVIP SSgA Bond Index Fund (Service Class)(34) 0.00 0.78 -0.08 0.70 LVIP SSgA Developed International 150 Fund (Service Class)(35) 0.00 1.17 -0.41 0.76 LVIP SSgA Emerging Markets 100 Fund (Service Class)(36) 0.00 1.70 -0.75 0.95 LVIP SSgA International Index Fund (Service Class)(37) 0.00 0.89 -0.19 0.70 LVIP SSgA Large Cap 100 Fund (Service Class)(38) 0.00 0.89 -0.18 0.71 LVIP SSgA Small/Mid Cap 200 Fund (Service Class)(39) 0.00 1.06 -0.35 0.71 LVIP SSgA S&P 500 Index Fund (Service Class)(40) 0.00 0.57 -0.04 0.53 LVIP SSgA Small-Cap Index Fund (Service Class)(41) 0.00 0.73 -0.02 0.71 LVIP T. Rowe Price Growth Stock Fund (Service Class)(42) 0.00 1.08 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class) 0.00 1.07 LVIP Templeton Growth Fund (Service Class)(43)(44) 0.00 1.09 -0.07 1.02 LVIP Turner Mid-Cap Growth Fund (Service Class)(45)(46) 0.00 1.31 -0.07 1.24 LVIP UBS Global Asset Allocation Fund (Service Class)(47) 0.05 1.17 LVIP Wilshire 2010 Profile Fund (Service Class)(48)(49) 0.76 4.44 -3.18 1.26 LVIP Wilshire 2020 Profile Fund (Service Class)(48)(49) 0.79 2.74 -1.45 1.29 LVIP Wilshire 2030 Profile Fund (Service Class)(48)(49) 0.88 3.99 -2.61 1.38 LVIP Wilshire 2040 Profile Fund (Service Class)(48)(49) 0.92 6.31 -4.89 1.42 LVIP Wilshire Aggressive Profile Fund (Service Class)(48)(49) 1.02 1.61 -0.09 1.52 LVIP Wilshire Conservative Profile Fund (Service Class)(48)(49) 0.77 1.35 -0.08 1.27 LVIP Wilshire Moderate Profile Fund (Service Class)(48)(49) 0.89 1.43 -0.04 1.39 LVIP Wilshire Moderately Aggressive Profile Fund (Service Class)(48)(49) 0.92 1.46 -0.04 1.42 MFS (Reg. TM) VIT Core Equity Fund (Service Class)(50)(51)(52) 0.00 1.27 -0.12 1.15 MFS (Reg. TM) VIT Growth Fund (Service Class)(50)(52) 0.00 1.12 MFS (Reg. TM) VIT Total Return Series (Service Class)(50)(52)(53) 0.00 1.08 -0.03 1.05 MFS (Reg. TM) VIT Utilities Series (Service Class)(50)(52)(54) 0.00 1.10 -0.03 1.07 Neuberger Berman AMT Mid-Cap Growth Portfolio (I Class)(55) 0.00 0.89 Neuberger Berman AMT Regency Portfolio (I Class)(55) 0.00 0.95 Putnam VT Growth & Income Fund (Class 1B)(56) 0.00 0.80
8
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + Putnam VT Health Sciences Fund (Class 1B)(56)(57) 0.70 % 0.25 % 0.13 % Total Total Expenses Total Expenses (before Contractual (after Acquired any waivers/ Contractual Fund waivers/ reimburse- waivers/ Fees and reimburse- ments reimburse- Expenses = ments) (if any) ments) Putnam VT Health Sciences Fund (Class 1B)(56)(57) 0.00 % 1.08 %
(*) The investment adviser is voluntarily waiving up to 10% of its management fee. The waiver may be disconintued at any time in consultation with the Series' board, but it is expected to continue at its current level until further review. Total annual fund operating expenses do not reflect this waiver. Information regarding the effect of any waiver on total annual fund operating expenses can be found in the Financial Highlights table in the Series' prospectus and in the audited financial statements in the Series' annual report. (1) Except as otherwise noted, figures shown in the table are for the year ended December 31, 2007 and are expressed as a percentage of the Fund's average daily net assets. There is no guarantee that actual expenses will be the same as those shown in the table. The Fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series II shares to the extent necessary to limit Total Annual Fund Operating Expenses (In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the Total Annual Fund Operating Expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. These credits are used to pay certain expenses incurred by the Fund.) of Series II shares to 1.45% of average daily net assets. The expense limitation agreement is in effect through at least April 30, 2009. (2) Except as otherwise noted, figures shown in the table are for the year ended December 31, 2007 and are expressed as a percentage of the Fund's average daily net assets. There is no guarantee that actual expenses will be the same as those shown in the table. Acquired Fund Fees and Expenses are not fees or expenses incurred by the fund directly but are expenses of the investment companies in which the fund invests. You incur these fees and expenses indirectly through the valuation of the fund's investment in those investment companies. As a result, the Net Annual Fund Operating Expenses listed above may exceed the limit on Total Annual Fund Operating Expenses, if any. The impact of the acquired fund fees and expense are included in the total returns of the Fund. The Fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series II shares to the extent necessary to limit Total Annual Fund Operating Expenses (In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the Total Annual Fund Operating Expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. These credits are used to pay certain expenses incurred by the Fund.) of Series II shares to 1.45% of average daily net assets. The expense limitation agreement is in effect through at least April 30, 2009. Effective July 1, 2007, AIM contractually agreed to waive 100% of the advisory fee AIM receives from affiliated money market funds on investments by the fund in such affiliated money market funds. Fee Waiver reflects this agreement. This waiver agreement is in effect through at least April 30, 2009. (3) The fund pays the advisor a single, unified management fee for arranging all services necessary for the fund to operate. The fee shown is based on assets during the fund's most recent fiscal year. The fund has a stepped fee schedule. As a result, the fund's unified management fee rate generally decreases as assets increase and increases as assets decrease. (4) Other expenses include the fees and expenses of the fund's independent directors and their legal counsel, interest and fees and expenses incurred indirectly by the fund as a result of investment in shares of one or more mutual funds, hedge funds, private equity funds or other pooled investment vehicles. (5) The investment advisor for the Delaware VIP Capital Reserves Series is Delaware Management Company ("DMC"). For the period May 1, 2008 through April 30, 2009, the advisor has contracted to waive all or a portion of its investment advisory fees and/or reimburse expenses in order to prevent total annual series operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, "non-routine expenses")) from exceeding, in an aggregate amount, 0.62% of average daily net assets. Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.50% on the first $500 million, 0.475% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (6) The investment advisor for the Delaware VIP Diversified Income Series is Delaware Management Company ("DMC"). Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (7) The investment advisor for the Delaware VIP Emerging Markets Series is Delaware Management Company ("DMC"). For the period May 1, 2007 through April 30, 2008, the advisor contracted to waive all or a portion of its investment advisory fees and/or reimburse expenses in order to prevent total annual series operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, "non-routine expenses")) from exceeding, in an aggregate amount, 1.50% of average daily net assets. Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 1.25% on the first $500 million, 1.20% on the next $500 million, 1.15% on the next $1.5 billion, and 1.10% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. 9 (8) The investment advisor for the Delaware VIP High Yield Series is Delaware Management Company ("DMC"). For the period May 1, 2007 through April 30, 2009, the advisor has contracted to waive all or a portion of its investment advisory fees and/or reimburse expenses in order to prevent total annual series operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, "non-routine expenses"))from exceeding, in an aggregate amount, 0.74% of average daily net assets. Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (9) The investment advisor for the Delaware VIP REIT Series is Delaware Management Company ("DMC"). For the period May 1, 2007 through April 30, 2008, the advisor contracted to waive all or a portion of its investment advisory fees and/or reimburse expenses in order to prevent total annual operating series expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, "non-routine expenses")) from exceeding, in an aggregate amount, 1.00% of average daily net assets. Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.75% on the first $500 million, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (10) The investment advisor for the Delaware VIP Small Cap Value Series is Delaware Management Company ("DMC"). Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.75% on the first $500 million, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (11) The investment advisor for the Delaware VIP Trend Series is Delaware Management Company ("DMC"). Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.75% on the first $500 million, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (12) The investment advisor for the Delaware VIP US Growth Series is Delaware Management Company ("DMC"). Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (13) The investment advisor for the Delaware VIP Value Series is Delaware Management Company ("DMC"). For the period May 1, 2007 until such time as the waiver is discontinued, the advisor has agreed to voluntarily waive all or a portion of its investment advisory fees and/or reimburse expenses in order to prevent total annual series operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, "non-routine expenses")) from exceeding, in an aggregate amount, 0.60% of average daily net assets. Under its Management Agreement, the Series pays an annual management fee based on average daily net assets as follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on assets in excess of $2.5 billion. The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2007 through April 30, 2009, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (14) Through April 30, 2009, 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 0.53% for Class B, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. (15) "Other Expenses" are based on estimated amounts for the current fiscal year. Actual expenses may be different. Includes 0.10% administration fee. (16) Contrafund - 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 0.89% for Service Class 2. These offsets may be discontinued at any time. (17) Growth. 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 0.89% for Service Class 2. These offsets may be discontinued at any time. (18) Mid Cap. 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. (19) Overseas. 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 1.07% for Service Class 2. These offsets may be discontinued at any time. (20) The Fund's manager has agreed in advance to reduce its fees from assets invested by the Fund in a Franklin Templeton money market fund (the Sweep Money Fund which is "the acquired fund" in this case) to the extent of the Fund's fees and expenses of the acquired fund. This reduction is required by the Trust's board of trustees and an exemptive order by the Securities and Exchange Commission (SEC); this arrangement will continue as long as the exemptive order is relied upon. This reduction is not reflected in Net Annual Fund operating expenses, which would be lower if it were. (21) All expenses are shown without the effect of expense offset arrangements. Pursuant to such offset arrangements, credits realized as a result of uninvested cash balances are used to reduce custodian and transfer agent expenses. (22) The "Management Fee" is the investment advisory fee rate paid by each Portfolio to Janus Capital as of the end of the fiscal year. For Worldwide Growth Portfolio, this fee may go up or down monthly based on the Portfolio's performance relative to its benchmark index.. (23) Worldwide Growth Portfolio pays an investment advisory fee rate that adjusts up or down based upon the Portfolio's performance relative to its benchmark index during the measuring period. This fee rate, prior to any 10 performance adjustment, is 0.60% for Worldwide Growth Portfolio; and may go up or down by a variable of up to 0.15% (assuming constant assets) on a monthly basis. Any such adjustment to the fee rate commenced February 2007 for Worldwide Growth Portfolio may increase or decrease the Management Fee. Refer to the "Management Expenses" section in the Fund's Prospectus for additional information with further description in the Statement of Additional Information. (24) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (25) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.03% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (26) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.10% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (27) The adviser has contractually agreed to waive the following portion of its advisory fee for the fund: 0.22% on the first $250,000,000 of average daily net assets of the fund and 0.32% on the excess over $250,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009, and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (28) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.59% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (29) The adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2009. The waiver amount is: 0.03% on the first $250,000,000 of average daily net assets of the fund; 0.08% on the next $500,000,000 of average daily net assets of the fund; and 0.13% of average daily net assets of the fund in excess of $750,000,000. The waiver will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (30) The adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2009. The waiver amount is: 0.15% on the first $100,000,000 of average daily net assets of the fund; 0.10% of the next $150,000,000 of average daily net assets of the fund; 0.15% on the next $250,000,000 of average daily net assets of the fund; 0.10% on the next $250,000,000 of average daily net assets of the fund; 0.15% on the next $750,000,000 of average daily net assets of the fund; and 0.20% on the excess of $1.5 billion of average daily net assets of the fund. The waiver will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (31) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (32) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.05% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (33) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (34) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.70% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.07% of the first $500,000,000 of average daily net assets of the fund and 0.12% of the excess over $500,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (35) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.76% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination tot he Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.35% of the first $100,000,000 of average daily net assets of the fund and 0.43% of the excess over $100,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (36) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.95% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.69% of the first $100,000,000 of average daily net assets of the fund and 0.76% of the excess over $100,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (37) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.70% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.06% of the first $500,000,000 of average daily net assets of the fund and 0.09% of the excess over $500,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (38) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.71% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.12% of the first $100,000,000 of average daily net assets of the fund and 0.22% of the excess over $100,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (39) Other expenses are based on estimated amounts for the current fiscal year. LIA has contractually agreed to reimburse the fund's Service Class to the extent that the Fund's total Annual Fund Operating Expenses exceed 0.71% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the Fund. LIA has contractually agreed to waive the following portion of its advisory fee for the fund: 0.29% of the first $100,000,000 of average daily net assets of the fund and 0.39% of the excess over $100,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 11 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (40) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 0.53% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (41) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 0.71% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (42) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.11% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (43) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.06% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (44) Lincoln Financial Distributors, Inc. (LFD) has contractually agreed to waive 0.04% of the 0.25% 12b-1 fee payable to LFD under the Distribution Services Agreement between the fund and LFD, in connection with the Service Class shares of the fund. The Agreement will continue through April 30, 2009 and will terminate on that date unless the parties agree otherwise. (45) The adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2009. The waiver amount is: 0.10% on the first $25 million and 0.05% on the next $50 million. The waiver will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (46) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.27% of average daily net assets. The Agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (47) Acquired Fund Fees and Expenses (AFFE) in the chart are based on the 2007 fees and expenses of the UBS Relationship Funds owned by the fund during 2007 and are provided to show you an estimate of the underlying fee and expenses attributable to the fund. (48) The ""Acquired Fund Fees and Expenses (AFFE)"" in the chart are based on the 2007 fees and expenses of the underlying funds that were owned by each Profile fund during 2007 and are provided to show you an estimate of the underlying fees and expenses attributable to each fund. Each funds' expense ratio will vary based on the actual allocations to the underlying funds that occurred through the year. (49) The adviser has contractually agreed to reimburse each fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.50% of average daily net assets. The agreement will continue at least through April 30, 2009 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (50) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian and dividend disbursing agent. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Net Expenses" would be lower. (51) MFS has agreed in writing to bear the series' expenses, such that "Other Expenses", determined without giving effect to the expense offset arrangements described above, do not exceed 0.15% annually. This written agreement excludes management fees, distribution and service fees, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses and will continue until at least April 30, 2009. (52) The funds' Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the funds' Service Class shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "12b-1 fee." (53) MFS has agreed in writing to reduce its management fee to 0.65% annually on average daily net assets in excess of $3 billion. This written agreement will remain in effect until modified by the funds' Board of Trustees. (54) MFS has agreed in writing to reduce its management fee to 0.70% annually on average daily net assets in excess of $1 billion. This written agreement will remain in effect until modified by the funds' Board of Trustees. (55) Neuberger Berman Management Inc. ("NBMI") has undertaken through December 31, 2011 to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI (except with respect to Balanced, Lehman Brothers Short Duration Bond, Mid-Cap Growth, and Partners Portfolios) and excluding taxes, interest, extraordinary expenses, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of average daily net asset value of the Balanced, Lehman Brothers Short Duration Bond, Mid-Cap Growth and Partners Portfolios; and 1.50% of the average daily net asset value of the Regency Portfolio. The expense limitation arrangements for the Portfolios are contractual and any excess expenses can be repaid to NBMI within three years of the year incurred, provided such recoupment would not cause a Portfolio to exceed its respective limitation. (56) Includes estimated expenses attributable to the fund's investments in other investment companies that the fund bears indirectly. (57) Reflects Putnam Management's contractual agreement to limit fund expenses through December 31, 2008. In order to further limit expenses of the fund to the extent necessary to ensure that the fund pays total fund operating expenses at an annual rate that does not exceed the simple average of the expenses of a custom group of competitive funds selected by Lipper Inc. based on the size of the applicable fund. For these purposes, total fund operating expenses of both the applicable fund and the Lipper custom group average are calculated without giving effect to 12b-1 fees or any expense offset and brokerage service arrangements that may reduce fund expenses. The expense limitation that resulted in the greater reduction in expenses of the fund at the end of the period was applied to the fund for that period. During the year ended December 31, 2007 this limitation decreased expenses by 0.02%. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. 12 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 EEB death benefit and Lincoln Lifetime IncomeSM Advantage Plus 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 -------- --------- --------- --------- $985 $2,890 $4,720 $9,036
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 -------- --------- --------- --------- $985 $2,890 $4,720 $9,036
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. The examples do not reflect persistency credits. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage including the Guaranteed Income Benefit Rider, 4LATER (Reg. TM) Advantage and Annuity Payouts. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. Summary of Common Questions What kind of contract am I buying? It is an individual variable or fixed and/or interest adjusted, if applicable, annuity contract between you and Lincoln Life. 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 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. 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, 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, you will be subject to certain requirements for your subaccount investments. You may be limited in how much you can invest in certain subaccounts. Different Investment Requirements apply to different riders. See The Contracts - Investment Requirements. What are my investment choices? 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. 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 received and the value of each annuity unit on payout days. See The Contracts. What charges do I pay under the contract? We will deduct any applicable premium tax from purchase payments or contract value 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. 13 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. What is a persistency credit? For contracts issued on or after June 6, 2005 (or later in some states that have not approved the contract changes), a persistency credit of 0.10% of contract value less purchase payments that have been in the contract less than seven years will be credited on a quarterly basis after the seventh anniversary. See The Contracts - Persistency Credits. How will my annuity payouts be calculated? If you decide to annuitize, you may select an annuity option and start receiving annuity payouts from your contract as a fixed option or variable option or a combination of both. See Annuity Payouts - Annuity Options. Remember that participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios. What happens if I die before I annuitize? Your beneficiary will receive death benefit proceeds based upon the death benefit you select. Your beneficiary has options as to how the death benefit is paid. In the alternative, you may choose to receive a death benefit on the death of the annuitant. See The Contracts - Death Benefit. May I transfer contract value between variable options and between the variable and fixed sides of the contract? Yes, subject to currently effective restrictions. For example, transfers made before the annuity commencement date are generally restricted to no more than twelve (12) per contract year. 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. What is Lincoln Lifetime IncomeSM Advantage? Lincoln Lifetime IncomeSM Advantage is a rider that you may purchase for an additional charge and which provides minimum guaranteed, periodic withdrawals for your life (Single Life Option) or for the lives of you and your spouse (Joint Life Option) regardless of the investment performance of the contract provided certain conditions are met. Withdrawals are based on the Guaranteed Amount which is equal to the initial purchase payment (or contract value if elected after contract issue). The Guaranteed Amount is not available as a separate benefit upon death or surrender and is increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the step-up to 200% of the initial Guaranteed Amount and is decreased by withdrawals in accordance with provisions described later in this prospectus. See The Contracts-Lincoln Lifetime IncomeSM Advantage. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage 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 Lincoln Lifetime IncomeSM Advantage Plus? Lincoln Lifetime IncomeSM Advantage Plus is available for an additional fee and provides an amount equal to the excess of the initial Guaranteed Amount over the current contract value on the seventh benefit year anniversary so long as no withdrawals have been taken and you adhere to certain Investment Requirements. Lincoln Lifetime IncomeSM Advantage Plus may only be purchased in addition to Lincoln Lifetime IncomeSM Advantage. What are Living Benefit Riders? Living benefit riders are optional riders available to purchase for an additional fee. These riders provide a type of minimum guarantee if you meet certain conditions. These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders at the end of this prospectus. 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. There are two options available to reset the Guaranteed Amount to the current contract value. 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 - Lincoln SmartSecurity (Reg. TM) Advantage. 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 are the Guaranteed Income Benefits? The Guaranteed Income Benefits provide a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. They are available either through 4LATER (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage or may be purchased at the time you elect i4LIFE (Reg. TM) Advantage. 4LATER (Reg. TM) Advantage is purchased prior to the time you elect i4LIFE (Reg. TM) Advantage and provides a guaranteed value, the Income Base, which can be used to establish the Guaranteed Income Benefit floor in the future. The 14 i4LIFE (Reg. TM) Guaranteed Income Benefit or Lincoln Lifetime IncomeSM Advantage Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period. The i4LIFE (Reg. TM) Guaranteed Income Benefit does not have an Income Base; the minimum floor is based on the contract value at the time you elect i4LIFE (Reg. TM) with the Guaranteed Income Benefit. By electing one of these benefits, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage Guaranteed Income Benefit. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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? Appendix A and B to this prospectus provide more information about accumulation unit values. 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. 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. During extended periods of low interest rates, 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. Guarantees provided within death benefit options and living benefit riders are backed by the claims-paying ability of Lincoln Life. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of financial products and solutions through financial advisors: mutual funds, managed accounts, retirement solutions, life insurance, 401(k) and 403(b) plans, savings plans, institutional investments 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. 15 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 financial statements of the VAA and the 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 0.46%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the Contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings. The AIM, AllianceBernstein, American Century, American Funds, Delaware, DWS, Fidelity, Franklin Templeton, Janus, Lincoln, MFS and Putnam Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.35% 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. 16 Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for the fund. You should read each fund prospectus carefully before investing. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. AIM Variable Insurance Funds, advised by AIM Advisors, Inc. o Capital Appreciation Fund (Series II): Capital appreciation. This fund is not offered in contracts issued on or after May 24, 2004. o Core Equity Fund (Series II): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. o International Growth Fund (Series II): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein Global Technology Portfolio (Class B): Maximum capital appreciation. o AllianceBernstein Growth and Income Portfolio (Class B): Growth and income. o AllianceBernstein International Value Portfolio (Class B): Long-term growth. o AllianceBernstein Large Cap Growth Portfolio (Class B): Maximum capital appreciation. This fund is not offered in contracts issued on or after June 6, 2005. o AllianceBernstein Small/Mid Cap Value Portfolio (Class B): Long-term growth. American Century Investments Variable Products, advised by American Century o Inflation Protection Fund (Class II): Long-term total return. American Funds Insurance SeriesSM, advised by Capital Research and Management Company o Global Growth Fund (Class 2): Long-term growth. o Global Small Capitalization Fund (Class 2): Long-term growth. o Growth Fund (Class 2): Long-term growth. o Growth-Income Fund (Class 2): Growth and income. o International Fund (Class 2): Long-term growth. Delaware VIP Trust, advised by Delaware Management Company o Capital Reserves Series (Service Class): Current income. o Diversified Income Series (Service Class): Total return. o Emerging Markets Series (Service Class): Capital appreciation. o High Yield Series (Service Class): Capital appreciation. o REIT Series (Service Class): Total return. This fund will not be offered in contracts issued on or after June 4, 2007. o Small Cap Value Series (Service Class): Capital appreciation. o Trend Series (Service Class): Capital appreciation. o U.S. Growth Series (Service Class): Capital appreciation. o Value Series (Service Class): Long-term capital appreciation. DWS Investments VIT Funds, advised by Deutsche Asset Management Inc. and subadvised by Northern Trust Investments, Inc. o DWS Equity 500 Index VIP (Class B): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) This fund will not be offered in contracts issued on or after June 4, 2007. o DWS Small Cap Index VIP (Class B): Capital appreciation. (Subadvised by Northern Trust Investments, Inc.) This fund will not be offered in contracts issued on or after June 4, 2007. Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company o Contrafund (Reg. TM) Portfolio (Service Class 2): Long-term capital appreciation. 17 o Equity-Income Portfolio (Service Class 2): Reasonable income. This fund is not offered in contracts issued on or after June 6, 2005. o Growth Portfolio (Service Class 2): Capital appreciation. o Mid Cap Portfolio (Service Class 2): Long-term growth. o VIP Overseas Portfolio (Service Class 2): Long-term growth. Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund and the Franklin Small-Mid Cap Growth Securities Fund, by Templeton Global Advisors Limited for the Templeton Global Income Securities Fund and the Templeton Growth Securities Fund, and by Franklin Mutual Advisors, LLC for the Mutual Shares Securities Fund. o Franklin Income Securities Fund (Class 2): Current income. o Franklin Small-Mid Cap Growth Securities Fund (Class 2): Long-term growth. o Mutual Shares Securities Fund (Class 2): Capital appreciation. o Templeton Global Income Securities Fund (Class 2): Total return. o Templeton Growth Securities Fund (Class 2): Long-term growth. (Subadvised by Templeton Asset Management Ltd.) This fund will not be offered in contracts issued on or after June 4, 2007. Janus Aspen Series, advised by Janus Capital Management LLC o Balanced Portfolio (Service Class): Long-term growth and current income. This fund is not offered in contracts issued on or after June 6, 2005. o Mid Cap Growth Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after June 6, 2005. o Worldwide Growth Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP Baron Growth Opportunities Fund (Service Class): Long-term growth. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital appreciation. (Subadvised by Wellington Management) o LVIP Cohen & Steers Global Real Estate Fund (Service Class): Total Return. (Subadvised by Cohen & Steers Capital Management) o LVIP Columbia Value Opportunities Fund (Service Class): Long-term capital appreciation. (Subadvised by Columbia Management Advisors, LLC) (formerly LVIP Value Opportunities Fund) o LVIP Delaware Bond Fund (Service Class): Current income. (Subadvised by Delaware Management Company) o LVIP Delaware Growth and Income Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Social Awareness Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP Delaware Special Opportunities Fund (Service Class): Capital appreciation. (Subadvised by Delaware Management Company) o LVIP FI Equity-Income Fund (Service Class): Income. (Subadvised by Pyramis Global Advisors LLC) This fund is not offered in contracts issued before June 6, 2005. o LVIP Janus Capital Appreciation Fund (Service Class): Long-term growth. (Subadvised by Janus Capital Management LLC) o LVIP Marsico International Growth Fund (Service Class): Long-term capital appreciation. (Subadvised by Marsico Capital Management, LLC) o LVIP MFS (Reg. TM) Value Fund (Service Class): Long-term growth of capital. (Subadvised by Massachusetts Financial Services Company) 18 o LVIP Mid-Cap Value Fund (Service Class): Long-term capital appreciation. (Subadvised by Wellington Management) o LVIP Mondrian International Value Fund (Service Class): Long-term capital appreciation. (Subadvised by Mondrian Investment Partners Limited) o LVIP Money Market Fund (Service Class): Preservation of capital. (Subadvised by Delaware Management Company) o LVIP SSgA Bond Index Fund (Service Class): Current income. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA International Index Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 16, 2008. Consult your financial adviser. o LVIP SSgA S&P 500 Index Fund (Service Class): Capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) (Subadvised by State Street Global Advisors) o LVIP SSgA Small-Cap Index Fund (Service Class): Capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) (Subadvised by State Street Global Advisors) o LVIP T. Rowe Price Growth Stock Fund (Service Class): Long-term growth of capital. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class): Maximum capital appreciation. (Subadvised by T. Rowe Price Associates, Inc.) o LVIP Templeton Growth Fund (Service Class): Long-term growth of capital. (Subadvised by Templeton Investment Counsel, LLC) o LVIP Turner Mid-Cap Growth Fund (Service Class): Capital appreciation. (Subadvised by Turner Investment Partners) (formerly LVIP Mid-Cap Growth Fund) o LVIP UBS Global Asset Allocation Fund (Service Class): Total return. (Subadvised by UBS Global Asset Management (Americas) Inc. (UBS Global AM) o LVIP Wilshire 2010 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2020 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2030 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire 2040 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Aggressive Profile Fund (Service Class): Capital appreciation; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Conservative Profile Fund (Service Class): Current income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) 19 o LVIP Wilshire Moderate Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) o LVIP Wilshire Moderately Aggressive Profile Fund (Service Class): Growth and income; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) *Funds offered in a fund of funds structure may have higher expenses than funds that invest directly in debt or equity securities. MFS (Reg. TM) Variable Insurance TrustSM, advised by Massachusetts Financial Services Company o Core Equity Series (Service Class): Capital appreciation. (formerly Capital Opportunities Series) This fund is not offered in contracts issued on or after June 6, 2005. o Growth Series (Service Class): Capital appreciation. (formerly Emerging Growth Series) This fund will be available on or about June 16, 2008. Consult your financial adviser. o Total Return Series (Service Class): Total return. o Utilities Series (Service Class): Total return. Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management, Inc. o Mid-Cap Growth Portfolio (I Class): Capital appreciation. This fund will not be offered in contracts issued on or after June 4, 2007. o Regency Portfolio (I Class): Long-term growth. This fund will not be offered in contracts issued on or after June 4, 2007. Putnam Variable Trust, advised by Putnam Investment Management, LLC o Growth & Income Fund (Class IB): Capital growth and current income. This fund is not offered in contracts issued on or after May 24, 2004. o Health Sciences Fund (Class IB): Capital appreciation. This fund is not offered in contracts issued on or after May 24, 2004. 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. 20 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. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. Charges and Other Deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, cross-reinvestment, portfolio rebalancing, and automatic withdrawal services - See Additional Services and the SAI for more information on these programs); o maintaining records; o administering annuity payouts; o furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount values); o reconciling and depositing cash receipts; o providing contract confirmations; o providing toll-free inquiry services; and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts 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 lifetime payments to individuals from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will exceed the contract value; o the risk that, if the i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit or 4LATER (Reg. TM) Guaranteed Income Benefit is in effect, the required 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. 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. 21 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:
With Estate Enhanced Guaranteed Guarantee of Enhancement Minimum death Principal death Account Benefit Rider (EEB) benefit (EGMDB) benefit Value death benefit --------------------- --------------------- ----------------- -------------------- o Mortality and expense risk charge 2.05% 1.85% 1.60% 1.55% o Administrative charge 0.10% 0.10% 0.10% 0.10% ---- ---- ---- ---- o Total annual charge for each subaccount 2.15% 1.95% 1.70% 1.65%
For contracts purchased before June 6, 2005 (or later in those states that have not approved the contract changes), the total annual charges are as follows: EEB 1.85%; EGMDB 1.65%; Guarantee of Principal 1.55%; Account Value N/A. 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 Charge. While this Rider is in effect, there is a charge for the Lincoln Lifetime IncomeSM Advantage, if elected. The Rider charge is currently equal to an annual rate of 0.75% (0.1875% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 0.90%. The charge is applied to the Guaranteed Amount as increased for subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements, and the 200% Step-up and decreased for withdrawals. We will deduct the cost of this Rider from the contract value on a quarterly basis, with the first deduction occurring on the valuation date on or next following the three-month anniversary of the effective date of the Rider. This deduction will be made in proportion to the value in each subaccount of the contract on the valuation date the Rider charge is assessed. The amount we deduct will increase or decrease as the Guaranteed Amount increases or decreases, because the charge is based on the Guaranteed Amount. Refer to the Lincoln Lifetime IncomeSM Advantage Guaranteed Amount section for a discussion and example of the impact of the changes to the Guaranteed Amount. The annual Rider percentage charge may increase each time the Guaranteed Amount increases as a result of the Automatic Annual Step-up, but the charge will never exceed the guaranteed maximum annual percentage charge of 1.50%. 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. This opt out will only apply for this particular Automatic Annual Step-up and is not available if additional purchase payments would cause your charge to increase (see below). You will need to notify us each time the percentage charge increases if you do not want the Automatic Annual Step-up. An increase in the Guaranteed Amount as a result of the 5% Enhancement or 200% Step-up will not cause an increase in the annual Rider percentage charge but will increase the dollar amount of charge. Once cumulative additional purchase payments into your annuity contract after the first Benefit Year exceed $100,000, any additional purchase payment will potentially cause the charge for your Rider to change to the current charge for new purchases in effect on the next Benefit Year anniversary, but the charge will never exceed the guaranteed maximum annual charge. The new charge will become effective on the Benefit Year anniversary. 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 Guaranteed Amount is reduced to zero while the contractowner is receiving a lifetime Maximum Annual Withdrawal, no rider charge will be deducted. If you purchase Lincoln Lifetime IncomeSM Advantage Plus Option, an additional 0.15% charge will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 0.90% applied to the Guaranteed Amount. This total charge (which may change as discussed above) is in effect until the 7th Benefit Year anniversary. If you exercise your Plus Option, this entire rider and its charge will terminate. If you do not exercise the Plus Option, after the 7th Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed and the Lincoln Lifetime IncomeSM Advantage rider and charge will continue. If you make a withdrawal prior to 22 the 7th Benefit Year anniversary, you will not be able to exercise the Plus option, but the additional 0.15% charge will remain on your contract until the 7th Benefit Year anniversary. Lincoln SmartSecurity (Reg. TM) Advantage Charge. While this Rider is in effect, there is a charge for the Lincoln SmartSecurity (Reg. TM) Advantage, if elected. The Rider charge is currently equal to an annual rate of: 1) 0.45% (0.1125% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option; or 2) 0.65% (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option (and also the prior version of Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up); or 3) 0.80% (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. Once the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Single Life option is available in your state, the prior version will not be available. 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 as adjusted. 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. In Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up (without the Single or Joint Life option), 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 - 1 Year Automatic Step-up option, the annual Rider percentage charge will not change upon each automatic step-up of the Guaranteed Amount for the 10-year period. Under both options, if you elect to step-up the Guaranteed Amount for another 10 year 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 0.95% for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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. Rider Charge Waiver. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the later of the fifth anniversary of the effective date of the Rider or the fifth anniversary of the most recent step-up of the Guaranteed Amount, the Rider charge may be waived. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, no Rider charge waiver is available with the Single Life and Joint Life options. The earlier version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option has a waiver charge provision which may occur after the fifth Benefit Year anniversary following the last automatic step-up opportunity. Whenever the above conditions are met, on each valuation date the Rider charge is to be deducted, if the total withdrawals from the contract have been less than or equal to 10% of the sum of: (1) the Guaranteed Amount on the effective date of this Rider or on the most recent step-up date; and (2) purchase payments made after the step-up, then the quarterly Rider charge will be waived. If the withdrawals have been more than 10%, then the Rider charge will not be waived. 4LATER (Reg. TM) Advantage Charge. Prior to the periodic income commencement date (which is defined as the valuation date the initial regular income payment under i4LIFE (Reg. TM) Advantage is determined), the annual 4LATER (Reg. TM) charge is currently 0.50% of the Income Base. The Income Base (an amount equal to the initial purchase payment or contract value at the time of election), as adjusted, is a value that will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. An amount equal to the quarterly 4LATER (Reg. TM) Rider charge multiplied by the Income Base will be deducted from the subaccounts on every third month anniversary of the later of the 4LATER (Reg. TM) Rider Effective Date or the most recent reset of the Income Base. This deduction will be made in proportion to the value in each subaccount on the valuation date the 4LATER (Reg. TM) Rider charge is assessed. The amount we deduct will increase as the Income Base increases, because the charge is based on the Income Base. As described in more detail below, the only time the Income Base will change is when there are additional purchase payments, withdrawals, automatic enhancements at the end of the 3-year waiting periods or in the event of a Reset to the current Account Value. If you purchase 4LATER (Reg. TM) in the future, the percentage charge will be the charge in effect at the time you elect 4LATER (Reg. TM). 23 Upon a reset of the Income Base, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge based on the Income Base immediately prior to the reset will be made on the valuation date of the reset. This deduction covers the cost of the 4LATER (Reg. TM) Rider from the time of the previous deduction to the date of the reset. After the reset, we will deduct the 4LATER (Reg. TM) Rider charge for the reset Income Base on a quarterly basis, beginning on the valuation date on or next following the three month anniversary of the reset. At the time of the reset, the annual charge will be the current charge in effect for new purchases of 4LATER (Reg. TM) at the time of reset, not to exceed the guaranteed maximum charge of 1.50%. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. i4LIFE (Reg. TM) Advantage Charge. i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the net asset value of the Account Value in the VAA. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 2.05% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.10% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.35% 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. After the Access Period ends, the charge will be the same rate as the cost of the i4LIFE (Reg. TM) Advantage Account Value death benefit. i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.55% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.60% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.85% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. 4LATER (Reg. TM) Guaranteed Income Benefit Charge. The 4LATER (Reg. TM) Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of .50% which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.55% for the Account Value death benefit; 2.60% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.85% for the EGMDB. These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. On and after the periodic income commencement date, the 4LATER (Reg. TM) Rider charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of average account value. This is a change to the calculation of the 4LATER (Reg. TM) charge because after the periodic income commencement date, when the 4LATER (Reg. TM) Guaranteed Income Benefit is established, the Income Base is no longer applicable. The percentage 4LATER (Reg. TM) charge is the same immediately before and after the periodic income commencement date; however, the charge is multiplied by the Income Base (on a quarterly basis) prior to the periodic income commencement date and then multiplied by the average daily account value after the periodic income commencement date. After the periodic income commencement date, the 4LATER (Reg. TM) percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Rider annual charge will also terminate. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit Charge. The Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50%, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage of the net asset value of the Account Value in the VAA computed daily as follows: 2.55% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.60% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.85% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the 24 time you elect a new 15 year period, the percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50%. After the periodic income commencement date, if the Guaranteed Income Benefit is terminated, the Guaranteed Income Benefit annual charge will also terminate. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium taxes generally depend upon the law of your state of residence. The tax ranges 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 1.40% 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. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. Additional Information The charges described previously may be reduced or eliminated for any particular contract. However, these reductions may be available only to the extent that we anticipate lower distribution and/or administrative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges, or when required by law. Lower distribution and administrative expenses may be the result of economies associated with: o the use of mass enrollment procedures, o the performance of administrative or sales functions by the employer, o the use by an employer of automated techniques in submitting deposits or information related to deposits on behalf of its employees, or o any other circumstances which reduce distribution or administrative expenses. The exact amount of charges and fees applicable to a particular contract will be stated in that contract. The Contracts 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 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 25 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. If you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum annual amount for additional purchase payments is $300. The minimum payment to the contract at any one time must be at least $100 ($25 if transmitted electronically). If a minimum purchase payment is not submitted, we will contact you to see if additional money will be sent, or if we should return the purchase payment to you. Purchase payments in total may not exceed $2 million without our approval. If you stop making purchase payments, the contract will remain in force as a paid-up contract. However, we may terminate the contract as allowed by 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. Persistency Credits For contracts purchased on or after June 6, 2005 (or later in those states that have not approved the contract changes), contractowners will receive a persistency credit on a quarterly basis after the seventh contract anniversary. The amount of the persistency credit is calculated by multiplying the contract value, less any purchase payments that have not been invested in the contract for at least seven years, by 0.10%. This persistency credit will be allocated to the variable subaccounts and the fixed subaccounts in proportion to the contract value in each variable subaccount and fixed subaccount at the time the persistency credit is paid into the contract. The amount of any persistency credit received will be noted on your quarterly statement. Confirmation statements for each individual transaction will not be issued. There is no additional charge to receive this persistency credit, and in no case will the persistency credit be less than zero. 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 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 26 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, and when permitted by law, it may be prudent for us to use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method. Transfers On or Before the Annuity Commencement Date 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. There is no charge for a transfer. 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. This limit does not apply to transfers made under the automatic transfer programs of dollar cost averaging, cross re-investment or portfolio rebalancing elected on forms available from us. See Additional Services and the SAI for more information on these programs. The minimum amount which may be transferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total balance of the subaccount. A transfer request may be made to our 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. 27 Requests for transfers will be processed on the valuation date that they are received when they are received 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 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 also may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. Transfers may be delayed as permitted by the 1940 Act. See Delay of Payments. Market Timing Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our contractowners and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other contractowners or fund shareholders. In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. While we reserve the right to enforce these policies and procedures, contractowners and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual contractowners, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific contractowners who violate the excessive trading policies established by the fund. You should be aware that the purchase and redemption orders received by the funds generally are "omnibus" orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds' ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our contractowners) will not be harmed by transfer activity relating to the retirement plans and/or other insurance companies that may invest in the funds. In addition, if a fund believes that an omnibus order we submit may reflect one or more transfer requests from policy owners engaged in disruptive trading activity, the fund may reject the entire omnibus order. Our Market Timing Procedures detect potential "market timers" by examining the number of transfers made by contractowners within given periods of time. In addition, managers of the funds might contact us if they believe or suspect that there is market timing. If requested by a fund company, we may vary our Market Timing Procedures from subaccount to subaccount to comply with specific fund policies and procedures. We may increase our monitoring of contractowners who we have previously identified as market timers. When applying the parameters used to detect market timers, we will consider multiple contracts owned by the same contractowner if that contractowner has been identified as a market timer. For each contractowner, we will investigate the transfer patterns that meet the parameters being 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, standard 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 28 (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. We also reserve the right to implement and administer redemption fees imposed by one or more of the funds in the future. Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund's investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date You may transfer all or a portion of your investment in one subaccount to another subaccount or to the fixed side of the contract, as permitted under your contract. Those transfers will be limited to three times per contract year. You may also transfer from a variable annuity payment to a fixed annuity payment. You may not transfer from a fixed annuity payment to a variable annuity payment. If you select i4LIFE (Reg. TM) Advantage your transfer rights and restrictions for the variable subaccounts and the fixed account during the Access Period are the same as stated in the section of this prospectus called Transfers On or Before the Annuity Commencement Date. During the i4LIFE (Reg. TM) Advantage Lifetime Income Period, you are subject to the rights set forth in the prior paragraph. Ownership The owner on the date of issue will be the person or entity designated in the contract specifications. If no owner is designated, the annuitant(s) will be the owner. The owner may name a joint owner. As contractowner, you have all rights under the contract. According to 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. Qualified contracts may not be assigned or transferred except as permitted by applicable law and upon written notification to us. 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. 29 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. 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 benefit on the death of the annuitant. 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 at the Home office. If we receive a surrender or withdrawal request 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. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may begin writing checks immediately. The SecureLine (Reg. TM) account is a special service that we offer in which your surrender proceeds are placed into an interest-bearing account. Instead of mailing you a check, we will send a checkbook so that you will have access to the account simply by writing a check for all or any part of the proceeds. 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 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), cross-reinvestment service and portfolio rebalancing. Currently, there is no charge for these services. However, we reserve the right to impose one. 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. Dollar cost averaging is not available on contracts owned by non-individuals (i.e. corporations, trusts). We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. Withdrawals under AWS are subject to applicable interest adjustments. See Fixed side of the contract - Interest adjustment. The cross-reinvestment service allows you to automatically transfer the account value in a designated variable subaccount that exceeds a baseline amount to another specific variable subaccount at specific intervals. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of contract value allocated to each variable account subaccount. The rebalancing may take place monthly, quarterly, semi-annually or annually. Only one of the three additional services (DCA, cross reinvestment and portfolio rebalancing) may be used at one time. For example, you cannot have DCA and cross reinvestment running simultaneously. 30 Asset Allocation Models Your registered representative may discuss asset allocation models with you to assist you in deciding how to allocate your purchase payments among the various subaccounts and/or the fixed account. The models listed below, available on or about June 16, 2008, were designed and prepared by SSgA Funds Management, Inc., a registered investment advisory firm for use by Lincoln Financial Distributors, Inc., (LFD) the principal underwriter of the contracts. LFD provides models to broker dealers who may offer the models to their own clients. The models do not constitute investment advice and you should consult with your broker dealer representative to determine whether you should utilize a model or which model is suitable for you based upon your goals, risk tolerance and time horizon. Each model invests different percentages of contract value in some or all of the LVIPT subaccounts currently available within your annuity contract. If you select an asset allocation model, 100% of your contract value (and any additional purchase payments you make) will be allocated among certain subaccounts in accordance with the model's asset allocation strategy. You may not make transfers among the subaccounts. We will deduct any withdrawals you make from the subaccounts in the asset allocation model on a pro rata basis. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in the contract at any time. Each of the asset allocation models seeks to meet its investment objective while avoiding excessive risk. The models also strive to achieve diversification among asset classes in order to help reduce volatility and boost returns over the long-term. There can be no assurance, however, that any of the asset allocation models will achieve its investment objective. If you are seeking a more aggressive strategy, these models are probably not appropriate for you. The asset allocation models are intended to provide a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. While diversification may help reduce overall risk, it does not eliminate the risk of losses and it does not protect against losses in a declining market. In order to maintain the model's specified subaccount allocation percentages, you agree to be automatically enrolled in and you thereby authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. The models are static asset allocation models. This means that that they have fixed allocations made up of underlying funds that are offered within your contract and the percentage allocations will not change over time. Once you have selected an asset allocation model, we will not make any changes to the fund allocations within the model except for the rebalancing described above. If you desire to change your contract value or purchase payment allocation or percentages to reflect a revised or different model, you must submit new allocation instructions to us. You may terminate a model at any time. There is no charge from Lincoln for participating in a model. Certain living benefit riders may require that you allocate purchase payments in accordance with Investment Requirements that may be satisfied by choosing one of the asset allocation models. Different requirements and/or restrictions may apply under the individual rider. See The Contracts - Investment Requirements. The following models have been prepared by SSgA Funds Management, Inc., a registered investment advisor. The models are comprised of funds from the LVIP that are offered within your contract. Your registered representative will have more information on the specific investments of each model. o The SSgA Conservative Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in three equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes index funds exclusively. o The SSgA Moderate Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in three equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in three equity subaccounts and 20% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes index funds exclusively. o The SSgA Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in three equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes index funds exclusively. 31 o The SSgA Structured Conservative Model is composed of specified underlying subaccounts representing a target allocation of approximately 40% in seven equity subaccounts and 60% in one fixed income subaccount. This model seeks a high level of current income with some consideration given to growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderate Model is composed of specified underlying subaccounts representing a target allocation of approximately 60% in seven equity subaccounts and 40% in one fixed income subaccount. This model seeks a balance between a high level of current income and growth of capital, with an emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven equity subaccounts and 20% fixed one income subaccount. This model seeks a balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. o The SSgA Structured Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 90% in seven equity subaccounts and 10% in one fixed income subaccount. This model seeks long term growth of capital. The model utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. Franklin Templeton Founding Investment Strategy: Through the Franklin Templeton Founding Investment Strategy you may allocate purchase payments and/or contract values to three underlying funds as listed below. This is not an asset allocation model. Upon selection of this program you agree to be automatically enrolled in portfolio rebalancing and authorize us to automatically rebalance your contract value on a quarterly basis based upon your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. We reserve the right to change the rebalancing frequency at any time, in our sole discretion, but will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. o FTVIPT Franklin Income Securities 34% o FTVIPT Mutual Shares Securities 33% o LVIP Templeton Growth Fund 33%
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 to the annuity commencement date. Refer to your contract for the specific provisions applicable upon death.
UPON DEATH OF: AND... contractowner There is a surviving joint owner contractowner There is no surviving joint owner contractowner There is no surviving joint owner and the beneficiary predeceases the contractowner annuitant The contractowner is living annuitant The contractowner is living annuitant** The contractowner is a trust or other non-natural person UPON DEATH OF: AND... DEATH BENEFIT PROCEEDS PASS TO: contractowner The annuitant is living or deceased joint owner contractowner The annuitant is living or deceased designated beneficiary contractowner The annuitant is living or deceased contractowner's estate annuitant There is no contingent annuitant The youngest contractowner becomes the contingent annuitant and the contract continues. The contractowner may waive* this continuation and receive the death benefit proceeds. annuitant The contingent annuitant is living contingent annuitant becomes the annuitant and the contract continues annuitant** No contingent annuitant allowed designated beneficiary with non-natural contractowner
* Notification from the contractowner to select the death benefit proceeds must be received within 75 days of the death of the annuitant. ** Death of annuitant is treated like death of the contractowner. 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 if you elect i4LIFE (Reg. TM) Advantage or any annuitization option. Generally, the more expensive the death benefit the greater the protection. 32 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. Account Value Death Benefit. Contractowners who purchase their contracts on or after June 6, 2005 , (or later in those states that have not approved the contract changes) may select the Account Value Death Benefit. If you elect the Account Value Death Benefit contract option, we will pay a death benefit equal to the contract value on the valuation date the death benefit is approved by us for payment. Once you have selected this death benefit option, it cannot be changed. (Your contract may refer to this benefit as the Contract Value Death Benefit.) Guarantee of Principal Death Benefit. If you do not select a death benefit, the Guarantee of Principal Death Benefit will apply to your contract. If the Guarantee of Principal Death Benefit is in effect, the death benefit will be equal to the greater of: o The current contract value as of the valuation date we approve the payment of the claim; or o The sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage). In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable withdrawal charges (an interest adjustment for example) and premium taxes, if any. For contracts issued on or after June 6, 2005 (or later in some states), you may discontinue the Guarantee of Principal Death Benefit 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 Account Value Death Benefit will apply. We will deduct the charge for the Account Value Death Benefit as of that date. See Charges and Other Deductions. Enhanced Guaranteed Minimum Death Benefit (EGMDB). If the EGMDB is in effect, the death benefit paid will be the greatest of: o The current contract value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o the highest contract value which the contract attains on any contract anniversary (including the inception date) (determined before the allocation of any purchase payments on that contract anniversary) prior to the 81st birthday of the deceased and prior to the death of the contractowner, joint owner (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 applicable charges and premium taxes, if any. 33 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, or, if your contract was purchased on or after June 6, 2005 (or later in some states) you may instead choose the Account Value Death Benefit. We will deduct the applicable charge for the new death benefit as of that date. See Charges and Other Deductions. Estate Enhancement Benefit Rider (EEB Rider). The amount of death benefit payable under this Rider is the greatest of the following amounts: o The 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 Maximum Annual Withdrawal amount under the Lincoln Lifetime IncomeSM Advantage rider may reduce the sum of all purchase payments amount on a dollar for dollar basis. See The Contracts - Lincoln Lifetime IncomeSM Advantage); or o The highest contract value on any contract anniversary (including the inception date) prior to the 81st birthday of the deceased contractowner, joint owner (if applicable), or annuitant and prior to the death of the contractowner, joint owner or annuitant for whom a death claim is approved for payment. The highest contract value is adjusted for certain transactions. It is increased by purchase payments made on or after that contract anniversary on which the highest contract value is obtained. It is decreased by withdrawals subsequent to that contract anniversary date in the same proportion that withdrawals reduced the contract value; or o The current contract value as of the valuation date we approve the payment of the claim plus an amount equal to the Enhancement Rate times the lesser of: o the contract earnings; or o the covered earnings limit. Note: If there are no contract earnings, there will not be an amount provided under this item. In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The Enhancement Rate is based on the age of the oldest contractowner, joint owner (if applicable), or annuitant on the date when the Rider becomes effective. If the oldest is under age 70, the rate is 40%. If the oldest is age 70 to 75, the rate is 25%. The EEB Rider is not available if the oldest contractowner, joint owner (if applicable), or annuitant is age 76 or older at the time the Rider would become effective. Contract earnings equal: o the contract value as of the date of death of the individual for whom a death claim is approved by us for payment; minus o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); minus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment; plus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. The covered earnings limit equals 200% of: o the contract value as of the effective date of this Rider (determined before the allocation of any purchase payments on that date); plus o each purchase payment that is made to the contract on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, and prior to the contract anniversary immediately preceding the 76th birthday of the oldest of the contractowner, joint owner (if applicable) or annuitant; minus o the amount by which each withdrawal made on or after the effective date of the Rider, and prior to the date of death of the individual for whom a death claim is approved for payment, exceeded the contract earnings immediately prior to the withdrawal. The EEB Rider may not be available in all states. Please check with your investment representative regarding availability of this rider. Contracts purchased after the Rider becomes available in your state may only elect the Rider at the time of purchase. The EEB Rider may not be terminated unless you surrender the contract or the contract is in the annuity payout period. 34 General Death Benefit Information Only one of these death benefit elections may be in effect at any one time and these elections terminate if you elect i4LIFE (Reg. TM) Advantage. 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. 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. If the EEB Rider is in effect, the Enhancement Rate for future benefits will be based on the age of the older of the surviving spouse or the annuitant at the time the EEB is paid into the contract. The contract earnings and the covered earnings limit will be reset, treating the current contract value (after crediting any death benefit amount into the contract as described above) as the initial deposit for purposes of future benefit calculations. If either the surviving spouse or the surviving annuitant is 76 or older, the EEB death benefit will be reduced to the EGMDB for a total annual charge of 1.95% or 1.65% for contracts issued prior to June 5, 2005. 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, 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. 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 contract value is over $10,000, the proceeds will be placed into the interest-bearing account in the recipient's name as the owner of the account. The SecureLine (Reg. TM) account allows the recipient additional time to decide how to manage death benefit proceeds with the balance earning interest from the day the account is opened. SecureLine (Reg. TM) is not a method of deferring taxation. The SecureLine (Reg. TM) account is a special service that we offer in which the death benefit proceeds are placed into an interest-bearing account. Instead of mailing you (or the recipient of the death proceeds) a check, we will send a checkbook so that you (or the death proceeds recipient) will have access to the account simply by writing a check for all or any part of the proceeds. 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. 35 Investment Requirements - Option 1 Contractowners who have elected 4LATER (Reg. TM) Advantage, the Lincoln SmartSecurity (Reg. TM) Advantage, or i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit will be subject to the following requirements on variable subaccount investments. You will be subject to different Investment Requirements if you elect the Lincoln Lifetime IncomeSM Advantage rider. If you do not elect any of these benefits, the Investment Requirements will not apply to your contract. For 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, and i4LIFE (Reg. TM) Advantage with Guaranteed Income Benefit, we do not intend to enforce these Investment Requirements at this time. We will notify you at least 30 days in advance of when the Investment Requirements will be enforced. Our decision to enforce these requirements will be based on our review of the subaccount investments of the contractowners who have these riders and market conditions. No more than 35% of your contract value (includes account value if i4LIFE (Reg. TM) Advantage is in effect) can be invested in the following subaccounts ("Limited Subaccounts"): o AIM V.I. International Growth Fund o AllianceBernstein Global Technology Portfolio o AllianceBernstein International Value Portfolio o AllianceBernstein Small/Mid Cap Value Portfolio o American Funds Global Growth Fund o American Funds Global Small Capitalization Fund o American Funds International Fund o Delaware VIP Emerging Markets Series o Delaware VIP REIT Series o Delaware VIP Small Cap Value Series o Delaware VIP Trend Series o DWS Small Cap Index VIP o Fidelity (Reg. TM) VIP Overseas Portfolio o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Templeton Growth Securities Fund o Janus Aspen Mid Cap Growth Portfolio o Janus Aspen Worldwide Growth Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Marsico International Growth Fund o LVIP Mondrian International Value Fund o LVIP SSgA Developed International 150 Fund o LVIP SSgA Emerging Markets 100 Fund o LVIP SSgA International Index Fund o LVIP SSgA Small/Mid Cap 200 Fund o LVIP SSgA Small-Cap Index Fund o LVIP T. Rowe Price Structured Mid-Cap Growth Fund o LVIP Templeton Growth Fund o LVIP Turner Mid-Cap Growth Fund o Neuberger Berman AMT Mid-Cap Growth Portfolio All other variable subaccounts will be referred to as "Non-Limited Subaccounts". You can select the percentages of contract value, if any, allocated to the Limited Subaccounts, but the cumulative total investment in all the Limited Subaccounts cannot exceed 35% of the total contract value. On each quarterly anniversary of the effective date of any of these benefits, if the contract value in the Limited Subaccounts exceeds 35%, Lincoln will rebalance your contract value so that the contract value in the Limited Subaccounts is 30%. If rebalancing is required, the contract value in excess of 30% will be removed from the Limited Subaccounts on a pro rata basis and invested in the remaining Non-Limited Subaccounts on a pro rata basis according to the contract value percentages in the Non-Limited Subaccounts at the time of the reallocation. If there is no contract value in the Non-Limited Subaccounts at that time, all contract value removed from the Limited Subaccounts will be placed in the LVIP Money Market subaccount. We may move subaccounts on or off the Limited Subaccount list, change the percentages of contract value allowed in the Limited Subaccounts or change the frequency of the contract value rebalancing, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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. 36 At the time you receive notice of a change or when you are notified that we will begin enforcing 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; 2. submit your own reallocation instructions for the contract value in excess of 35% in the Limited Subaccounts; or 3. take no action and be subject to the quarterly rebalancing as described above. Investment Requirements - Option 2 Contractowners who have elected the Lincoln Lifetime IncomeSM Advantage will be subject to the following Investment Requirements-Option 2 on the investments in their contracts. These Investment Requirements are different from the Investment Requirements-Option 1 that apply to purchases of other optional riders. Contractowners with an active Lincoln Lifetime IncomeSM Advantage who terminate Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit are also subject to Investment Requirements-Option 2. We have divided the subaccounts of your contract into two groups. We will specify the minimum or maximum percentages of your contract value that must be in each group at the time you purchase the Rider. In addition, you may allocate your contract value and purchase payments in accordance with certain asset allocation models. If you terminate an asset allocation model, you must follow the Investment Requirements applicable to your rider. Some investment options are not available to you if you purchase this Rider. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. You can select the percentages of contract value to allocate to individual funds within each group, but the total investment for all funds in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion, but we will not make changes more than once per calendar year. You will be notified at least 30 days prior to the date of any change in frequency. 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 or change the investment options that are or are not available to you, at any time, in our sole discretion, but we will not make changes more than once per calendar year. 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 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 the new terms of the Investment Requirements; 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. if you take no action, such changes will apply only to additional deposits or to future transfers of contract value. You will not be required to change allocations to existing subaccounts, but you will not be allowed to add money, by either an additional deposit or a contract transfer, in excess of the new percentage applicable to a fund or fund group. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% Investments cannot exceed 75% --------------------------------------------------- -------------------------------------------------------- 1. American Century VIP Inflation Protection All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Capital Reserves Series 5. Delaware VIP Diversified Series 6. FTVIPT Templeton Global Income Securities Fund
37 7. LVIP SSgA Bond Index Fund
To satisfy the Investment Requirements for the Lincoln Lifetime Income (Reg. TM) Advantage, you may allocate 100% of your contract value to or among the MFS VIT Total Return Fund, the FTVIPT Franklin Income Securities Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 75% can be allocated to the LVIP Wilshire Aggressive Profile Fund. If you allocate less than 100% to these funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. In addition, you can allocate 100% of your contract value to the Founding Investment Strategy (FTVIPT Franklin Income Securities Fund 34%, LVIP Templeton Growth Fund 33% and FTVIPT Mutual Shares Securities Fund 33%). The LVIP SSgA Emerging Markets 100 Fund and the fixed accounts (except for dollar cost averaging) are not available with Lincoln Lifetime Income (Reg. TM) Advantage. To satisfy the Investment Requirements of Lincoln Lifetime Income (Reg. TM) Advantage, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. On or about June 16, 2008, 100% of the contract value can be allocated to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Structured Moderately Aggressive Model, SSgA Conservative Index Model, SSgA Moderate Index Model and SSgA Moderately Aggressive Index Model. As discussed in the Lincoln Lifetime IncomeSM Advantage Plus section, if you purchase the Lincoln Lifetime IncomeSM Advantage Plus rider, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund (both are funds of funds) or the FTVIPT Franklin Income Securities Fund. On or about June 16, 2008, you may also allocate 100% of your contract value to one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. Lincoln Lifetime IncomeSM Advantage The Lincoln Lifetime IncomeSM Advantage is a Rider that is available for purchase with your variable annuity contract if the purchase payment or contract value (if purchased after the contract is issued) is at least $50,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contract owner/annuitant (Single Life Option) or for the lives of you as contract owner/annuitant and your spouse as joint owner or primary beneficiary (Joint Life Option) regardless of the investment performance of the contract, provided that certain conditions are met. A minimum guaranteed amount (Guaranteed Amount) is used to calculate the periodic withdrawals from your contract but, is not available as a separate benefit upon death or surrender. The Guaranteed Amount is equal to the initial purchase payment (or contract value if elected after contract issue) increased by subsequent purchase payments, Automatic Annual Step-ups, 5% Enhancements and the Step-up to 200% of the initial Guaranteed Amount and decreased by withdrawals in accordance with the provisions set forth below. No additional purchase payments are allowed if the contract value decreases to zero for any reason. This Rider provides annual withdrawals of 5% of the initial Guaranteed Amount called Maximum Annual Withdrawal amounts. With the Single Life option, you may receive Maximum Annual Withdrawal amounts for your lifetime. If you purchase the Joint Life option, Maximum Annual Withdrawal amounts for the lifetimes of you and your spouse will be available. Withdrawals in excess of the Maximum Annual Withdrawal amount and any withdrawals prior to age 591/2 (for the Single Life Option) or age 65 (for the Joint Life Option) may significantly reduce your Maximum Annual Withdrawal amount. Withdrawals will also negatively impact the availability of the 5% Enhancement, the 200% Step-up and the Lincoln Lifetime IncomeSM Advantage Plus. These options are discussed below in detail. An additional option, available for purchase with your Lincoln Lifetime IncomeSM Advantage provides that on the seventh Benefit Year anniversary, provided you have not made any withdrawals, you may choose to cancel your Lincoln Lifetime IncomeSM Advantage rider and receive an increase in your contract value of an amount equal to the excess of your initial Guaranteed Amount (and purchase payments made within 90 days of rider election) over your contract value. This option is called Lincoln Lifetime IncomeSM Advantage Plus and is discussed in detail below. You may consider purchasing this option if you want to guarantee at least a return of your initial purchase payment after 7 years. Lincoln Lifetime IncomeSM Advantage Plus must be purchased with the Lincoln Lifetime IncomeSM Advantage. By purchasing the Lincoln Lifetime IncomeSM Advantage Rider, you will be limited in how you can invest in the subaccounts in your contract. In addition, the fixed account is not available except for use with dollar cost averaging. See The Contracts - Investment Requirements - Option 2. If you purchase the Lincoln Lifetime IncomeSM Advantage Plus option, your only investment options until the seventh Benefit Year anniversary are the following: the LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. 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. These riders are fully discussed in this prospectus. There are differences between the riders in the features provided as well as the charge structure. In addition, the purchase of one rider 38 may impact the availability of another rider. Information about the relationship between Lincoln Lifetime IncomeSM Advantage and these other riders is included later in this prospectus. Not all riders will be available at all times. We have designed the rider to protect you from outliving your contract value. If the rider terminates or you (or your spouse, if applicable) die before your contract value is reduced to zero, neither you nor your estate will receive any lifetime withdrawals from us under the rider. We limit your withdrawals to the Maximum Annual Withdrawal amount and impose Investment Requirements in order to minimize the risk that your contract value will be reduced to zero before your (or your spouse's) death. Accordingly, a significant risk against which the rider protects, i.e., that your contract value will be reduced to zero (due to poor market performance or charges) while you are still alive, may be minimal. 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. You may not simultaneously elect Lincoln Lifetime IncomeSM Advantage with any other living benefit rider. 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. 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 you elect the Rider. If you elect the Rider at the time you purchase the contract, the initial Guaranteed Amount will equal your initial purchase payment. If you elect the Rider after we issue the contract, the initial Guaranteed Amount will equal the contract value on the effective date of the Rider. The maximum Guaranteed Amount is $10,000,000. This maximum takes into consideration the total Guaranteed Amounts from all Lincoln Life contracts (or contracts issued by our affiliates) in which you (or spouse if Joint Life Option) are the covered lives under either the Lincoln Lifetime IncomeSM Advantage or Lincoln SmartSecurity (Reg. TM) Advantage. Additional purchase payments automatically increase the Guaranteed Amount by the amount of the purchase payment (not to exceed the maximum Guaranteed Amount); for example, a $10,000 additional purchase payment will increase the Guaranteed Amount by $10,000. After the first anniversary of the Rider effective date, each time a purchase payment is made after the cumulative purchase payments equal or exceed $100,000, the charge for your Rider may change on the next Benefit Year anniversary. The charge will be the current charge in effect on that next Benefit Year Anniversary, for new purchases of the Rider. The charge will never exceed the guaranteed maximum annual charge. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge in this prospectus. Additional purchase payments will not be allowed if the contract value decreases to zero for any reason including market loss. The following example demonstrates the impact of additional purchase payments on the Lincoln Lifetime IncomeSM Advantage charge: Initial purchase payment $100,000 Additional purchase payment in Year 2 $ 95,000 No change to charge Additional purchase payment in Year 3 $ 75,000 Charge will be the current charge Additional purchase payment in Year 4 $ 25,000 Charge will be the current charge
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, Automatic Annual Step-ups, 5% Enhancements and the 200% Step-up are made, and the cost decreases as withdrawals are made because these transactions all adjust the Guaranteed Amount. In addition, the percentage charge may change when cumulative purchase payments exceed $100,000 and also when Automatic Annual Step-ups occur as discussed below. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. 5% Enhancement to the Guaranteed Amount. On each Benefit Year anniversary, the Guaranteed Amount, 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. Additional purchase payments must be invested in the contract at least one Benefit Year before the 5% Enhancement will be made on the portion of the Guaranteed Amount equal to that purchase payment. Any purchase payments made within the first 90 days after the effective date of the Rider will be included in the Guaranteed Amount for purposes of receiving the 5% Enhancement on the first Benefit Year anniversary. Note: The 5% Enhancement is not available in any year there is a withdrawal from contract value including a Maximum Annual Withdrawal Amount. A 5% Enhancement will occur in subsequent years after a withdrawal 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 Guaranteed Amount: Initial purchase payment = $100,000; Guaranteed Amount = $100,000 39 Additional purchase payment on day 30 = $15,000; Guaranteed Amount = $115,000 Additional purchase payment on day 95 = $10,000; Guaranteed Amount = $125,000 On the first Benefit Year Anniversary, the Guaranteed Amount is $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 15 years from the effective date of the Rider. The 5% Enhancement will cease upon the death of the contract owner/annuitant or upon the death of the survivor of the contractowner or spouse (if Joint Life option is in effect) or when the oldest of these individuals reaches age 86. A new 15-year 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 Guaranteed Amount, you will not receive the 5% Enhancement. The 5% Enhancement cannot increase the Guaranteed Amount above the maximum Guaranteed Amount of $10,000,000. Any withdrawal from the contract value limits the 5% Enhancement as follows: a. The 5% Enhancement will not occur on any Benefit Year anniversary in which there is a withdrawal, including a Maximum Annual Withdrawal amount, from the contract during that Benefit Year. The 5% Enhancement will occur on the following Benefit Year anniversary if no other withdrawals are made from the contract and the Rider is within the 15-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2or older or the contractowner and spouse (Joint Life Option) are age 65 or older. b. If the contractowner/annuitant (Single Life Option) is under age 591/2 or the contractowner or spouse (Joint Life Option) is under age 65, and a withdrawal is made from the contract, the 5% Enhancement will not occur again until an Automatic Annual Step-Up to the contract value (as described below) occurs. An example of the impact of a withdrawal on the 5% Enhancement is included in the Withdrawals section below. If your Guaranteed Amount is increased by the 5% Enhancement on the Benefit Year anniversary, your percentage charge for the Rider will not change. However, the amount you pay for the Rider will increase since the charge for the Rider is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. Automatic Annual Step-ups of the Guaranteed Amount. The Guaranteed Amount 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 both still living and under age 86; and b. the contract value on that Benefit Year anniversary is greater than the Guaranteed Amount after the 5% Enhancement (if any) or 200% Step-up (if any, as described below). Each time the Guaranteed Amount 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 Charge. If your percentage rider charge is increased upon an Automatic Annual Step-up, 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 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. If you decline the Automatic Annual Step-up, you will receive the 200% Step-up (if you are eligible as described below) or the 5% Enhancement (if you are eligible as specified above); however, a new 15-year period for 5% Enhancements will not begin. You may not decline the Automatic Annual Step-up, if applicable, if your additional purchase payments would cause your charge to increase. See the earlier Guaranteed Amount section. Following is an example of how the Automatic Annual Step-ups and the 5% Enhancement will work (assuming no withdrawals or additional purchase payments and issue age above 591/2(Single Life) or 65 (Joint Life):
Potential for Length of 5% Guaranteed Charge to Enhancement Contract Value Amount Change Period ---------------- ------------ --------------- ------------- Initial Purchase Payment $50,000.... $50,000 $50,000 No 15 1st Benefit Year Anniversary ....... $54,000 $54,000 Yes 15 2nd Benefit Year Anniversary ....... $53,900 $56,700 No 14 3rd Benefit Year Anniversary ....... $57,000 $59,535 No 13 4th Benefit Year Anniversary ....... $64,000 $64,000 Yes 15
40 On the 1st Benefit Year anniversary, the Automatic Annual Step-up increased the Guaranteed Amount 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 Guaranteed Amount beyond the maximum Guaranteed Amount of $10,000,000. Step-up to 200% of the initial Guaranteed Amount. On the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 70, or the rider has been in effect for 10 years, whichever event is later, we will step-up your Guaranteed Amount to 200% of your initial Guaranteed Amount (plus any purchase payments made within 90 days of rider election), less any withdrawals, if this would increase your Guaranteed Amount to an amount higher than that provided by the 5% Enhancement or the Automatic Annual Step-up for that year, if applicable. (You will not also receive the 5% Enhancement or Automatic Annual Step-up if the 200% Step-up applies.) This Step-up will not occur if: 1) any withdrawal was made prior to age 591/2 (Single Life) or age 65 (Joint Life); 2) An Excess Withdrawal (defined below) has occurred; or 3) Cumulative withdrawals totaling more than 10% of the initial Guaranteed Amount (plus purchase payments within 90 days of rider election) have been made (even if these withdrawals were within the Maximum Annual Withdrawal amount). For example, assume the initial Guaranteed Amount is $200,000. A $10,000 Maximum Annual Withdrawal was made at age 65 and at age 66. If one more $10,000 Maximum Annual Withdrawal was made at age 67, the Step-up would not be available since withdrawals cannot exceed $20,000 (10% of $200,000). This Step-up is only available one time and it will not occur if, on the applicable Benefit Year anniversary, your Guaranteed Amount exceeds 200% of your initial Guaranteed Amount (plus purchase payments within 90 days of rider election). Required minimum distributions from qualified contracts may adversely impact this benefit because you may have to withdraw more than 10% of your initial Guaranteed Amount. See the terms governing RMDs in the Maximum Annual Withdrawal Amounts section below. This Step-up will not cause a change to the percentage charge for your rider. However, the amount you pay for the rider will increase since the charge is based on the Guaranteed Amount. See Charges and Other Deductions - Lincoln Lifetime IncomeSM Advantage Charge. The following example demonstrates the impact of this Step-up on the Guaranteed Amount: Initial purchase payment at age 60 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 70, the Guaranteed Amount is $272,339 (after applicable 5% Enhancements and two $10,000 Maximum Annual Withdrawal Amounts) and the contract value is $250,000. Since the Guaranteed Amount is less than $360,000 ($200,000 initial Guaranteed Amount reduced by the two $10,000 withdrawals times 200%), the Guaranteed Amount is increased to $360,000. The 200% Step-up cannot increase the Guaranteed Amount beyond the Maximum Guaranteed Amount of $10,000,000. Maximum Annual Withdrawal Amount. You may make periodic withdrawals up to the Maximum Annual Withdrawal 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 you are at least age 591/2 (Single Life Option) or you and your spouse are both at least age 65 (Joint Life Option) and your Maximum Annual Withdrawal amount is greater than zero. On the effective date of the Rider, the Maximum Annual Withdrawal amount is equal to 5% of the initial 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. If your contract value is reduced to zero because of market performance, withdrawals equal to the Maximum Annual Withdrawal amount will continue automatically for your life (and your spouse if applicable) under the Maximum Annual Withdrawal Amount Annuity Payment Option (discussed later). You may not withdraw the remaining Guaranteed Amount in a lump sum. Note: if any withdrawal is made, the 5% Enhancement is not available during that Benefit Year and the Lincoln Lifetime IncomeSM Advantage Plus is not available (see below). Withdrawals may also negatively impact the 200% Step-up (see above). The tax consequences of withdrawals are discussed in Federal Tax Matters section of this prospectus. All withdrawals you make, whether or not within the Maximum Annual Withdrawal amount, will decrease your contract value. The Maximum Annual Withdrawal amount will be doubled, called the Nursing Home Enhancement, during a Benefit Year when the contractowner/annuitant is age 591/2 or older or the contractowner and spouse (Joint Life option), are both age 65 or older, 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 36 months or more after the effective date of the Rider, the individual was not in the nursing home in the year 41 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. Proof of nursing home confinement will be required each year. If you leave the nursing home, your Maximum Annual Withdrawal amount will be reduced by 50% starting after the next Benefit Year anniversary. 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 remaining references to the 5% Maximum Annual Withdrawal amount also include the Nursing Home Enhancement Maximum Annual Withdrawal amount. The Maximum Annual Withdrawal amount is increased by 5% of any additional purchase payments. For example, if the 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). 5% Enhancements, Automatic Annual Step-ups and the 200% Step-up will cause a recalculation of the eligible Maximum Annual Withdrawal amount to the greater of: a. the Maximum Annual Withdrawal amount immediately prior to the 5% Enhancement, Automatic Annual Step-up or 200% Step-up; or b. 5% of the Guaranteed Amount on the Benefit Year anniversary. See the chart below for examples of the recalculation. The Maximum Annual Withdrawal amount from both Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage under all Lincoln Life contracts (or contracts issued by our affiliates) applicable to you (or your spouse if Joint Life Option) can never exceed 5% of the maximum Guaranteed Amount. Withdrawals after age 591/2 (Single Life Option) or age 65 (Joint Life Option). If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) after age 591/2 (Single Life) or age 65 (Joint Life) 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. The impact of withdrawals prior to age 591/2 or age 65 will be discussed later in this section. The following example illustrates the impact of Maximum Annual Withdrawals on the Guaranteed Amount and the recalculation of the Maximum Annual Withdrawal amount (assuming no additional purchase payments and the contractowner (Single Life) is older than 591/2 and the contractowner and spouse (Joint Life) are both older than 65):
Guaranteed Maximum Annual Contract Value Amount Withdrawal Amount ---------------- ------------ ------------------ Initial Purchase Payment $50,000.... $50,000 $50,000 $2,500 1st Benefit Year Anniversary ....... $54,000 $54,000 $2,700 2nd Benefit Year Anniversary ....... $51,000 $51,300 $2,700 3rd Benefit Year Anniversary ....... $57,000 $57,000 $2,850 4th Benefit Year Anniversary ....... $64,000 $64,000 $3,200
The initial Maximum Annual Withdrawal amount is equal to 5% of the Guaranteed Amount. Since withdrawals occurred each year (even withdrawals within the Maximum Annual Withdrawal amount), the 5% Enhancement of the Guaranteed Amount was not available. However, each year the Automatic Annual Step-up occurred (1st, 3rd and 4th anniversaries), the Maximum Annual Withdrawal amount was recalculated to 5% of the current Guaranteed Amount. Withdrawals from Individual Retirement Annuity 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 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 that Benefit Year (except as described in next paragraph). If your RMD withdrawals during a Benefit Year are less than the Maximum Annual Withdrawal amount, an additional amount up to the Maximum Annual Withdrawal Amount may be withdrawn. If a withdrawal, other than an RMD is made during the Benefit Year, then all 42 amounts withdrawn in excess of the Maximum Annual Withdrawal amount, including amounts attributed to RMDs, will be treated as Excess Withdrawals (see below). 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. Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) that exceed the Maximum Annual Withdrawal amount. When Excess Withdrawals occur: 1. The Guaranteed Amount is reduced by the same proportion that the Excess Withdrawal reduces the contract value. This means that the reduction in the Guaranteed Amount could be more than a dollar-for-dollar reduction. 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount (after the pro rata reduction for the Excess Withdrawal); and 3. The 200% Step-up will never occur. The following example demonstrates the impact of an Excess Withdrawal on the Guaranteed Amount and the Maximum Annual Withdrawal amount. A $12,000 withdrawal caused a $15,182 reduction in the Guaranteed Amount. Prior to Excess Withdrawal: Contract Value = $60,000 Guaranteed Amount = $85,000 Maximum Annual Withdrawal amount = $5,000 (5% of the initial Guaranteed Amount of $100,000) After a $12,000 Withdrawal ($5,000 is within the Maximum Annual Withdrawal amount, $7,000 is the Excess Withdrawal): The contract value and Guaranteed Amount are reduced dollar for dollar for the Maximum Annual Withdrawal amount of $5,000: Contract Value = $55,000 Guaranteed Amount = $80,000 The contract value is reduced by the $7,000 Excess Withdrawal and the Guaranteed Amount is reduced by 12.72%, the same proportion that the Excess Withdrawal reduced the $55,000 contract value ($7,000 \d $55,000) Contract value = $48,000 Guaranteed Amount = $69,818 ($80,000 X 12.72% = $10,181; $80,000 - $10,181 = $69,818) Maximum Annual Withdrawal amount = $3,491.00 (5% of $69,818) In a declining market, withdrawals that exceed the Maximum Annual Withdrawal amount may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. Withdrawals before age 591/2/65. If any withdrawal is made prior to the time the contractowner, is age 591/2 (Single Life) or the contractowner and spouse (Joint Life) are both age 65, including withdrawals equal to Maximum Annual Withdrawal amounts, the following will occur: 1. The Guaranteed Amount will be reduced in the same proportion that the entire withdrawal reduced the contract value (this means that the reduction in the Guaranteed amount could be more than a dollar-for-dollar reduction); 2. The Maximum Annual Withdrawal amount will be immediately recalculated to 5% of the new (reduced) Guaranteed Amount; 3. The 5% Enhancement to the Guaranteed Amount is not available until after an Automatic Annual Step-up to the contract value occurs. This Automatic Annual Step-up will not occur until the contract value exceeds the Guaranteed Amount on a Benefit Year anniversary.See the 5% Enhancement section above), and 4. The 200% Step-up will never occur. The following is an example of the impact of a withdrawal prior to age 591/2 for single or age 65 for joint: o $100,000 purchase payment o $100,000 Guaranteed Amount o A 10% market decline results in a contract value of $90,000 o $5,000 Maximum Annual Withdrawal amount If a $5,000 withdrawal is made before age 591/2, the Guaranteed Amount will be $94,444 ($100,000 reduced by 5.56% ($5,000/ $90,000) and the new Maximum Annual Withdrawal amount is $4,722 (5% times $94,444). In a declining market, withdrawals prior to age 591/2 (or 65 if Joint Life) may substantially deplete or eliminate your Guaranteed Amount and reduce or deplete your Maximum Annual Withdrawal amount. 43 Lincoln Lifetime IncomeSM Advantage Plus. If you have purchased Lincoln Lifetime IncomeSM Advantage Plus, ("Plus Option"), on the seventh Benefit Year anniversary, you may elect to receive an increase in your contract value equal to the excess of your initial Guaranteed Amount, (plus any purchase payments made within 90 days of the rider effective date) over your current contract value. Making this election will terminate the Plus Option as well as the Lincoln Lifetime IncomeSM Advantage and the total charge for this rider and you will have no further rights to Maximum Annual Withdrawal amounts or any other benefits under this rider. You have 30 days after the seventh Benefit Year anniversary to make this election, but you will receive no more than the difference between the contract value and the initial Guaranteed Amount (plus any purchase payments within 90 days of the rider effective date) on the seventh Benefit Year anniversary. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts, prior to the seventh Benefit Year anniversary. If you make a withdrawal prior to the seventh Benefit Year anniversary, the charge for this Plus Option (in addition to the Lincoln Lifetime IncomeSM Advantage charge) will continue until the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, the 0.15% charge for the Plus Option will be removed from your contract and the charge for your Lincoln Lifetime IncomeSM Advantage will continue. If you do not elect to exercise the Plus Option, after the seventh Benefit Year anniversary, your Lincoln Lifetime IncomeSM Advantage and its charge will continue and the Plus Option 0.15% charge will be removed from your contract. The following example illustrates the Plus Option upon the seventh Benefit Year anniversary: Initial purchase payment of $100,000; Initial Guaranteed Amount of $100,000. On the seventh Benefit Year anniversary, if the current contract value is $90,000; the contractowner may choose to have $10,000 placed in the contract and the Plus Option (including the right to continue the Lincoln Lifetime IncomeSM Advantage) will terminate at that time. If you decide to purchase the Plus Option, your only investment options until the seventh Benefit Year anniversary are the: LVIP Wilshire Moderate Profile Fund, the LVIP Wilshire Conservative Profile Fund, both funds of funds, the FTVIPT Franklin Income Securities Fund or one of the following models: SSgA Structured Conservative Model, SSgA Structured Moderate Model, SSgA Conservative Index Model and SSgA Moderate Index Model. You may not transfer contract value out of these funds to any other funds before the seventh Benefit Year anniversary. After the seventh Benefit Year anniversary, you may invest in other subaccounts in your contract, subject to the Investment Requirements. Maximum Annual Withdrawal Amount Annuity Payout Option. If you are required to annuitize your Maximum Annual Withdrawal Amount, because you have reached the Maturity Date of the Contract, the Maximum Annual Withdrawal Amount Annuity Payout Option is available. The Maximum Annual Withdrawal Amount Annuity Payment Option is a fixed annuitization in which the contractowner (and spouse if applicable) will receive annual annuity payments equal to the Maximum Annual Withdrawal amount for life (this option is different from other annuity payment options discussed in your prospectus, 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 Maximum Annual Withdrawal amount (including the Nursing Home Enhancement if you qualify) for your life or the life of you and your spouse for the Joint Life option. If the contract value is zero and you have a remaining Maximum Annual Withdrawal amount, you will receive the Maximum Annual Withdrawal Amount Annuity Payment Option. If you are receiving the Maximum Annual Withdrawal Amount Annuity Payout Option, you may be eligible for a 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 Maximum Annual Withdrawal Amount Annuity Payout Option must not be the Account Value Death Benefit. The final payment is equal to the sum of all purchase payments, decreased by withdrawals in the same proportion as the withdrawals reduce the contract value; withdrawals less than or equal to the Maximum Annual Withdrawal amount and payments under the Maximum Annual Withdrawal Annuity Payout Option will reduce the sum of the purchase payments dollar for dollar. If your death benefit option in effect immediately prior to the Maximum Annual Withdrawal Amount Annuity Payout Option provided for deduction for withdrawals on a dollar for dollar basis, then any withdrawals that occurred prior to the election of the Lincoln Lifetime Income (Reg. TM) Advantage will reduce the sum of all purchase payments on a dollar for dollar basis. Death Prior to the Annuity Commencement Date. The Lincoln Lifetime IncomeSM Advantage has no provision for a payout of the Guaranteed Amount 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 in the Death Benefit section of this prospectus) will be in effect. Election of the Lincoln Lifetime IncomeSM Advantage 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. 44 Upon the death of the Single Life, the Lincoln Lifetime IncomeSM Advantage will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. 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 Rider if available under the terms and charge in effect at the time of the new purchase. There is no carryover of the Guaranteed Amount. Upon the first death under the Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount will continue for the life of the surviving spouse. The 5% Enhancement, 200% Step-up, Lincoln Lifetime IncomeSM Advantage Plus and Automatic Annual Step-up will continue if applicable as discussed above. Upon the death of the surviving spouse, the Lincoln Lifetime IncomeSM Advantage will end and no further Maximum Annual Withdrawal amounts are available (even if there was a Guaranteed Amount in effect at the time of the death). The Lincoln Lifetime IncomeSM Advantage Plus will also terminate, if in effect. As an alternative, after the first death, the surviving spouse 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. The surviving spouse must be under age 65. In deciding whether to make this change, the surviving spouse should consider: 1) if the change will cause the Guaranteed Amount and the Maximum Annual Withdrawal amount to decrease and 2) if the Single Life Rider option for new issues will provide an earlier age (591/2) to receive Maximum Annual Withdrawal amounts. Impact of Divorce on Joint Life Option. In the event of a divorce, the contractowner may terminate the Joint Life Option and purchase a Single Life Option, if available, (if the contractowner is under age 65) at the current Rider charge and the terms in effect for new sales of the Single Life Option. 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. General Provisions. Termination. After the seventh anniversary of the effective date of the Rider, the contractowner may terminate the Rider by notifying us in writing. Lincoln Lifetime IncomeSM Advantage will automatically terminate: o Upon exercise of the Lincoln Lifetime IncomeSM Advantage Plus option to receive an increase in the contract value equal to the excess of your initial Guaranteed Amount over the contract value; o on the annuity commencement date (except payments under the Maximum Annual Withdrawal Amount Annuity Payment Option will continue if applicable); o if the contractowner or annuitant is changed (except if the surviving spouse under the Joint Life option 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 death under the Single Life option or the death of the surviving spouse under the Joint Life option; o when the Maximum Annual Withdrawal amount is reduced 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 re-elect any Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, 4LATER (Reg. TM) Advantage or any other living benefits we may offer in the future. The one-year wait does not apply to the election of a new rider after the exercise (and resulting termination) of the Lincoln Lifetime IncomeSM Advantage Plus. 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 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 has the opportunity to provide a higher Guaranteed Amount because of the 5% Enhancement, Automatic Annual Step-up or 200% Step-up and this benefit also provides the potential for lifetime withdrawals from an earlier age for the Single Life Option only (59 1/2 rather than age 65 with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-Up). However, the percentage charge for the Lincoln Lifetime IncomeSM Advantage is higher for the Single Life (lower for the Joint Life) and has the potential to increase on every Benefit Year Anniversary if the increase in contract value exceeds the 5% Enhancement. Another factor to consider is that immediate withdrawals from your contract, under the Lincoln Lifetime IncomeSM Advantage, will adversely impact the 5% Enhancement and 200% Step-up. In addition, if the withdrawal is made before age 591/2 (Single Life) or age 65 (Joint Life), the 5% Enhancement is further limited and the 200% Step-up is not available. The Lincoln SmartSecurity (Reg. TM) Advantage provides that Maximum Annual Withdrawal amounts can continue to a beneficiary to the extent of any remaining Guaranteed Amount while the Lincoln Lifetime IncomeSM Advantage does not offer this feature. The Investment Requirements and Termination provisions are different between these two riders. 45 i4LIFE (Reg. TM) Advantage Option. i4LIFE (Reg. TM) Advantage is an income program, available for purchase at an additional charge, that provides periodic variable income payments for life, the ability to make withdrawals during a defined period of time (the Access Period) and a death benefit during the Access Period. A minimum payout floor, called the Guaranteed Income Benefit, is also available for purchase at the time you elect i4LIFE (Reg. TM) Advantage. 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 Maximum Annual Withdrawal amounts under Lincoln Lifetime IncomeSM Advantage. You cannot have both i4LIFE (Reg. TM)Advantage and Lincoln Lifetime IncomeSM Advantage in effect on your contract at the same time. Contractowners with an active Lincoln Lifetime IncomeSM Advantage may decide to drop Lincoln Lifetime IncomeSM Advantage and purchase i4LIFE (Reg. TM) Advantage if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. If this decision is made, the contractowner can use any remaining Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage at the terms in effect for owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. i4LIFE (Reg. TM) Advantage with the Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit must be elected before the Annuity Commencement Date and by age 99 for nonqualified contracts or age 85 for qualified contracts. See i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit sections of your prospectus. The charges for these benefits will be the current charges in effect for the i4LIFE (Reg. TM) Advantage and Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit at the time of election of these benefits. If you use your Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. In addition, Option 2 of the Investment Requirements applicable to Lincoln Lifetime IncomeSM Advantage will also apply to i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit Below is an example of how the Guaranteed Amount from the Lincoln Lifetime IncomeSM Advantage is used to establish the Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. Prior to i4LIFE (Reg. TM) Advantage election: Contract Value = $100,000 Guaranteed Amount = $100,000 After i4LIFE (Reg. TM)Advantage election: Regular Income Payment = $6,700 per year = Contract Value divided by the i4LIFE (Reg. TM) Advantage annuity factor Guaranteed Income Benefit = $5,020 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime Income (Reg. TM) Advantage rider. 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. 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, withdrawals less than or equal to the Maximum Annual Withdrawal amount, after age 591/2 for the Single Life Option or age 65 for Joint Life Option, 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 Enhanced Guaranteed Minimum Death Benefit or the Estate Enhancement Benefit, whichever is in effect. See Death Benefits in your prospectus. Any Excess Withdrawals and all withdrawals prior to age 591/2 for Single Life or age 65 for Joint Life 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. The following example demonstrates how a withdrawal will reduce the death benefit if both the Enhanced Guaranteed Minimum Death Benefit (EGMDB) and the Lincoln Lifetime IncomeSM Advantage 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 Maximum Annual Withdrawal Amount $ 5,000 Enhanced Guaranteed Minimum Death Benefit (EGMDB) values before withdrawal is the greatest of a), b), or c) described in detail in the EGMDB section of this prospectus: a) Contract value $80,000 b) Sum of purchase payments $100,000 c) Highest anniversary contract value $150,000 Withdrawal of $9,000 will impact the death benefit calculations as follows: 46 a) $80,000 - $9,000 = $71,000 (Reduction $9,000) b) $100,000 - $5,000 = $95,000 (dollar for dollar reduction of Maximum Annual Withdrawal amount) $95,000 - $5,067 = $89,933 [$95,000 times ($4,000/$75,000) = $5,067] Pro rata 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 reduces the death benefit option pro rata. Total reduction = $16,875. Item c) provides the largest death benefit of $133,125. Availability. The Lincoln Lifetime IncomeSM Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts, for existing contractowners, on or about May 19, 2008. 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 on or after the purchase of i4LIFE (Reg. TM) Advantage or on or after the Annuity Commencement Date and must wait at least 12 months after terminating 4LATER (Reg. TM) Advantage, Lincoln SmartSecurity (Reg. TM) Advantage or any other living benefits we may offer in the future. The 12 month wait will be waived until the later of July 31, 2008 or 60 days after the Lincoln Lifetime IncomeSM Advantage is available for sale in your state. If you decide to drop a rider to add Lincoln Lifetime IncomeSM Advantage, your Guaranteed Amount will equal the current contract value on the effective date of the change. Before you make this change, you should consider that no guarantees or fee waiver provisions carry over from the previous rider. The Lincoln Lifetime IncomeSM Advantage terminates after the death of a covered life and the Guaranteed Amount is not available to a benefiicary. You will be subject to additional Investment Requirements. See the comparison to Lincoln SmartSecurity (Reg. TM) Advantage for other factors to consider before making a change. There is no guarantee that the Lincoln Lifetime IncomeSM Advantage 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. In addition, certain features of the Rider may not be available in some states. Check with your investment representative regarding availability. 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. Two different options are available to step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up). You must choose one of these two options: Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up when you purchase the benefit. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up, the contractowner has the option to step-up the Guaranteed Amount after five years. With the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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 may 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 its 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, which provides minimum guaranteed, periodic withdrawals for life. See The Contracts - Lincoln Lifetime IncomeSM Advantage - 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. 47 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 $5,000,000 under Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and $10,000,000 for Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. This maximum takes into consideration the combined Guaranteed Amount 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) under either the Lincoln SmartSecuritySM Advantage or the Lincoln Lifetime IncomeSM Advantage. 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. For the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option we may restrict purchase payments to your annuity contract in the future. We will notify you if we restrict additional purchase payments. For the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, 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 option, 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 interest adjustments), the Rider charge and account fee plus any purchase payments made on that date is greater than the Guaranteed Amount immediately preceding the valuation date. After the tenth Benefit Year anniversary, you may initiate another ten-year period of automatic step-ups by electing (in writing) to step-up the Guaranteed Amount to the greater of the Contract Value or the current Guaranteed Amount if: a. each contractowner and annuitant is under age 81; and b. the contractowner or joint owner is still living. If you choose, we will administer this election for you automatically, so that a new ten-year period of step-ups will begin at the end of each prior ten-year step-up period. Following is an example of how the step-ups work in the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option, (assuming no withdrawals or additional purchase payments):
Contract Value Guaranteed Amount o Initial Deposit $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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, after the fifth anniversary of the Rider, you may elect (in writing) to step-up the Guaranteed Amount to an amount equal to the contract value on the effective date of the step-up. Additional step-ups are permitted, but you must wait at least 5 years between each step-up. 48 Under both the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up and the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up options, 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: o 7% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option and o 5% of the Guaranteed Amount under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option. 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 7% or 5% (depending on your option) 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. 7% or 5% (depending on your option) of the new (stepped-up) Guaranteed Amount. If the cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) are within the Maximum Annual Withdrawal amount, then: 1. the withdrawal will reduce the Guaranteed Amount by the amount of the withdrawal on a dollar-for-dollar basis, and 2. the Maximum Annual Withdrawal amount will remain the same. Withdrawals within the Maximum Annual Withdrawal amount are not subject to the interest adjustment on the amount withdrawn from the fixed account, if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option is in effect, withdrawals from IRA contracts will be treated as within the Maximum Annual Withdrawal amount (even if they exceed the 5% Maximum Annual Withdrawal amount) only if the withdrawals are taken in the form of systematic monthly or quarterly installments, as calculated by Lincoln, of the amount needed to satisfy the required minimum distribution rules under Internal Revenue Code Section 401(a)(9) for this contract value. Distributions from qualified contracts are generally taxed as ordinary income. In nonqualified contracts, withdrawals of contract value that exceed purchase payments are taxed as ordinary income. See Federal Tax Matters. When cumulative amounts withdrawn from the contract during the Benefit Year (including the current withdrawal) exceed the Maximum Annual Withdrawal amount: 1. The Guaranteed Amount is reduced to the lesser of: o the contract value immediately following the withdrawal, or o the Guaranteed Amount immediately prior to the withdrawal, less the amount of the withdrawal. 2. The Maximum Annual Withdrawal amount will be the least of: o the Maximum Annual Withdrawal amount immediately prior to the withdrawal; or o the greater of: o 7% or 5% (depending on your option) of the reduced Guaranteed Amount immediately following the withdrawal (as specified above when withdrawals exceed the Maximum Annual Withdrawal amount); or o 7% or 5% (depending on your option) 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 option 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. 49 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. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option for IRA contracts, the annual amount available for withdrawal within the Maximum Annual Withdrawal amount may not be sufficient to satisfy your required minimum distributions under the Internal Revenue Code. This is particularly true for individuals over age 84. Therefore, you may have to make withdrawals that exceed the Maximum Annual Withdrawal amount. Withdrawals over the Maximum Annual Withdrawal amount may quickly and substantially decrease your Guaranteed Amount and Maximum Annual Withdrawal amount, especially in a declining market. You should consult your tax advisor to determine if there are ways to limit the risks associated with these withdrawals. Such methods may involve the timing of withdrawals or foregoing step-ups of the Guaranteed Amount. Withdrawals in excess of the Maximum Annual Withdrawal amount will be subject to 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. (Available only with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up Single or Joint Life options and not the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or the prior version of the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option). Payment of the Maximum Annual Withdrawal amount will be guaranteed for your (contractowner) lifetime (if you purchase the Single Life option) or for the lifetimes of you (contractowner) and your spouse (if the Joint Life option is purchased), as long as: 1) No withdrawals are made before you (and your spouse if a Joint Life) are age 65; and 2) An excess withdrawal (described above) has not reduced the Maximum Annual Withdrawal amount to zero. If the lifetime withdrawal is not in effect, the Maximum Annual Withdrawal amount will last only until the Guaranteed Amount equals zero. If any withdrawal is made prior to the time you (or both spouses) are age 65, the Maximum Annual Withdrawal amount will not last for the lifetime(s), except in the two situations described below: 1) If a step-up of the Guaranteed Amount after age 65 causes the Maximum Annual Withdrawal amount to equal or increase from the immediately prior Maximum Annual Withdrawal amount. This typically occurs if the contract value equals or exceeds the highest, prior Guaranteed Amount. If this happens, the new Maximum Annual Withdrawal amount will automatically be available for the specified lifetime(s); or 2) The contractowner makes a one-time election to reset the Maximum Annual Withdrawal amount to 5% of the current Guaranteed Amount. This reset will occur on the first valuation date following the Benefit Year anniversary and will be based on the Guaranteed Amount as of that valuation date. This will reduce your Maximum Annual Withdrawal amount. A contractowner would only choose this if the above situation did not occur. To reset the Maximum Annual Withdrawal amount, the following must occur: a. the contractowner (and spouse if applicable) is age 65; b. the contract is currently within a ten-year automatic step-up period described above (or else a contractowner submits a step-up request to start a new ten-year automatic step-up period) (the contractowner must be eligible to elect a step-up; i.e., all contractowners and the annuitant must be alive and under age 81); and c. you have submitted this request to us in writing at least 30 days prior to the end of the Benefit Year. 50 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 7% or 5% (depending on your option) Maximum Annual Withdrawal amount, including the lifetime Maximum Annual Withdrawals if in effect (this option is different from other annuity payment options discussed in your prospectus, including i4LIFE (Reg. TM) Advantage, which are based on your contract value). Payment frequencies other than annual may be available. Payments will continue until the Guaranteed Amount equals zero and may continue until death if the lifetime Maximum Annual Withdrawal is in effect. This may result in a partial, final payment. You would consider this option only if your contract value is less than the Guaranteed Amount (and you don't believe the contract value will ever exceed the Guaranteed Amount) and you do not wish to keep your annuity contract in force other than to pay out the Guaranteed Amount. You will have no other contract features other than the right to receive annuity payments equal to the Maximum Annual Withdrawal amount until the Guaranteed Amount equals zero. If the contract value is zero and you have a remaining Guaranteed Amount, you may not withdraw the remaining Guaranteed Amount in a lump sum, but must elect the Guaranteed Amount Annuity Payment Option. Death Prior to the Annuity Commencement Date. There is no provision for a lump sum payout of the Guaranteed Amount upon death of the contractowners or annuitant. At the time of death, if the contract value equals zero, no death benefit will be paid other than any applicable Maximum Annual Withdrawal amounts. All death benefit payments must be made in compliance with Internal Revenue Code Sections 72(s) or 401(a)(9) as applicable as amended from time to time. See The Contracts - Death Benefit. Upon the death of the Single Life under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Single Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will end. If the contract is continued as discussed below, the Maximum Annual Withdrawal amount will continue until the Guaranteed Amount, if any, is zero. In the alternative, the surviving spouse can choose to become the new Single Life, if the surviving spouse is under age 81. This will cause a reset of the Guaranteed Amount and the Maximum Annual Withdrawal amount. The new Guaranteed Amount will equal the contract value on the date of the reset and the new Maximum Annual Withdrawal amount will be 5% of the new Guaranteed Amount. This also starts a new 10 year period of automatic step-ups. At this time, the charge for the Rider will become the current charge in effect for new purchases of the Single Life option. The surviving spouse will need to be 65 before taking withdrawals to qualify for a lifetime payout. In deciding whether to make this change, the surviving spouse should consider: 1) the change a reset would cause to the Guaranteed Amount and the Maximum Annual Withdrawal amount ; 2) whether it is important to have Maximum Annual Withdrawal amounts for life versus the remainder of the prior Guaranteed Amount and 3) the cost of the Single Life option. Upon the first death under the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up-Joint Life option, the lifetime payout of the Maximum Annual Withdrawal amount, if in effect, will continue for the life of the surviving spouse. Upon the death of the surviving spouse, the lifetime payout of the Maximum Annual Withdrawal amount will end. However, if the spouse's beneficiary elects to take the annuity death benefit in installments, 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 51 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 option, will apply to the spouse as the new contractowner. Under the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option, the new contractowner is eligible to elect to step-up the Guaranteed Amount prior to the next available step-up date; however, all other conditions for the step-up apply and any subsequent step-up by the new contractowner must meet all conditions for a step-up. If a non-spouse beneficiary elects to receive the death benefit in installments (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 option 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 re-elect any Lincoln SmartSecurity (Reg. TM) Advantage, Lincoln Lifetime IncomeSM Advantage or 4LATER (Reg. TM) Advantage or any other living benefit we are offering in the future. i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to drop Lincoln SmartSecurity (Reg. TM) Advantage 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. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. All contractowners and the annuitant of the contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option and contractowners of qualified annuity contracts with the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option must be under age 81 at the time this Rider is elected. You cannot elect the Rider on or after the purchase of i4LIFE (Reg. TM) Advantage or 4LATER (Reg. TM) Advantage or on or after the Annuity Commencement Date. There is no guarantee that the Lincoln SmartSecurity (Reg. TM) Advantage will be available for new purchasers in the future as we reserve the right to discontinue this benefit at any time. The availability of this Rider will depend upon your state's approval of this Rider. Check with your investment representative regarding availability. 52 i4LIFE (Reg. TM) Advantage i4LIFE (Reg. TM) Advantage (the Variable Annuity Payout Option Rider in your contract) is an optional annuity payout rider you may purchase at an additional cost and is separate and distinct from other annuity payout options offered under your contract and described later in this prospectus. You may also purchase either the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit or the 4LATER (Reg. TM) Guaranteed Income Benefit (described below) for an additional charge. See Charges and Other Deductions - i4LIFE (Reg. TM) Advantage Charges. i4LIFE (Reg. TM) Advantage is a payout option that provides you with variable, periodic regular income payments for life. These payouts are made during an Access Period, where you have access to the Account Value. After the Access Period ends, payouts continue for the rest of your life, during the Lifetime Income Period. i4LIFE (Reg. TM) Advantage is different from other annuity payout options provided by Lincoln because with i4LIFE (Reg. TM) Advantage, you have the ability to make additional withdrawals or surrender the contract during the Access Period. You may also purchase the Guaranteed Income Benefit which provides a minimum payout floor for your regular income payments. The initial regular income payment is calculated from the Account Value on the periodic income commencement date, a date no more than 14 days prior to the date you select to begin receiving the regular income payments. This option is available on non-qualified annuities, IRAs and Roth IRAs (check with your registered representative regarding availability with SEP market). This option, when available in your state, 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 an annuity payout option is elected by sending a written request to our Home Office. If you purchased 4LATER (Reg. TM) Advantage, you must wait at least one year before you can purchase i4LIFE (Reg. TM) Advantage. When you elect i4LIFE (Reg. TM) Advantage, you must choose the annuitant, secondary life, if applicable, and make several choices about your regular income payments. The annuitant and secondary life may not be changed after i4LIFE (Reg. TM) Advantage is elected. For qualified contracts, the secondary life must be the spouse. See i4LIFE (Reg. TM) Advantage Death Benefits regarding the impact of a change to the annuitant prior to the i4LIFE (Reg. TM) Advantage election. i4LIFE (Reg. TM) Advantage for IRA annuity contracts is only available if the annuitant and secondary life, 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 the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit or i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit has been elected. Additional purchase payments will not be accepted once i4LIFE (Reg. TM) Advantage becomes effective for a non-qualified annuity contract. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The Contracts - Transfers on or Before the Annuity Commencement Date. When you elect i4LIFE (Reg. TM) Advantage you must select a death benefit option. Once i4LIFE (Reg. TM) Advantage begins, any prior death benefit election will terminate and the i4LIFE (Reg. TM) Advantage death benefit will be in effect. Existing contractowners, with the Account Value death benefit, who elect i4LIFE (Reg. TM) Advantage must choose the i4LIFE (Reg. TM) Advantage Account Value death benefit. The amount paid under the new death benefit may be less than the amount that would have been paid under the death benefit provided before i4LIFE (Reg. TM) Advantage began. See The Contracts - i4LIFE (Reg. TM) Advantage Death Benefits. Access Period. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period, which begins on the periodic income commencement date. The Access Period is a defined period of time during which we pay variable, periodic regular income payments and provide a death benefit, and during which you may surrender the contract and make withdrawals from your Account Value (defined below). At the end of the Access Period, the remaining Account Value is used to make regular income payments for the rest of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently to age 115 for non-qualified contracts; to age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. 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. Account Value. The initial Account Value is the contract value on the valuation date i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value will be increased/decreased by any investment gains/losses including 53 interest credited on the fixed account, and will be reduced by regular income payments made and 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 applicable interest adjustments. See Charges and Other Deductions. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (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 annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and the Guaranteed Income Benefit if applicable) will terminate. Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed 54 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 Account Value Death Benefit. The i4LIFE (Reg. TM) Advantage Account Value death benefit is available during the Access Period. This death benefit is equal to the Account Value as of the valuation date on which we approve the payment of the death claim. You may not change this death benefit once it is elected. i4LIFE (Reg. TM) Advantage Guarantee of Principal Death Benefit. The i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit is available during the Access Period and will be equal to the greater of: o the Account Value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income 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 or Account Value, may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for applicable charges and premium taxes, if any. The 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. 55 During the Access Period, contracts with the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit may elect to change to the i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our 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 Guarantee of Principal death benefit. i4LIFE (Reg. TM) Advantage EGMDB. The i4LIFE (Reg. TM) Advantage EGMDB is only available during the Access Period. This benefit is the greatest of: o the Account Value as of the valuation date on which we approve the payment of the claim; or o the sum of all purchase payments, less the sum of regular income payments and other withdrawals where: o regular income payments, including withdrawals to provide the Guaranteed Income Benefit, reduce the death benefit by the dollar amount of the payment or in the same proportion that regular income payments reduce the Account Value, depending on the terms of your contract; 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. If your contract has the ABE Enhancement Amount (if elected at the time of application) (see discussion under Accumulated Benefit Enhancement ABE) specified in your contract benefit data pages as applicable on the date of death, this Enhancement Amount will be added to the sum of the purchase payments, but will be reduced by the regular income payments and withdrawals on either a dollar for dollar basis or in the same proportion that the regular income payment or withdrawal reduced the contract value or Account Value, depending on the terms of your contract. 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 applicable charges and premium taxes, if any. Contracts with the i4LIFE (Reg. TM) Advantage EGMDB may elect to change to the i4LIFE (Reg. TM) Advantage Guarantee of Principal or i4LIFE (Reg. TM) Advantage Account Value death benefit. We will effect the change in death benefit on the valuation date we receive a completed election form at our 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 i4LIFE (Reg. TM) Advantage Account Value death benefit. For non-qualified contracts, upon the death of the contractowner, joint owner or annuitant, the contractowner (or beneficiary) may elect to terminate the contract and receive full payment of the death benefit or may elect to continue the contract and receive regular income payments. Upon the death of the secondary life, who is not also an owner, only the surrender value is paid. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. 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). 56 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. Accumulated Benefit Enhancement (ABESM) (Non-qualified contracts only). This benefit is no longer available to contract purchasers after November 1, 2005. We provide to eligible contractowners of non-qualified i4LIFE (Reg. TM) Advantage contracts only an ABE Enhancement Amount, if requested at the time of application, at no additional charge. You are eligible to receive the ABE Enhancement Amount if: o you are purchasing i4LIFE (Reg. TM) Advantage with the EGMDB death benefit; o you are utilizing the proceeds of a variable annuity contract of an insurer not affiliated with us to purchase the contract. Prior contracts with loans or collateral assignments are not eligible for this benefit; o the cash surrender value of the prior contract(s) is at least $50,000 at the time of the surrender (amounts above $2,000,000 will require our approval); o all contractowners, joint owners and annuitants must be under the age of 76 as of the contract date (as shown in your contract) to select this benefit; or o the contractowners, joint owners and annuitants of this contract must have been owner(s) or annuitants of the prior contract(s). Upon the death of any contractowner, joint owner or annuitant, the ABE Enhancement Amount will be payable in accordance with the terms of the i4LIFE (Reg. TM) Advantage EGMDB death benefit. However, if the death occurs in the first contract year, only 75% of the Enhancement Amount is available. The ABE Enhancement Amount is equal to the excess of the prior contract's documented death benefit(s) over the actual cash surrender value received by us. However, we will impose a limit on the prior contract's death benefit equal to the lesser of: o 140% of the prior contract's cash value; or o the prior contract's cash value plus $400,000. In addition, if the actual cash surrender value we receive is less than 95% of the documented cash value from the prior insurance company, the prior contract's death benefit will be reduced proportionately according to the reduction in cash value amounts. For the ABE Enhancement Amount to be effective, documentation of the death benefit and cash value from the prior insurance company must be provided to us at the time of the application. We will only accept these amounts in a format provided by the prior insurance company. Examples of this documentation include: the prior company's periodic customer statement, a statement on the prior company's letterhead, or a printout from the prior company's website. This documentation cannot be more than ninety (90) days old at the time of the application. You may provide updated documentation prior to the contract date if it becomes available from your prior company. If more than one annuity contract is exchanged to a contract with us, the ABE Enhancement Amount will be calculated for each prior contract separately, and then added together to determine the total ABE Enhancement Amount. Upon the death of any contractowner or joint owner who was not a contractowner on the effective date of the i4LIFE (Reg. TM) Advantage EGMDB death benefit, the ABE Enhancement Amount will be equal to zero (unless the change occurred because of the death of a contractowner or joint owner). If any contractowner or joint owner is changed due to a death and the new contractowner or joint owner is age 76 or older when added to the contract, then the ABE Enhancement Amount for this new contractowner or joint owner will be equal to zero. The ABE Enhancement Amount will terminate on the valuation date the i4LIFE (Reg. TM) Advantage EGMDB death benefit option of the contract is changed or terminated. It is important to realize that even with the ABE Enhancement Amount, your death benefit will in many cases be less than the death benefit from your prior company. This is always true in the first year, when only 75% of the ABE Enhancement Amount is available. 57 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage There is a Guaranteed Income Benefit 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 i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit charge. 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 prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit. Refer to the 4LATER (Reg. TM) section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider may limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements - Option 1. 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 for new elections 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 who decides to drop Lincoln Lifetime IncomeSM Advantage 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 rider. i4LIFE (Reg. TM) Guaranteed Income Benefit, if available, is purchased when you elect i4LIFE (Reg. TM) Advantage or anytime during the Access Period. If you intend to use the Guaranteed Amount from either the Lincoln SmartSecurity (Reg. TM) Advantage or the Lincoln Lifetime IncomeSM Advantage riders to establish the Guaranteed Income Benefit, you must elect the Guaranteed Income Benefit at the time you elect i4LIFE (Reg. TM) Advantage. The Guaranteed Income Benefit is initially equal to 75% of the regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) in effect at the time the Guaranteed Income Benefit is elected. Contractowners who purchased the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage can use the remaining Guaranteed Amount (if greater than the contract value) at the time the Guaranteed Income Benefit is determined, to increase the Guaranteed Income Benefit. The Guaranteed Income Benefit will be increased by the ratio of the remaining Guaranteed Amount to the contract value at the time the initial i4LIFE (Reg. TM) Advantage payment is calculated. In other words, the Guaranteed Income Benefit will equal 75% of the initial regular income payment times the remaining Guaranteed Amount divided by the contract value, if the Guaranteed Amount is greater than the contract value. 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 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. This withdrawal 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 withdrawals 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. If your Account Value equals zero, no death benefit will be paid. 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. 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. 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. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment affects the i4LIFE (Reg. TM) Account Value: Guaranteed Income Benefit = $5,692; i4LIFE regular income payment = $5,280 i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment -$5,280 Additional withdrawal for Guaranteed Income Benefit -$412 i4LIFE (Reg. TM) Account Value after payouts $74,308
In the current version of the Guaranteed Income Benefit option ("Version 2") the Guaranteed Income Benefit will automatically step-up every three years to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary during a 15-year step-up period. At the end of a 15-year step-up period, you may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that we administer this election for you. At the time of a reset of the 15 year period, the Guaranteed Income Benefit charge may increase subject to the guaranteed maximum 58 charge of 1.50%. (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charges.) After we administer this election, you have 30 days to notify us if you wish to reverse the election. If you have an older version of the Guaranteed Income Benefit ("Version 1"), your Guaranteed Income Benefit will not step-up on an anniversary, but will remain level. This version is no longer available for sale. 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 General i4LIFE (Reg. TM) Provisions for an example. 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 this benefit is 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) thereby reducing your regular income payment, your i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will also be reduced. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be reduced in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will terminate. Refer to the Example in the 4LATER (Reg. TM) Guaranteed Income Benefit section. 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 periodic 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 periodic 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. If you used your Lincoln Lifetime IncomeSM Advantage Guaranteed Amount to establish the Guaranteed Income Benefit, you must keep i4LIFE (Reg. TM) Advantage and the Guaranteed Income Benefit in effect for at least 3 years. 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. Lincoln Lifetime Income (Reg. TM) Advantage Guaranteed Income Benefit. Contractowners with the Lincoln Lifetime IncomeSM Advantage rider who purchase the Guaranteed Income Benefit are subject to the following guarantees which are set forth in the Lincoln Lifetime IncomeSM Advantage rider: a) Maximum charge for the Guaranteed Income Benefit b) guaranteed annuity factors. General i4LIFE (Reg. TM) Provisions Withdrawals. You may request a withdrawal at any time prior to or during the Access Period. We reduce the Account Value by the amount of the withdrawal, and all subsequent regular income payments and Guaranteed Income Benefit payments, if applicable, will be reduced proportionately. Withdrawals may have tax consequences. See Federal Tax Matters. 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 $ 750 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 59 Reduction in Guaranteed Income Benefit for Withdrawal = $750 X 10% = $75 Guaranteed Income Benefit after Withdrawal = $750 - $75 = $675 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. The interest adjustment may apply. Termination. For IRA annuity contracts, you may terminate i4LIFE (Reg. TM) Advantage prior to the end of the Access Period by notifying us in writing. The termination will be effective on the next valuation date after we receive the notice and your contract will return to the accumulation phase. Your i4LIFE (Reg. TM) Advantage death benefit will terminate and you may choose the Guarantee of Principal (if you had the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit) or Account Value death benefit options. Upon termination, we will stop assessing the charge for i4LIFE (Reg. TM) Advantage and begin assessing the mortality and expense risk charge and administrative charge associated with the new death benefit option. Your contract value upon termination will be equal to the Account Value on the valuation date we terminate i4LIFE (Reg. TM) Advantage. For non-qualified contracts, you may not terminate i4LIFE (Reg. TM) Advantage once you have elected it. 4LATER (Reg. TM) Advantage 4LATER (Reg. TM) Advantage is a rider that is available to protect against market loss by providing you with a method to receive a minimum payout from your annuity. The rider provides an Income Base (described below) prior to the time you begin taking payouts from your annuity. If you elect 4LATER (Reg. TM) Advantage, you must elect i4LIFE (Reg. TM) with the 4LATER (Reg. TM) Guaranteed Income Benefit to receive a benefit from 4LATER (Reg. TM) Advantage. Election of these riders may limit how much you can invest in certain subaccounts. See The Contracts-Investment Requirements. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Advantage charge. 4LATER (Reg. TM) Advantage Before Payouts Begin The following discussion applies to 4LATER (Reg. TM) Advantage during the accumulation phase of your annuity, referred to as 4LATER (Reg. TM). This is prior to the time any payouts begin under i4LIFE (Reg. TM) Advantage with the 4LATER (Reg. TM) Guaranteed Income Benefit. Income Base. The Income Base is a value established when you purchase 4LATER (Reg. TM) and will only be used to calculate the minimum payouts available under your contract at a later date. The Income Base is not available for withdrawals or as a death benefit. If you elect 4LATER (Reg. TM) at the time you purchase the contract, the Income Base initially equals the purchase payments. If you elect 4LATER (Reg. TM) after we issue the contract, the Income Base will initially equal the contract value on the 4LATER (Reg. TM) Effective Date. Additional purchase payments automatically increase the Income Base by the amount of the purchase payments. Additional purchase payments will not be allowed if the contract value is zero. Each withdrawal reduces the Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. As described below, during the accumulation phase, the Income Base will be automatically enhanced by 15% (adjusted for additional purchase payments and withdrawals as described in the Future Income Base section below) at the end of each Waiting Period. In addition, after the Initial Waiting Period, you may elect to reset your Income Base to the current contract value if your contract value has grown beyond the 15% enhancement. You may elect this reset on your own or you may choose to have Lincoln Life automatically reset the Income Base for you at the end of each Waiting Period. These reset options are discussed below. Then, when you are ready to elect i4LIFE (Reg. TM) Advantage and establish the 4LATER (Reg. TM) Guaranteed Income Benefit, the Income Base (if higher than the contract value) is used in the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit calculation. Waiting Period. The Waiting Period is each consecutive 3-year period which begins on the 4LATER (Reg. TM) Effective Date, or on the date of any reset of the Income Base to the contract value. At the end of each completed Waiting Period, the Income Base is increased by 15% (as adjusted for purchase payments and withdrawals) to equal the Future Income Base as discussed below. The Waiting Period is also the amount of time that must pass before the Income Base can be reset to the current contract value. A new Waiting Period begins after each reset and must be completed before the next 15% enhancement or another reset occurs. Future Income Base. 4LATER (Reg. TM) provides a 15% automatic enhancement to the Income Base after a 3-year Waiting Period. This enhancement will continue every 3 years until i4LIFE (Reg. TM) Advantage is elected, you terminate 4LATER (Reg. TM) or you reach the Maximum Income Base. See Maximum Income Base. During the Waiting Period, the Future Income Base is established to provide the value of this 15% enhancement on the Income Base. After each 3-year Waiting Period is satisfied, the Income Base is increased to equal the value of the Future Income Base. The 4LATER (Reg. TM) charge will then be assessed on this newly adjusted Income Base, but the percentage charge will not change. Any purchase payment made after the 4LATER (Reg. TM) Effective Date, but within 90 days of the contract effective date, will increase the Future Income Base by the amount of the purchase payment, plus 15% of that purchase payment. 60 Example: Initial Purchase Payment $100,000 Purchase Payment 60 days later $ 10,000 -------- Income Base $110,000 Future Income Base (during the 1st Waiting Period) $126,500 ($110,000 x 115%) Income Base (after 1st Waiting Period) $126,500 New Future Income Base (during 2nd Waiting Period) $145,475 ($126,500 x 115%)
Any purchase payments made after the 4LATER (Reg. TM) Effective Date and more than 90 days after the contract effective date will increase the Future Income Base by the amount of the purchase payment plus 15% of that purchase payment on a pro-rata basis for the number of full years remaining in the current Waiting Period. Example: Income Base $100,000 Purchase Payment in Year 2 $ 10,000 New Income Base $110,000 -------- Future Income Base (during 1st Waiting Period-Year 2) $125,500 ($100,000 x 115%) + ($10,000 x 100%) + (10,000 x 15% x 1/3) Income Base (after 1st Waiting Period) $125,500 New Future Income Base (during 2nd Waiting Period) $144,325 (125,500 x 115%)
Withdrawals reduce the Future Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. During any subsequent Waiting Periods, if you elect to reset the Income Base to the contract value, the Future Income Base will equal 115% of the contract value on the date of the reset and a new Waiting Period will begin. See Resets of the Income Base to the current contract value below. In all situations, the Future Income Base is subject to the Maximum Income Base described below. The Future Income Base is never available to the contractowner to establish a 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, but is the value the Income Base will become at the end of the Waiting Period. Maximum Income Base. The Maximum Income Base is equal to 200% of the Income Base on the 4LATER (Reg. TM) Effective Date. The Maximum Income Base will be increased by 200% of any additional purchase payments. In all circumstances, the Maximum Income Base can never exceed $10,000,000. This maximum takes into consideration the combined Income Bases for all Lincoln Life contracts (or contracts issued by our affiliates) owned by you or on which you are the annuitant. After a reset to the current contract value, the Maximum Income Base will equal 200% of the contract value on the valuation date of the reset not to exceed $10,000,000. Each withdrawal will reduce the Maximum Income Base in the same proportion as the amount withdrawn reduces the contract value on the valuation date of the withdrawal. 61 Example: Income Base $100,000 Maximum Income Base $200,000 Purchase Payment in Year 2 $ 10,000 Increase to Maximum Income Base $ 20,000 New Income Base $110,000 New Maximum Income Base $220,000 Future Income Base after Purchase $125,500 Maximum Income Base $220,000 Payment Income Base (after 1st Waiting $125,500 Period) Future Income Base (during 2nd $144,325 Maximum Income Base $220,000 Waiting Period) Contract Value in Year 4 $112,000 Withdrawal of 10% $ 11,200 After Withdrawal (10% adjustment) ----------------------------------------- Contract Value $100,800 Income Base $112,950 Future Income Base $129,892 Maximum Income Base $198,000
Resets of the Income Base to the current contract value ("Resets"). You may elect to reset the Income Base to the current contract value at any time after the initial Waiting Period following: (a) the 4LATER (Reg. TM) Effective Date or (b) any prior reset of the Income Base. Resets are subject to a maximum of $10,000,000 and the annuitant must be under age 81. You might consider resetting the Income Base if your contract value has increased above the Income Base (including the 15% automatic Enhancements) and you want to lock-in this increased amount to use when setting the Guaranteed Income Benefit. If the Income Base is reset to the contract value, the 15% automatic Enhancement will not apply until the end of the next Waiting Period. This reset may be elected by sending a written request to our Home office or by specifying at the time of purchase that you would like us to administer this reset election for you. If you want us to administer this reset for you, at the end of each 3-year Waiting Period, if the contract value is higher than the Income Base (after the Income Base has been reset to the Future Income Base), we will implement this election and the Income Base will be equal to the contract value on that date. We will notify you that a reset has occurred. This will continue until you elect i4LIFE (Reg. TM) Advantage, the annuitant reaches age 81, or you reach the Maximum Income Base. If we administer this reset election for you, you have 30 days after the election to notify us if you wish to reverse this election and have your Income Base increased to the Future Income Base instead. You may wish to reverse this election if you are not interested in the increased charge. If the contract value is less than the Income Base on any reset date, we will not administer this reset. We will not attempt to administer another reset until the end of the next 3-year Waiting Period; however, you have the option to request a reset during this period by sending a written request to our Home office. At the time of each reset (whether you elect the reset or we administer the reset for you), the annual charge will change to the current charge in effect at the time of the reset, not to exceed the guaranteed maximum charge. At the time of reset, a new Waiting Period will begin. Subsequent resets may be elected at the end of each new Waiting Period. The reset will be effective on the next valuation date after notice of the reset is approved by us. We reserve the right to restrict resets to Benefit Year anniversaries. The Benefit Year is the 12-month period starting with the 4LATER (Reg. TM) Effective Date and starting with each anniversary of the 4LATER (Reg. TM) Effective Date after that. If the contractowner elects to reset the Income Base, the Benefit Year will begin on the effective date of the reset and each anniversary of the effective date of the reset after that. Eligibility. To purchase 4LATER (Reg. TM) Advantage, the annuitant must be age 80 or younger. If you plan to elect i4LIFE (Reg. TM) Advantage within three years of the issue date of 4LATER (Reg. TM) Advantage, you will not receive the benefit of the Future Income Base. 4LATER (Reg. TM) Rider Effective Date. If 4LATER (Reg. TM) is elected at contract issue, then it will be effective on the contract's effective date. If 4LATER (Reg. TM) is elected after the contract is issued (by sending a written request to our Home office), then it will be effective on the next valuation date following approval by us. 4LATER (Reg. TM) Guaranteed Income Benefit When you are ready to elect i4LIFE (Reg. TM) Advantage regular income payments, the greater of the Income Base accumulated under 4LATER (Reg. TM) or the contract value will be used to calculate the 4LATER (Reg. TM) Guaranteed Income Benefit. The 4LATER (Reg. TM) Guaranteed Income Benefit is a minimum payout floor for your i4LIFE (Reg. TM) Advantage regular income payments. See Charges and Other Deductions for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit charge. The Guaranteed Income Benefit will be determined by dividing the greater of the Income Base or contract value (or Guaranteed Amount if applicable) on the periodic income commencement date, by 1000 and multiplying the result by the rate per $1000 from the 62 Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: 4LATER (Reg. TM) Guaranteed Income $ 5,692 i4LIFE (Reg. TM) regular income payment $ 5,280 Benefit
i4LIFE (Reg. TM) Account Value before payment $80,000 Regular Income Payment - $ 5,280 Additional payment for 4LATER (Reg. TM) Guaranteed Income Benefit - $ 412 ---------------------------------------------------------------------------- ------- i4LIFE (Reg. TM) Account Value after payment $74,308
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the Home office. If you prefer, when you start the Guaranteed Income Benefit, you can request that Lincoln Life administer this election for you. At the time of a reset of the 15 year period, the charge for the 4LATER (Reg. TM) Guaranteed Income Benefit will become the current charge up to the guaranteed maximum charge of 1.50% (i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit charge). After we administer this election, you have 30 days to notify us if you wish to reverse the election (because you do not wish to incur the additional cost). Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. 63 When you make your 4LATER (Reg. TM) Guaranteed Income Benefit and i4LIFE (Reg. TM) Advantage elections, you must also choose an assumed investment return of 4% to calculate your i4LIFE (Reg. TM) Advantage regular income payments. Once you have elected 4LATER (Reg. TM), the assumed investment return rate will not change; however, we may change the required assumed investment return rate in the future for new purchasers only. The following is an example of what happens when you extend the Access Period: Assume: i4LIFE (Reg. TM) Advantage remaining Access Period = 10 years Current i4LIFE (Reg. TM) Advantage regular income payment = $6375 Current 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 Extend Access Period 5 years: i4LIFE (Reg. TM) Advantage regular income payment after extension = $5355 Percentage change in i4LIFE (Reg. TM) Advantage regular income payment = $5355 \d $6375 = 84% New 4LATER (Reg. TM) Guaranteed Income Benefit = $5692 x 84% = $4781 General Provisions of 4LATER (Reg. TM) Advantage Termination. After the later of the third anniversary of the 4LATER (Reg. TM) Rider Effective Date or the most recent Reset, the 4LATER (Reg. TM) Rider may be terminated upon written notice to us. Prior to the periodic income commencement date, 4LATER (Reg. TM) will automatically terminate upon any of the following events: o termination of the contract to which the 4LATER (Reg. TM) Rider is attached; o the change of or the death of the annuitant (except if the surviving spouse assumes ownership of the contract and the role of the annuitant upon death of the contractowner); or o the change of contractowner (except if the surviving spouse assumes ownership of the contract and the role of annuitant upon the death of the contractowner), including the assignment of the contract. After the periodic income commencement date, the 4LATER (Reg. TM) Rider will terminate due to any of the following events: o the death of the annuitant (or the later of the death of the annuitant or secondary life if a joint payout was elected); or o a contractowner requested decrease in the Access Period or a change to the regular income payment frequency. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the 4LATER (Reg. TM) Guaranteed Income Benefit and not the i4LIFE (Reg. TM) Advantage election, unless otherwise specified. If you terminate 4LATER (Reg. TM) prior to the periodic income commencement date, you must wait one year before you can re-elect 4LATER (Reg. TM) or purchase the Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. If you terminate the 4LATER (Reg. TM) Rider on or after the periodic income commencement date, you cannot re-elect it. You may be able to elect the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, if available, after one year. The i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit will be based on the Account Value at the time of the election. The election of one of these benefits, if available, will be treated as a new purchase, subject to the terms and charges in effect at the time of election. Availability. The availability of 4LATER (Reg. TM) will depend upon your state's approval of the 4LATER (Reg. TM) Rider. Check with your registered representative regarding availability. You cannot elect 4LATER (Reg. TM) after an annuity payout option or i4LIFE (Reg. TM) Advantage has been elected, and it cannot be elected on contracts that currently have Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage and elect 4LATER (Reg. TM) will not carry their Guaranteed Amount over into the new 4LATER (Reg. TM). The 4LATER (Reg. TM) Income Base will be established based on the contractowner's contract value on the Effective Date of 4LATER (Reg. TM). Contractowners who drop Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage will have to wait one year before they can elect 4LATER (Reg. TM). See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage. 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 may elect the Maximum Annual Withdrawal 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. 64 You may elect annuity payouts in monthly, quarterly, semiannual or annual installments. If the payouts from any subaccount would be or become less than $50, we have the right to reduce their frequency until the payouts are at least $50 each. Following are explanations of the annuity options available. Annuity Options The annuity options outlined below do not apply to contractowners who have elected i4LIFE (Reg. TM) Advantage, the Maximum Annual Withdrawal Amount Annuity Payout option or the Guaranteed Amount Annuity Payout option. Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if the annuitant dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Payouts Guaranteed for Designated Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues during the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option provides a periodic payout during the joint lifetime of the annuitant and a joint annuitant. When one of the joint annuitants dies, the survivor receives two-thirds of the periodic payout made when both were alive. This option further provides that should one or both of the annuitants die during the elected guaranteed period, usually 10 or 20 years, full benefit payment will continue for the rest of the guaranteed period. Unit Refund Life Annuity. This option offers a periodic payout during the lifetime of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable Annuity Payouts) equal to the excess, if any, of: o the total amount applied under this option divided by the annuity unit value for the date payouts begin, minus o the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for payment by the 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. 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 65 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. 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). The interest adjustment will NOT reduce the amount available for a surrender, withdrawal or transfer 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. 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, 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. 66 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, cross-reinvestment, portfolio rebalancing transfers, regular income payments under i4LIFE (Reg. TM) Advantage or withdrawals within the Maximum Annual Withdrawal Limit in Lincoln SmartSecurity (Reg. TM) Advantage) will be subject to the interest adjustment. A surrender, withdrawal or transfer effective upon the expiration date of the guaranteed period will not be subject to the interest adjustment. The interest adjustment will be applied to the amount being surrendered, withdrawn or transferred. The interest adjustment will be applied after the deduction of any applicable account fees and before any applicable transfer charges. Any transfer, withdrawal, or surrender of contract value from a fixed subaccount will be increased or decreased by an interest adjustment, unless the transfer, withdrawal or surrender is effective: o during the free look period (See Return Privilege). o on the expiration date of a guaranteed period. o as a result of the death of the contractowner or annuitant. o subsequent to the diagnosis of a terminal illness of the contractowner. Diagnosis of the terminal illness must be after the 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. 67 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. 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. 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). 68 Distribution of the Contracts Lincoln Financial Distributors ("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 ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us. While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. The following paragraphs describe how payments are made by us and The Principal Underwriter to various parties. Compensation Paid to LFA. The maximum commission the Principal Underwriter pays to LFA is 2.00% of purchase payments, plus up to 0.25% quarterly based on contract value. LFA 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 LFA is 4.00% of annuitized value and/or ongoing annual compensation of up to 1.00% of annuity value or statutory reserves. Lincoln Life also pays for the operating and other expenses of LFA, including the following sales expenses: sales representative training allowances; compensation and bonuses for LFA's management team; advertising expenses; and all other expenses of distributing the contracts. LFA pays its sales representatives a portion of the commissions received for their sales of contracts. LFA 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 LFA. Non-cash compensation items may include conferences, seminars, trips, entertainment, merchandise and other similar items. In addition, LFA sales representatives who meet certain productivity, persistency and length of service standards and/or their managers may be eligible for additional compensation. Sales of the contracts may help LFA sales representatives and/or their managers qualify for such benefits. LFA 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 LFA, is 2.50% of purchase payments , plus up to 0.30% quarterly based on contract value. 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 4.00% of annuitized value and/or ongoing annual compensation of up to 1.15% 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 2007 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 69 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. Contracts, endorsements and riders may vary as required by state law. This prospectus provides a general description of the contract. Questions about your contract should be directed to us at 1-888-868-2583. Federal Tax Matters Introduction The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules to your individual situation. Nonqualified Annuities This part of the discussion describes some of the Federal income tax rules applicable to nonqualified annuities. A nonqualified annuity is a contract not issued in connection with a qualified retirement plan, such as an IRA or a section 403(b) plan, receiving special tax treatment under the tax code. We may not offer nonqualified annuities for all of our annuity products. Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decendent; 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 not issued 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 70 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 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, and if your Guaranteed Amount 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 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 in the same manner as a withdrawal during the deferral period. 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), 71 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). Special Rules If You Own More Than One Annuity Contract In certain circumstances, you must combine some or all of the nonqualified annuity contracts you own in order to determine the amount of an annuity payout, a surrender, or a withdrawal that you must include in income. For example, if you purchase two or more deferred annuity contracts from the same life insurance company (or its affiliates) during any calendar year, the tax code treats all such contracts as one contract. Treating two or more contracts as one contract could affect the amount of a surrender, a withdrawal or an annuity payout that you must include in income and the amount that might be subject to the penalty tax described previously. Loans and Assignments Except for certain qualified contracts, the tax code treats any amount received as a loan under your contract, and any assignment or pledge (or agreement to assign or pledge) of any portion of your contract value, as a withdrawal of such amount or portion. Gifting A Contract If you transfer ownership of your contract, 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 charge and charges for other optional riders, 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. Tax Treatment of Qualified Contracts 72 The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o 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 has issued new regulations concerning required minimum distributions. The regulations 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. 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 Plan Act permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distributions after 2007). There are special rules that apply to rollovers, direct rollovers and transfers (including rollovers or transfers of after-tax amounts). If the applicable rules are not followed, you may incur adverse Federal income tax consequences, including paying taxes which you might not otherwise have had to pay. Before we send a rollover distribution, we will provide a notice explaining tax withholding requirements (see Federal Income Tax Withholding). We are not required to send you such notice for your IRA. You should always consult your tax adviser before you move or attempt to move any funds. 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. 73 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 Separate Account 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. 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 Home office at PO Box 7866, 1300 South Clinton Street, Fort Wayne, IN 46802-7866. 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 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. 74 For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return only the purchase payment(s). IRA purchasers will receive purchase payments only. 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 Mellon Bank, N.A., 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 A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further information about the VAA, Lincoln Life and the contracts offered. Statements in this prospectus about the content of contracts and other legal instruments are summaries. For the complete text of those contracts and instruments, please refer to those documents as filed with the SEC. 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.LFG.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 VAA, or the principal underwriter. 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. 75 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 Advertising Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below: Statement of Additional Information Request Card Lincoln ChoicePlus AssuranceSM (C Share) 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. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 76 (This page intentionally left blank) 77 Appendix A - Condensed Financial Information Accumulation Unit Values The following information relates to accumulation unit values and accumulation units for contracts purchased before June 5, 2005 for funds in the periods ended December 31. It should be read along with the VAA's financial statement and notes which are included in the SAI.
with EEB with EGMDB with GOP ---------------------------------- ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) AIM V.I. Capital Appreciation 2006......... N/A N/A N/A N/A N/A N/A 11.636 11.462 1* 2007......... N/A N/A N/A N/A N/A N/A 11.462 12.610 1* ------------- -- ------ -------- -- --- - ------ ------ - AIM V.I. Core Equity 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- -- ------ -------- -- --- - ------ ------ ---- AIM V.I. International Growth Fund 2003......... N/A N/A N/A N/A N/A N/A 8.792 11.133 1,059 2004......... N/A N/A N/A N/A N/A N/A 11.133 13.560 1 2005......... N/A N/A N/A N/A N/A N/A 13.560 15.715 1 2006......... N/A N/A N/A N/A N/A N/A 15.715 19.788 2 2007......... N/A N/A N/A N/A N/A N/A 19.788 22.298 1 ------------- -- ------ -------- -- --- - ------ ------ ----- AllianceBernstein VPS Global Technology 2003......... N/A N/A N/A 2.788 3.944 881 7.379 10.447 1,091 2004......... N/A N/A N/A 3.944 4.076 1 10.447 10.810 4 2005......... N/A N/A N/A 4.076 4.156 1 10.810 11.032 3 2006......... N/A N/A N/A 4.156 4.431 1 11.032 11.773 3 2007......... N/A N/A N/A 4.431 5.226 1 11.773 13.898 4 ------------- -- ------ -------- ----- ----- ----- ------ ------ ----- AllianceBernstein VPS Growth and Income 2003......... N/A N/A N/A 7.889 10.257 23,386 8.667 11.281 22,863 2004......... 11.204 12.233 1 10.257 11.221 83 11.281 12.354 58 2005......... 12.233 12.561 2 11.221 11.545 74 12.354 12.723 88 2006......... 12.561 14.425 2 11.545 13.285 61 12.723 14.655 80 2007......... 14.425 14.849 2 13.285 13.703 57 14.655 15.130 69 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ AllianceBernstein VPS International Value 2006......... N/A N/A N/A 10.659 11.842 10 11.043 11.850 6 2007......... 12.521 12.257 1* 11.842 12.297 12 11.850 12.318 17 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ AllianceBernstein VPS Large Cap Growth 2003......... N/A N/A N/A 4.273 5.186 4,990 8.142 9.891 643 2004......... N/A N/A N/A 5.186 5.527 38 9.891 10.551 1 2005......... N/A N/A N/A 5.527 6.243 28 10.551 11.931 1 2006......... N/A N/A N/A 6.243 6.101 31 11.931 11.672 2 2007......... N/A N/A N/A 6.101 6.819 31 11.672 13.057 1 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ AllianceBernstein VPS Small/Mid Cap Value 2003......... N/A N/A N/A 10.936 15.156 1,158 10.950 15.191 431 2004......... N/A N/A N/A 15.156 17.751 22 15.191 17.811 11 2005......... N/A N/A N/A 17.751 18.619 28 17.811 18.700 30 2006......... N/A N/A N/A 18.619 20.915 27 18.700 21.027 22 2007......... N/A N/A N/A 20.915 20.887 17 21.027 21.020 19 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ American Century Investments VP Inflation Protection Fund 2004......... 9.991 10.392 1 9.905 10.404 16 10.042 10.410 72 2005......... 10.392 10.360 3 10.404 10.393 50 10.410 10.410 143 2006......... 10.360 10.330 3 10.393 10.384 41 10.410 10.411 100 2007......... 10.330 11.105 3 10.384 11.185 30 10.411 11.226 76 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ American Funds Global Growth Fund 2004......... 10.267 11.252 1 10.216 11.266 7 10.239 11.273 16 2005......... 11.252 12.601 2 11.266 12.641 23 11.273 12.662 27 2006......... 12.601 14.897 3 12.641 14.975 45 12.662 15.014 26 2007......... 14.897 16.795 3 14.975 16.917 31 15.014 16.978 25 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------
A-1
with EEB with EGMDB with GOP ---------------------------------- ------------------------------------ ---------------------------------- Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of ---------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- ---------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) American Funds Global Small Capitalization Fund 2003......... N/A N/A N/A 5.627 8.497 3,621 9.969 15.071 9,573 2004......... 14.974 17.769 1* 8.497 10.104 82 15.071 17.937 29 2005......... 17.769 21.866 1* 10.104 12.458 135 17.937 22.139 51 2006......... 21.866 26.628 1* 12.458 15.201 135 22.139 27.042 46 2007......... 26.628 31.742 1* 15.201 18.157 102 27.042 32.332 54 ------------- ------ ------ --- ------ ------ ----- ------ ------ ----- American Funds Growth Fund 2003......... 9.130 12.262 836 5.368 7.224 70,637 9.164 12.344 52,948 2004......... 12.262 13.541 5 7.224 7.993 407 12.344 13.673 272 2005......... 13.541 15.445 6 7.993 9.136 461 13.673 15.643 362 2006......... 15.445 16.711 6 9.136 9.904 371 15.643 16.976 306 2007......... 16.711 18.431 5 9.904 10.945 316 16.976 18.779 272 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ American Funds Growth-Income Fund 2003......... 9.066 11.786 831 8.456 11.015 49,158 9.101 11.867 84,704 2004......... 11.786 12.771 16 11.015 11.959 370 11.867 12.897 391 2005......... 12.771 13.268 31 11.959 12.449 406 12.897 13.439 522 2006......... 13.268 15.005 31 12.449 14.107 380 13.439 15.244 409 2007......... 15.005 15.473 24 14.107 14.576 286 15.244 15.767 363 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ American Funds International Fund 2003......... 9.060 11.994 312 5.168 6.855 36,438 9.094 12.075 21,952 2004......... 11.994 14.049 3 6.855 8.045 165 12.075 14.186 76 2005......... 14.049 16.758 4 8.045 9.615 193 14.186 16.972 111 2006......... 16.758 19.573 5 9.615 11.253 187 16.972 19.882 103 2007......... 19.573 23.061 15 11.253 13.285 134 19.882 23.496 103 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP Capital Reserves 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A 10.141 10.197 5 2007......... N/A N/A N/A N/A N/A N/A 10.197 10.466 5 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP Diversified Income Series 2004......... 10.011 10.858 1* 10.207 10.872 25 10.080 10.878 56 2005......... 10.858 10.597 2 10.872 10.631 155 10.878 10.648 117 2006......... 10.597 11.190 3 10.631 11.248 86 10.648 11.277 107 2007......... 11.190 11.799 2 11.248 11.884 89 11.277 11.927 111 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP Emerging Markets Series(4) 2004......... N/A N/A N/A 14.457 19.360 4 10.243 13.572 4 2005......... N/A N/A N/A 19.360 24.206 13 13.572 16.986 28 2006......... N/A N/A N/A 24.206 30.194 13 16.986 21.209 25 2007......... N/A N/A N/A 30.194 41.137 20 21.209 28.925 23 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP High Yield Series 2003......... 10.282 12.981 180 8.425 10.658 31,016 10.322 13.071 16,226 2004......... 12.981 14.530 3 10.658 11.953 60 13.071 14.675 60 2005......... 14.530 14.741 1 11.953 12.151 46 14.675 14.932 86 2006......... 14.741 16.235 1 12.151 13.409 40 14.932 16.495 82 2007......... 16.235 16.343 2 13.409 13.526 46 16.495 16.655 68 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP REIT Series 2003......... 10.965 14.395 226 11.748 15.453 13,348 11.006 14.491 10,383 2004......... 14.395 18.525 9 15.453 19.926 37 14.491 18.704 55 2005......... 18.525 19.432 19 19.926 20.944 37 18.704 19.679 72 2006......... 19.432 25.243 17 20.944 27.260 33 19.679 25.640 58 2007......... 25.243 21.266 15 27.260 23.012 30 25.640 21.666 46 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Delaware VIP Small Cap Value Series 2003......... 10.915 15.179 304 12.061 16.806 9,098 10.954 15.280 4,836 2004......... 15.179 18.054 10 16.806 20.029 59 15.280 18.229 36 2005......... 18.054 19.345 19 20.029 21.504 65 18.229 19.590 81 2006......... 19.345 22.007 18 21.504 24.512 57 19.590 22.353 86 2007......... 22.007 20.126 16 24.512 22.462 39 22.353 20.504 59 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------
A-2
with EEB with EGMDB with GOP ------------------------------------ ------------------------------------ ------------------------------------ Accumulation unit Accumulation unit Accumulation unit value value value ---------------------- Number of ---------------------- Number of ---------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- ---------- ------------- ----------- ---------- ------------- ----------- ---------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) Delaware VIP Trend Series 2003......... N/A N/A N/A 5.075 6.729 8,885 10.070 13.365 10,051 2004......... 13.276 14.638 5 6.729 7.434 61 13.365 14.780 31 2005......... 14.638 15.177 5 7.434 7.723 45 14.780 15.370 55 2006......... 15.177 15.991 5 7.723 8.154 38 15.370 16.244 38 2007......... 15.991 17.340 4 8.154 8.859 28 16.244 17.666 27 ------------- ------ ------ --- ----- ----- ----- ------ ------ ------ Delaware VIP US Growth Series 2003......... N/A N/A N/A 8.101 9.830 9,742 8.110 9.851 13,590 2004......... 9.797 9.909 1* 9.830 9.962 24 9.851 9.993 31 2005......... 9.909 11.129 1* 9.962 11.211 10 9.993 11.257 30 2006......... 11.129 11.150 1* 11.211 11.254 10 11.257 11.313 28 2007......... 11.150 12.300 1* 11.254 12.440 10 11.313 12.517 27 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ Delaware VIP Value Series 2003......... N/A N/A N/A 8.712 10.978 2,431 N/A N/A N/A 2004......... N/A N/A N/A 10.978 12.373 11 11.195 12.631 27 2005......... 12.504 12.985 1* 12.373 12.876 19 12.631 13.157 38 2006......... 12.985 15.781 1* 12.876 15.678 20 13.157 16.037 37 2007......... 15.781 15.027 1* 15.678 14.960 15 16.037 15.317 26 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ DWS VIP Equity 500 Index 2003......... N/A N/A N/A 10.870 12.029 4,210 10.579 12.037 3,841 2004......... N/A N/A N/A 12.029 13.053 9 12.037 13.074 50 2005......... N/A N/A N/A 13.053 13.406 10 13.074 13.442 58 2006......... N/A N/A N/A 13.406 15.197 15 13.442 15.252 42 2007......... N/A N/A N/A 15.197 15.701 16 15.252 15.774 13 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ DWS VIP Small Cap Index 2003......... N/A N/A N/A 11.470 13.527 10,168 10.821 13.535 1,857 2004......... 13.510 15.580 1* 13.527 15.631 11 13.535 15.656 8 2005......... 15.580 15.905 1* 15.631 15.989 10 15.656 16.031 23 2006......... 15.905 18.298 1* 15.989 18.431 11 16.031 18.497 26 2007......... 18.298 17.574 1* 18.431 17.738 11 18.497 17.820 9 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Fidelity VIP Contrafund Portfolio 2003......... N/A N/A N/A 9.726 12.264 11,942 N/A N/A N/A 2004......... N/A N/A N/A 12.264 13.892 37 12.291 13.937 37 2005......... 13.805 15.810 1 13.892 15.941 67 13.937 16.008 107 2006......... 15.810 17.294 3 15.941 17.473 73 16.008 17.564 121 2007......... 17.294 19.915 11 17.473 20.161 80 17.564 20.286 121 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Fidelity VIP Equity-Income Portfolio 2003......... N/A N/A N/A 8.250 10.552 5,600 9.056 11.595 5,214 2004......... 11.516 12.575 1* 10.552 11.545 51 11.595 12.699 93 2005......... 12.575 13.032 2 11.545 11.989 66 12.699 13.200 108 2006......... 13.032 15.343 3 11.989 14.143 55 13.200 15.587 84 2007......... 15.343 15.253 3 14.143 14.088 42 15.587 15.543 80 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Fidelity VIP Growth Portfolio 2003......... N/A N/A N/A N/A N/A N/A 8.083 10.549 4,268 2004......... 10.477 10.606 1* 6.037 6.123 9 10.549 10.711 19 2005......... 10.606 10.985 1 6.123 6.355 23 10.711 11.126 26 2006......... 10.985 11.492 1 6.355 6.661 19 11.126 11.675 23 2007......... 11.492 14.289 2 6.661 8.299 24 11.675 14.560 18 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Fidelity VIP Mid Cap 2005......... N/A N/A N/A 10.237 11.564 12 10.182 11.571 24 2006......... N/A N/A N/A 11.564 12.786 27 11.571 12.806 39 2007......... N/A N/A N/A 12.786 14.506 17 12.806 14.543 58 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Fidelity VIP Overseas Portfolio 2003......... N/A N/A N/A 5.218 7.342 24,584 8.540 12.028 6,749 2004......... 11.944 13.286 1 7.342 8.184 93 12.028 13.419 35 2005......... 13.286 15.492 2 8.184 9.562 86 13.419 15.695 69 2006......... 15.492 17.911 2 9.562 11.077 64 15.695 18.200 62 2007......... 17.911 20.581 2 11.077 12.754 56 18.200 20.976 57 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------
A-3
with EEB with EGMDB with GOP ------------------------------------ ------------------------------------ ------------------------------------ Accumulation unit Accumulation unit Accumulation unit value value value ---------------------- Number of ---------------------- Number of ---------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- ---------- ------------- ----------- ---------- ------------- ----------- ---------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) FTVIPT Franklin Income Securities 2006......... N/A N/A N/A 10.115 11.222 2 10.599 11.229 10 2007......... N/A N/A N/A 11.222 11.453 44 11.229 11.471 21 ------------- -- -- --- ------ ------ -- ------ ------ -- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2003......... N/A N/A N/A 4.702 6.348 10,700 8.637 11.672 2,353 2004......... N/A N/A N/A 6.348 6.961 41 11.672 12.811 40 2005......... N/A N/A N/A 6.961 7.175 37 12.811 13.218 67 2006......... N/A N/A N/A 7.175 7.671 35 13.218 14.146 64 2007......... N/A N/A N/A 7.671 8.394 30 14.146 15.494 54 ------------- -- -- --- ------ ------ ------ ------ ------ ----- FTVIPT Mutual Shares Securities 2006......... N/A N/A N/A 9.893 11.267 3 10.479 11.274 6 2007......... N/A N/A N/A 11.267 11.467 25 11.274 11.486 15 ------------- -- -- --- ------ ------ ------ ------ ------ ----- FTVIPT Templeton Global Income Securities 2005......... 9.794 9.862 1* N/A N/A N/A 9.763 9.879 3 2006......... 9.862 10.918 1* 10.144 10.952 1 9.879 10.969 4 2007......... 10.918 11.899 1* 10.952 11.958 9 10.969 11.988 16 ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- FTVIPT Templeton Growth Securities Fund 2003......... 8.934 11.589 285 7.941 10.322 7,166 8.969 11.670 6,589 2004......... 11.589 13.200 1* 10.322 11.780 39 11.670 13.332 34 2005......... N/A N/A N/A 11.780 12.614 39 13.332 14.290 74 2006......... N/A N/A N/A 12.614 15.114 40 14.290 17.139 62 2007......... N/A N/A N/A 15.114 15.215 28 17.139 17.271 51 ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Janus Aspen Balanced Portfolio 2003......... N/A N/A N/A 9.786 10.947 1,237 9.800 10.973 1,789 2004......... N/A N/A N/A 10.947 11.660 13 10.973 11.701 19 2005......... N/A N/A N/A 11.660 12.348 14 11.701 12.403 26 2006......... N/A N/A N/A 12.348 13.411 9 12.403 13.484 20 2007......... N/A N/A N/A 13.411 14.549 8 13.484 14.643 14 ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Janus Aspen Mid Cap Growth Portfolio 2003......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2004......... N/A N/A N/A 10.668 12.642 2 10.692 12.683 3 2005......... 12.562 13.815 1* 12.642 13.930 2 12.683 13.990 3 2006......... 13.815 15.366 1* 13.930 15.525 1 13.990 15.608 1 2007......... 15.366 18.364 1* 15.525 18.592 1 15.608 18.709 1 ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Janus Aspen Worldwide Growth Portfolio 2003......... N/A N/A N/A N/A N/A N/A 8.422 10.256 27 2004......... N/A N/A N/A N/A N/A N/A 10.256 10.556 1 2005......... N/A N/A N/A N/A N/A N/A 10.556 10.972 1 2006......... N/A N/A N/A N/A N/A N/A 10.972 12.741 1 2007......... N/A N/A N/A N/A N/A N/A 12.741 13.720 1 ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Lincoln VIP Core Fund(1) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Lincoln VIP Growth Fund(2) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Lincoln VIP Growth Opportunities(3) 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ----- Lincoln VIP Money Market Fund 2003......... N/A N/A N/A 9.982 9.919 21,584 9.989 9.925 65,299 2004......... 9.907 9.786 2 9.919 9.818 53 9.925 9.834 356 2005......... 9.786 9.850 7 9.818 9.902 114 9.834 9.928 203 2006......... 9.850 10.097 2 9.902 10.170 93 9.928 10.207 161 2007......... 10.097 10.378 1 10.170 10.474 174 10.207 10.523 195 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------ Lincoln VIPT Baron Growth Opportunities(4) 2006......... N/A N/A N/A N/A N/A N/A 9.303 10.623 3 2007......... N/A N/A N/A 10.876 10.800 2 10.623 10.817 1 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------
A-4
with EEB with EGMDB with GOP ---------------------------------- ------------------------------------ ------------------------------------ Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of ---------------------- Number of ---------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- ---------- ------------- ----------- ---------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) Lincoln VIPT Capital Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- -- ------ --- -- -- --- -- -- --- Lincoln VIPT Cohen & Steers Global Real Estate 2007......... N/A N/A N/A 9.598 8.218 10 8.991 8.223 4 ------------- -- ------ --- ----- ----- ----- ----- ----- ----- Lincoln VIPT Delaware Bond 2003......... 9.623 10.002 466 9.965 10.014 75,256 10.092 10.020 102,843 2004......... 10.002 10.314 17 10.014 10.347 237 10.020 10.364 353 2005......... 10.314 10.366 38 10.347 10.421 262 10.364 10.448 488 2006......... 10.366 10.629 40 10.421 10.706 252 10.448 10.745 432 2007......... 10.629 10.974 39 10.706 11.076 188 10.745 11.127 384 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Delaware Growth and Income 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A 11.873 11.928 1* ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Delaware Social Awareness 2003......... N/A N/A N/A 11.029 12.260 7,707 10.664 12.267 15,649 2004......... 12.244 13.513 1 12.260 13.557 25 12.267 13.579 46 2005......... 13.513 14.824 2 13.557 14.902 27 13.579 14.941 61 2006......... 14.824 16.302 2 14.902 16.421 24 14.941 16.481 55 2007......... 16.302 16.437 2 16.421 16.590 21 16.481 16.667 53 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Delaware Special Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT FI Equity-Income 2005......... N/A N/A N/A N/A N/A N/A 10.009 10.478 1 2006......... N/A N/A N/A N/A N/A N/A 10.478 11.451 1 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Janus Capital Appreciation 2003......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2004......... N/A N/A N/A 12.186 12.587 2 11.621 12.610 2 2005......... 12.549 12.805 1* 12.587 12.869 7 12.610 12.906 6 2006......... 12.805 13.752 1* 12.869 13.849 6 12.906 13.902 6 2007......... 13.752 16.215 1* 13.849 16.362 4 13.902 16.441 5 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Marsico International Growth 2007......... N/A N/A N/A 9.990 11.146 4 9.939 11.153 8 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT MFS Value 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Mid-Cap Growth 2007......... N/A N/A N/A 10.180 10.836 1* 10.222 10.843 17 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Mid-Cap Value 2007......... N/A N/A N/A 9.974 8.635 1 N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Mondrian International Value 2003......... N/A N/A N/A 10.919 13.129 12,731 10.950 13.137 16,995 2004......... 13.112 15.529 1 13.129 15.580 59 13.137 15.605 52 2005......... 15.529 17.114 2 15.580 17.203 52 15.605 17.249 70 2006......... 17.114 21.787 2 17.203 21.945 40 17.249 22.025 60 2007......... 21.787 23.785 1 21.945 24.005 35 22.025 24.116 51 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT S&P 500 Index 2007......... N/A N/A N/A N/A N/A N/A 11.079 11.350 1 ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT Small Cap Index 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT T. Rowe Price Growth Stock 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ------ ------ ------ ------- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2003......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2004......... N/A N/A N/A N/A N/A N/A 12.650 13.760 4 2005......... N/A N/A N/A N/A N/A N/A 13.760 14.842 2 2006......... N/A N/A N/A N/A N/A N/A 14.842 15.929 1 2007......... N/A N/A N/A N/A N/A N/A 15.929 17.770 2 ------------- ------ ------ --- ------ ------ ------ ------ ------ -------
A-5
with EEB with EGMDB with GOP ---------------------------------- ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) Lincoln VIPT Templeton Growth 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- -- --- --- -- --- --- Lincoln VIPT UBS Global Asset Allocation 2003......... N/A N/A N/A 10.500 11.342 293 10.622 11.349 1,100 2004......... N/A N/A N/A 11.342 12.637 1* 11.349 12.657 8 2005......... N/A N/A N/A 12.637 13.242 9 12.657 13.277 11 2006......... N/A N/A N/A 13.242 14.878 9 13.277 14.932 11 2007......... N/A N/A N/A 14.878 15.529 9 14.932 15.601 22 ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Value Opportunities 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire 2010 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire 2020 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire 2030 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire 2040 Profile 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire Aggressive Profile 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A 10.911 12.443 1 N/A N/A N/A 2007......... N/A N/A N/A 12.443 13.555 1 N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire Conservative Profile 2005......... N/A N/A N/A 10.074 10.252 87 10.012 10.257 50 2006......... N/A N/A N/A 10.252 10.998 119 10.257 11.015 74 2007......... N/A N/A N/A 10.998 11.630 54 11.015 11.660 93 ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire Moderate Profile 2005......... N/A N/A N/A 10.008 10.469 5 10.000 10.475 11 2006......... N/A N/A N/A 10.469 11.510 26 10.475 11.528 24 2007......... N/A N/A N/A 11.510 12.340 23 11.528 12.372 22 ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005......... N/A N/A N/A 10.026 10.646 51 10.122 10.652 5 2006......... N/A N/A N/A 10.646 11.923 51 10.652 11.941 8 2007......... N/A N/A N/A 11.923 12.847 42 11.941 12.880 7 ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- MFS VIT Core Equity 2003......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2004......... N/A N/A N/A N/A N/A N/A 10.285 11.351 1 2005......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2006......... N/A N/A N/A N/A N/A N/A N/A N/A N/A 2007......... N/A N/A N/A N/A N/A N/A N/A N/A N/A ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- MFS VIT Emerging Growth Series 2003......... N/A N/A N/A N/A N/A N/A 7.904 10.112 426 2004......... N/A N/A N/A N/A N/A N/A 10.112 11.223 1* 2005......... N/A N/A N/A 4.918 5.269 1 11.223 12.037 2 2006......... N/A N/A N/A 5.269 5.578 1 12.037 12.754 4 2007......... N/A N/A N/A 5.578 6.632 1 12.754 15.179 5 ------------- ------ ------ --- ------ ------ ---- ------ ------ ----- MFS VIT Total Return Series 2003......... N/A N/A N/A 10.193 11.631 8,388 9.918 11.328 21,120 2004......... 11.250 12.262 11 11.631 12.702 54 11.328 12.384 94 2005......... 12.262 12.349 32 12.702 12.819 74 12.384 12.510 140 2006......... 12.349 13.532 33 12.819 14.075 90 12.510 13.750 109 2007......... 13.532 13.807 24 14.075 14.389 70 13.750 14.071 95 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ MFS VIT Utilities Series 2003......... N/A N/A N/A 5.579 7.439 1,795 7.478 9.983 2,339 2004......... N/A N/A N/A 7.439 9.502 17 9.983 12.763 21 2005......... N/A N/A N/A 9.502 10.895 19 12.763 14.649 25 2006......... N/A N/A N/A 10.895 14.035 19 14.649 18.890 26 2007......... 21.020 23.278 1* 14.035 17.610 19 18.890 23.725 16 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------
A-6
with EEB with EGMDB with GOP ---------------------------------- ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit Accumulation unit value value value -------------------- Number of -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation Beginning End of accumulation of period period units of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars. Number of accumulation units in thousands beginning in 2004.) Neuberger Berman AMT Mid-Cap Growth Portfolio 2003......... 8.322 10.463 445 8.343 10.510 5,111 8.353 10.534 3,471 2004......... 10.463 11.946 1* 10.510 12.024 16 10.534 12.063 29 2005......... N/A N/A N/A 12.024 13.453 16 12.063 13.510 55 2006......... N/A N/A N/A 13.453 15.177 14 13.510 15.256 48 2007......... N/A N/A N/A 15.177 18.292 13 15.256 18.406 60 ------------- ------ ------ --- ------ ------ ----- ------ ------ ----- Neuberger Berman AMT Regency Portfolio 2003......... N/A N/A N/A 9.809 13.107 9,390 9.823 13.139 11,074 2004......... 13.052 15.678 1 13.107 15.776 19 13.139 15.830 46 2005......... 15.678 17.237 1 15.776 17.380 27 15.830 17.457 86 2006......... 17.237 18.811 1 17.380 19.005 24 17.457 19.108 95 2007......... 18.811 19.075 1 19.005 19.311 22 19.108 19.435 77 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ Putnam VT Growth and Income Fund 2003......... N/A N/A N/A N/A N/A N/A 8.668 10.871 1,941 2004......... N/A N/A N/A N/A N/A N/A 10.871 11.894 4 2005......... N/A N/A N/A N/A N/A N/A 11.894 12.323 3 2006......... N/A N/A N/A N/A N/A N/A 12.323 14.064 3 2007......... N/A N/A N/A N/A N/A N/A 14.064 13.011 2 ------------- ------ ------ --- ------ ------ ----- ------ ------ ------ Putnam VT Health Sciences Fund 2003......... N/A N/A N/A 8.279 9.641 750 8.291 9.664 485 2004......... N/A N/A N/A 9.641 10.159 1 9.664 10.193 1 2005......... N/A N/A N/A 10.159 11.311 1 10.193 11.361 2 2006......... N/A N/A N/A 11.311 11.437 1 11.361 11.499 1 2007......... N/A N/A N/A 11.437 11.182 1 11.499 11.254 1* ------------- ------ ------ --- ------ ------ ----- ------ ------ ------
* All numbers less than 500 were rounded up to one. (1) Effective April 30, 2007, the Lincoln Core Fund was reorganized into the LVIP S&P 500 Index Fund, a series of Lincoln Variable Insurance Products Trust. (2) Effective April 30, 2007, the Lincoln Growth Fund, was reorganized into the LVIP Janus Capital Appreciation Fund, a series of Lincoln Variable Insurance Products Trust. (3) Effective June 11, 2007, the Lincoln Growth Opportunities Fund was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. (4)Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund. A-7 [THIS PAGE INTENTIONALLY LEFT BLANK] Appendix B - Condensed Financial Information Accumulation Unit Values The following information relates to accumulation unit values and number of accumulation units for contracts purchased after June 5, 2005 (or later in those states that have not approved the contract changes) for funds available in the periods ended December 31. It should be read along with the VAA's financial statement and notes which are included in the SAI.
with EEB with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AllianceBernstein VPS Global Technology 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A 17.117 1 N/A N/A N/A 2007.. 17.117 20.086 1 11.851 13.554 2 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS Growth and Income 2005.. 15.070 15.427 1 12.193 12.507 10 2006.. 15.427 17.664 1 12.507 14.349 14 2007.. 17.664 18.129 4 14.349 14.756 29 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS International Value 2006.. 10.821 11.807 16 9.942 11.821 38 2007.. 11.807 12.199 19 11.821 12.238 95 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 2005.. N/A N/A N/A 17.581 18.385 8 2006.. N/A N/A N/A 18.385 20.591 16 2007.. 23.190 21.528 1 20.591 20.501 23 ---- ------ ------ --- ------ ------ --- American Century Investments VP Inflation Protection Fund 2005.. N/A N/A N/A 10.385 10.344 8 2006.. 10.135 10.250 1 10.344 10.304 14 2007.. 10.250 10.986 6 10.304 11.065 31 ---- ------ ------ --- ------ ------ --- American Funds Global Growth Fund 2005.. N/A N/A N/A 11.246 12.581 12 2006.. 14.163 14.781 1* 12.581 14.858 57 2007.. 14.781 16.615 2 14.858 16.735 97 ---- ------ ------ --- ------ ------ --- American Funds Global Small Capitalization Fund 2005.. 18.775 23.035 1 17.707 21.767 11 2006.. 23.035 27.968 1 21.767 26.482 42 2007.. 27.968 33.239 1 26.482 31.535 87 ---- ------ ------ --- ------ ------ --- American Funds Growth Fund 2005.. 15.654 17.801 1 13.496 15.378 44 2006.. 17.801 19.203 12 15.378 16.622 203 2007.. 19.203 21.115 8 16.622 18.314 365 ---- ------ ------ --- ------ ------ --- American Funds Growth-Income Fund 2005.. 15.210 15.755 2 12.728 13.210 64 2006.. 15.755 17.764 15 13.210 14.925 258 2007.. 17.764 18.263 17 14.925 15.374 477 ---- ------ ------ --- ------ ------ --- American Funds International Fund 2005.. 16.766 19.938 1 14.002 16.684 16 2006.. 19.938 23.217 3 16.684 19.467 108 2007.. 23.217 27.273 5 19.467 22.914 247 ---- ------ ------ --- ------ ------ --- Delaware VIP Capital Reserves 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A N/A N/A N/A 2007.. N/A N/A N/A 10.199 10.360 8 ---- ------ ------ --- ------ ------ --- Delaware VIP Diversified Income Series 2005.. N/A N/A N/A 10.852 10.580 17 2006.. N/A N/A N/A 10.580 11.160 64 2007.. 11.413 11.672 1 11.160 11.757 102 ---- ------ ------ --- ------ ------ --- with GOP Acct Value DB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AllianceBernstein VPS Global Technology 2005.. 10.758 10.962 1 N/A N/A N/A 2006.. 10.962 11.680 3 11.434 11.710 1 2007.. 11.680 13.768 23 11.710 13.810 6 ---- ------ ------ -- ------ ------ --- AllianceBernstein VPS Growth and Income 2005.. 12.294 12.642 17 N/A N/A N/A 2006.. 12.642 14.540 54 13.067 14.576 17 2007.. 14.540 14.990 92 14.576 15.035 22 ---- ------ ------ -- ------ ------ --- AllianceBernstein VPS International Value 2006.. 9.951 11.839 66 11.234 11.842 3 2007.. 11.839 12.287 353 11.842 12.297 26 ---- ------ ------ --- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 2005.. 17.724 18.581 12 17.754 18.621 3 2006.. 18.581 20.862 37 18.621 20.918 4 2007.. 20.862 20.824 67 20.918 20.890 5 ---- ------ ------ --- ------ ------ --- American Century Investments VP Inflation Protection Fund 2005.. 10.401 10.385 25 10.404 10.393 4 2006.. 10.385 10.371 111 10.393 10.384 6 2007.. 10.371 11.165 140 10.384 11.185 14 ---- ------ ------ --- ------ ------ --- American Funds Global Growth Fund 2005.. 11.263 12.631 26 11.266 12.641 6 2006.. 12.631 14.955 139 12.641 14.975 4 2007.. 14.955 16.886 310 14.975 16.917 15 ---- ------ ------ --- ------ ------ --- American Funds Global Small Capitalization Fund 2005.. 17.855 22.004 16 N/A N/A N/A 2006.. 22.004 26.837 78 25.254 26.893 4 2007.. 26.837 32.039 166 26.893 32.121 9 ---- ------ ------ --- ------ ------ --- American Funds Growth Fund 2005.. 13.608 15.544 135 13.627 15.574 6 2006.. 15.544 16.844 503 15.574 16.884 46 2007.. 16.844 18.605 902 16.884 18.659 76 ---- ------ ------ --- ------ ------ --- American Funds Growth-Income Fund 2005.. 12.833 13.352 157 12.852 13.379 10 2006.. 13.352 15.123 573 13.379 15.161 68 2007.. 15.123 15.618 945 15.161 15.665 110 ---- ------ ------ --- ------ ------ --- American Funds International Fund 2005.. 14.116 16.863 70 14.136 16.895 4 2006.. 16.863 19.725 277 16.895 19.773 17 2007.. 19.725 23.275 480 19.773 23.344 33 ---- ------ ------ --- ------ ------ --- Delaware VIP Capital Reserves 2005.. 9.885 9.917 12 9.959 9.922 1 2006.. 9.917 10.173 57 N/A N/A N/A 2007.. 10.173 10.425 78 10.427 10.439 1 ---- ------ ------ --- ------ ------ --- Delaware VIP Diversified Income Series 2005.. 10.868 10.622 71 10.872 10.631 3 2006.. 10.622 11.233 216 10.631 11.248 13 2007.. 11.233 11.863 404 11.248 11.884 17 ---- ------ ------ --- ------ ------ ---
B-1
with EEB with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP Emerging Markets Series(4) 2005.. 11.033 11.999 1 10.976 12.013 15 2006.. 11.999 14.893 1 12.013 14.940 58 2007.. 14.893 20.190 2 14.940 20.294 137 ---- ------ ------ - ------ ------ --- Delaware VIP High Yield Series 2005.. N/A N/A N/A 14.483 14.678 4 2006.. N/A N/A N/A 14.678 16.150 15 2007.. 17.719 17.368 1* 16.150 16.242 38 ---- ------ ------ --- ------ ------ --- Delaware VIP REIT Series 2005.. N/A N/A N/A 18.462 19.347 5 2006.. N/A N/A N/A 19.347 25.106 39 2007.. 25.048 20.466 1 25.106 21.130 30 ---- ------ ------ --- ------ ------ --- Delaware VIP Small Cap Value Series 2005.. 17.548 18.746 1 17.994 19.261 27 2006.. 18.746 21.262 2 19.261 21.890 45 2007.. 21.262 19.386 2 21.890 19.999 76 ---- ------ ------ --- ------ ------ --- Delaware VIP Trend Series 2005.. N/A N/A N/A 14.591 15.113 3 2006.. 15.279 17.339 1 15.113 15.908 4 2007.. 17.339 18.745 2 15.908 17.233 7 ---- ------ ------ --- ------ ------ --- Delaware VIP US Growth Series 2006.. N/A N/A N/A 10.566 11.081 1* 2007.. N/A N/A N/A 11.081 12.212 1 ---- ------ ------ --- ------ ------ --- Delaware VIP Value Series 2005.. N/A N/A N/A 12.463 12.931 6 2006.. N/A N/A N/A 12.931 15.699 24 2007.. 19.441 17.869 1 15.699 14.934 33 ---- ------ ------ --- ------ ------ --- DWS VIP Equity 500 Index 2005.. N/A N/A N/A 12.990 13.302 2 2006.. 14.390 14.926 7 13.302 15.033 3 2007.. 14.926 15.343 7 15.033 15.485 11 ---- ------ ------ --- ------ ------ --- DWS VIP Small Cap Index 2005.. N/A N/A N/A 15.820 15.864 1 2006.. 15.837 18.100 1* 15.864 18.232 3 2007.. 18.100 17.333 1* 18.232 17.493 5 ---- ------ ------ --- ------ ------ --- Fidelity VIP Contrafund Portfolio 2005.. 14.093 16.091 1 13.755 15.737 30 2006.. 16.091 17.550 11 15.737 17.197 107 2007.. 17.550 20.148 15 17.197 19.783 147 ---- ------ ------ --- ------ ------ --- Fidelity VIP Growth Portfolio 2005.. 13.456 13.895 1 10.572 10.938 3 2006.. 13.895 14.493 1 10.938 11.432 3 2007.. 14.493 17.966 2 11.432 14.200 16 ---- ------ ------ --- ------ ------ --- Fidelity VIP Mid Cap 2005.. 10.092 11.531 1 10.093 11.545 11 2006.. 11.531 12.686 4 11.545 12.726 68 2007.. 12.686 14.321 4 12.726 14.394 176 ---- ------ ------ --- ------ ------ --- Fidelity VIP Overseas Portfolio 2005.. N/A N/A N/A 13.244 15.428 7 2006.. 20.216 21.583 1* 15.428 17.819 16 2007.. 21.583 24.726 1 17.819 20.454 15 ---- ------ ------ --- ------ ------ --- FTVIPT Franklin Income Securities 2006.. 10.094 11.188 6 9.998 11.201 66 2007.. 11.188 11.361 8 11.201 11.398 254 ---- ------ ------ --- ------ ------ --- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2005.. 16.890 17.322 1 12.646 12.996 3 2006.. 17.322 18.428 1* 12.996 13.853 14 2007.. 18.428 20.063 1 13.853 15.112 27 ---- ------ ------ --- ------ ------ --- with GOP Acct Value DB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Delaware VIP Emerging Markets Series(4) 2005.. 9.959 12.030 59 11.366 12.034 4 2006.. 12.030 14.999 120 12.034 15.010 11 2007.. 14.999 20.424 202 15.010 20.451 23 ---- ------ ------ --- ------ ------ -- Delaware VIP High Yield Series 2005.. 14.602 14.835 52 9.999 10.236 9 2006.. 14.835 16.364 101 10.236 11.296 10 2007.. 16.364 16.498 167 11.296 11.394 18 ---- ------ ------ --- ------ ------ -- Delaware VIP REIT Series 2005.. 18.611 19.552 18 10.111 10.406 4 2006.. 19.552 25.436 93 10.406 13.545 15 2007.. 25.436 21.461 93 13.545 11.434 16 ---- ------ ------ --- ------ ------ -- Delaware VIP Small Cap Value Series 2005.. 18.142 19.468 46 N/A N/A N/A 2006.. 19.468 22.181 138 11.196 12.274 17 2007.. 22.181 20.315 215 12.274 11.247 20 ---- ------ ------ --- ------ ------ --- Delaware VIP Trend Series 2005.. 14.711 15.275 6 N/A N/A N/A 2006.. 15.275 16.119 17 12.229 11.864 5 2007.. 16.119 17.504 41 11.864 12.891 5 ---- ------ ------ --- ------ ------ --- Delaware VIP US Growth Series 2006.. 9.983 11.226 1* 10.394 11.254 1* 2007.. 11.226 12.403 3 11.254 12.440 1* ---- ------ ------ --- ------ ------ --- Delaware VIP Value Series 2005.. 12.567 13.070 31 9.961 10.354 3 2006.. 13.070 15.908 137 10.354 12.608 15 2007.. 15.908 15.171 205 12.608 12.030 28 ---- ------ ------ --- ------ ------ --- DWS VIP Equity 500 Index 2005.. 13.043 13.389 7 N/A N/A N/A 2006.. 13.389 15.170 16 N/A N/A N/A 2007.. 15.170 15.665 29 N/A N/A N/A ---- ------ ------ --- ------ ------ --- DWS VIP Small Cap Index 2005.. 15.618 15.968 3 N/A N/A N/A 2006.. 15.968 18.398 14 12.097 12.411 2 2007.. 18.398 17.697 18 12.411 11.944 2 ---- ------ ------ --- ------ ------ --- Fidelity VIP Contrafund Portfolio 2005.. 13.870 15.909 67 13.891 15.940 12 2006.. 15.909 17.429 343 15.940 17.471 23 2007.. 17.429 20.100 540 17.471 20.159 31 ---- ------ ------ --- ------ ------ --- Fidelity VIP Growth Portfolio 2005.. 10.658 11.055 6 N/A N/A N/A 2006.. 11.055 11.583 34 10.520 11.130 1 2007.. 11.583 14.424 91 11.130 13.867 4 ---- ------ ------ --- ------ ------ --- Fidelity VIP Mid Cap 2005.. 9.976 11.561 31 10.237 11.564 14 2006.. 11.561 12.776 158 11.564 12.786 13 2007.. 12.776 14.487 315 12.786 14.506 23 ---- ------ ------ --- ------ ------ --- Fidelity VIP Overseas Portfolio 2005.. 13.352 15.592 6 10.004 11.982 1 2006.. 15.592 18.054 25 11.982 13.880 3 2007.. 18.054 20.777 36 13.880 15.981 9 ---- ------ ------ --- ------ ------ --- FTVIPT Franklin Income Securities 2006.. 10.112 11.219 181 10.003 11.222 17 2007.. 11.219 11.444 786 11.222 11.453 54 ---- ------ ------ --- ------ ------ --- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2005.. 12.751 13.136 21 N/A N/A N/A 2006.. 13.136 14.037 57 13.113 14.070 8 2007.. 14.037 15.352 93 14.070 15.396 12 ---- ------ ------ --- ------ ------ ---
B-2
with EEB with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Mutual Shares Securities 2006.. 10.108 11.232 20 9.950 11.246 54 2007.. 11.232 11.367 22 11.246 11.412 161 ---- ------ ------ -- ------ ------ --- FTVIPT Templeton Global Income Securities 2005.. N/A N/A N/A 9.979 9.855 3 2006.. 10.401 10.866 2 9.855 10.899 31 2007.. 10.866 11.805 4 10.899 11.865 141 ---- ------ ------ --- ------ ------ --- FTVIPT Templeton Growth Securities Fund 2005.. N/A N/A N/A 13.156 14.046 6 2006.. 16.875 19.740 10 14.046 16.779 31 2007.. 19.740 19.774 14 16.779 16.841 47 ---- ------ ------ --- ------ ------ --- Lincoln VIP Core Fund(1) 2005.. N/A N/A N/A N/A N/A N/A 2006.. 10.192 11.365 16 N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIP Growth Fund(2) 2005.. N/A N/A N/A 10.141 10.800 4 2006.. N/A N/A N/A 10.800 11.218 9 ---- ------ ------ --- ------ ------ --- Lincoln VIP Growth Opportunities(3) 2005.. N/A N/A N/A 11.727 11.420 1 2006.. N/A N/A N/A 11.420 12.307 1 ---- ------ ------ --- ------ ------ --- Lincoln VIP Money Market Fund 2005.. 9.739 9.773 16 9.770 9.824 10 2006.. 9.773 9.987 2 9.824 10.060 137 2007.. 9.987 10.235 2 10.060 10.330 525 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Baron Growth Opportunities(4) 2006.. N/A N/A N/A 9.391 10.597 7 2007.. 10.870 10.713 3 10.597 10.748 26 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Capital Growth 2007.. N/A N/A N/A 10.854 10.681 1* ---- ------ ------ --- ------ ------ --- Lincoln VIPT Cohen & Steers Global Real Estate 2007.. 9.372 8.193 1* 9.548 8.203 50 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Delaware Bond 2005.. 10.264 10.285 1 10.297 10.339 37 2006.. 10.285 10.514 1* 10.339 10.591 161 2007.. 10.514 10.823 1* 10.591 10.923 277 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Delaware Growth and Income 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A 10.792 11.373 2 2007.. N/A N/A N/A 11.373 11.806 2 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Delaware Social Awareness 2005.. N/A N/A N/A 13.491 14.786 1 2006.. 14.236 16.128 1* 14.786 16.244 1 2007.. 16.128 16.212 1* 16.244 16.362 1 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Delaware Special Opportunities 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT FI Equity-Income 2005.. N/A N/A N/A N/A N/A N/A 2006.. N/A N/A N/A 10.790 11.379 6 2007.. 11.715 11.557 1 11.379 11.616 15 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Janus Capital Appreciation 2005.. N/A N/A N/A 12.529 12.772 1 2006.. N/A N/A N/A 12.772 13.702 1* 2007.. 14.400 15.991 15 13.702 16.141 11 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Marsico International Growth 2007.. N/A N/A N/A 11.280 11.125 12 ---- ------ ------ --- ------ ------ --- Lincoln VIPT MFS Value 2007.. N/A N/A N/A 9.838 9.689 14 ---- ------ ------ --- ------ ------ --- with GOP Acct Value DB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) FTVIPT Mutual Shares Securities 2006.. 9.915 11.263 116 10.020 11.267 12 2007.. 11.263 11.458 555 11.267 11.467 35 ---- ------ ------ --- ------ ------ -- FTVIPT Templeton Global Income Securities 2005.. 9.963 9.870 15 9.944 9.873 1 2006.. 9.870 10.943 98 9.873 10.952 4 2007.. 10.943 11.942 262 10.952 11.958 21 ---- ------ ------ --- ------ ------ -- FTVIPT Templeton Growth Securities Fund 2005.. 13.266 14.199 24 13.285 14.226 6 2006.. 14.199 17.004 78 14.226 17.045 10 2007.. 17.004 17.109 122 17.045 17.160 12 ---- ------ ------ --- ------ ------ -- Lincoln VIP Core Fund(1) 2005.. 10.173 10.242 9 N/A N/A N/A 2006.. 10.242 11.445 4 10.125 11.454 1 ---- ------ ------ --- ------ ------ --- Lincoln VIP Growth Fund(2) 2005.. 10.022 10.815 1 N/A N/A N/A 2006.. 10.815 11.262 4 N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIP Growth Opportunities(3) 2005.. N/A N/A N/A N/A N/A N/A 2006.. 12.349 12.356 1* N/A N/A N/A ---- ------ ------ ---- ------ ------ --- Lincoln VIP Money Market Fund 2005.. 9.810 9.889 150 10.001 10.074 5 2006.. 9.889 10.152 4,292 10.074 10.347 100 2007.. 10.152 10.450 1,248 10.347 10.656 82 ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Baron Growth Opportunities(4) 2006.. 9.949 10.613 1 9.540 10.616 1 2007.. 10.613 10.791 45 10.616 10.800 4 ---- ------ ------ ----- ------ ------ --- Lincol VIPT Capita Growth 2007.. 9.860 10.698 2 10.881 10.701 1 ---- ------ ------ ----- ------ ------ --- Lincol VIPT Cohen & Steers Global Real Estate 2007.. 9.953 8.216 103 9.412 8.218 11 ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Delaware Bond 2005.. 10.339 10.407 124 10.027 9.880 9 2006.. 10.407 10.687 548 9.880 10.151 33 2007.. 10.687 11.050 790 10.151 10.502 58 ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Delaware Growth and Income 2005.. N/A N/A N/A N/A N/A N/A 2006.. 10.521 11.417 3 11.287 11.426 1 2007.. 11.417 11.882 20 11.426 11.897 2 ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Delaware Social Awareness 2005.. 13.546 14.883 2 N/A N/A N/A 2006.. 14.883 16.391 18 N/A N/A N/A 2007.. 16.391 16.552 20 13.093 11.986 1* ---- ------ ------ ----- ------ ------ --- Lincol VIPT Delawa Specia Opport 2007.. 9.631 9.137 1 N/A N/A N/A ---- ------ ------ ----- ------ ------ --- Lincoln VIPT FI Equity-Income 2005.. 10.009 10.469 2 N/A N/A N/A 2006.. 10.469 11.424 21 10.901 11.433 1* 2007.. 11.424 11.691 26 11.433 11.706 1 ---- ------ ------ ----- ------ ------ --- Lincoln VIPT Janus Capital Appreciation 2005.. 12.579 12.855 5 N/A N/A N/A 2006.. 12.855 13.826 5 N/A N/A N/A 2007.. 13.826 16.328 53 16.714 16.362 1* ---- ------ ------ ----- ------ ------ --- Lincol VIPT Marsic Intern Growth 2007.. 10.118 11.142 41 N/A N/A N/A ---- ------ ------ ----- ------ ------ --- Lincol VIPT MFS Value 2007.. 9.793 9.704 18 N/A N/A N/A ---- ------ ------ ----- ------ ------ ---
B-3
with EEB with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIPT Mid-Cap Growth 2007.. N/A N/A N/A 10.190 10.925 12 ---- -- --- --- ------ ------ -- Lincoln VIPT Mid-Cap Value 2007.. N/A N/A N/A 9.887 8.619 14 ---- -- --- --- ------ ------ -- Lincoln VIPT Mondrian International Value 2005.. N/A N/A N/A 15.504 17.069 11 2006.. 18.859 21.553 7 17.069 21.708 26 2007.. 21.553 23.459 7 21.708 23.675 18 ---- ------ ------ --- ------ ------ -- Lincoln VIPT S&P 500 Index 2007.. 11.334 11.176 17 11.378 11.234 1 ---- ------ ------ --- ------ ------ -- Lincoln VIPT Small Cap Index 2007.. N/A N/A N/A 10.016 9.128 6 ---- ------ ------ --- ------ ------ -- Lincoln VIPT T. Rowe Price Growth Stock 2007.. 9.991 9.890 1 10.363 9.902 1 ---- ------ ------ --- ------ ------ -- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2005.. N/A N/A N/A 14.150 14.689 1 2006.. 14.738 15.588 1* 14.689 15.702 4 2007.. 15.588 17.286 2 15.702 17.446 6 ---- ------ ------ --- ------ ------ -- Lincoln VIPT Templeton Growth 2007.. 9.524 9.762 2 10.014 9.774 29 ---- ------ ------ --- ------ ------ -- Lincoln VIPT UBS Global Asset Allocation 2005.. N/A N/A N/A N/A N/A N/A 2006.. 12.982 14.611 3 13.518 14.717 14 2007.. 14.611 15.175 3 14.717 15.315 44 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Value Opportunities 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire 2010 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire 2020 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire 2030 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire 2040 Profile 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Aggressive Profile 2005.. N/A N/A N/A 10.136 10.863 50 2006.. N/A N/A N/A 10.863 12.385 76 2007.. 12.523 13.382 5 12.385 13.451 148 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Conservative Profile 2005.. N/A N/A N/A 10.252 10.234 54 2006.. N/A N/A N/A 10.234 10.946 104 2007.. N/A N/A N/A 10.946 11.541 119 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderate Profile 2005.. 10.061 10.439 8 9.994 10.451 7 2006.. 10.439 11.420 8 10.451 11.456 157 2007.. 11.420 12.183 6 11.456 12.245 256 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005.. N/A N/A N/A 10.104 10.628 49 2006.. 11.210 11.830 1 10.628 11.867 137 2007.. 11.830 12.683 1 11.867 12.748 204 ---- ------ ------ --- ------ ------ --- MFS VIT Total Return Series 2005.. 12.815 12.868 1 12.219 12.295 10 2006.. 12.868 14.058 2 12.295 13.459 72 2007.. 14.058 14.301 5 13.459 13.718 94 ---- ------ ------ --- ------ ------ --- with GOP Acct Value DB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincol VIPT Mid-Ca Growth 2007.. 9.905 10.832 39 9.735 10.836 3 ---- ----- ------ -- ----- ------ - Lincol VIPT Mid-Ca Value 2007.. 9.777 8.633 67 10.231 8.635 2 ---- ----- ------ -- ------ ------ - Lincoln VIPT Mondrian International Value 2005.. 15.567 17.181 8 9.985 11.097 3 2006.. 17.181 21.906 44 11.097 14.156 13 2007.. 21.906 23.950 56 14.156 15.485 12 ---- ------ ------ -- ------ ------ -- Lincol VIPT S&P 500 Index 2007.. 11.432 11.294 9 11.442 11.320 2 ---- ------ ------ -- ------ ------ -- Lincol VIPT Small Cap Index 2007.. 10.082 9.142 14 10.020 9.144 1* ---- ------ ------ -- ------ ------ -- Lincol VIPT T. Rowe Price Growth Stock 2007.. 9.961 9.917 13 N/A N/A N/A ---- ------ ------ -- ------ ------ --- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2005.. 13.728 14.785 1 13.739 14.805 5 2006.. 14.785 15.844 5 14.805 15.873 7 2007.. 15.844 17.649 26 15.873 17.690 3 ---- ------ ------ -- ------ ------ --- Lincol VIPT Temple Growth 2007.. 10.119 9.789 91 9.553 9.792 3 ---- ------ ------ -- ------ ------ --- Lincoln VIPT UBS Global Asset Allocation 2005.. 12.627 13.225 13 N/A N/A N/A 2006.. 13.225 14.851 27 13.544 14.878 2 2007.. 14.851 15.494 80 14.878 15.529 7 ---- ------ ------ -- ------ ------ --- Lincol VIPT Value Opport 2007.. 9.987 9.352 5 N/A N/A N/A ---- ------ ------ -- ------ ------ --- Lincol VIPT Wilshi 2010 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2020 Profil 2007.. 10.301 10.277 9 N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2030 Profil 2007.. 10.319 10.384 1* N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincol VIPT Wilshi 2040 Profil 2007.. N/A N/A N/A N/A N/A N/A ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Aggressive Profile 2005.. 10.169 10.878 11 N/A N/A N/A 2006.. 10.878 12.434 83 11.840 12.443 4 2007.. 12.434 13.537 143 12.443 13.555 4 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Conservative Profile 2005.. 10.038 10.249 83 10.074 10.252 18 2006.. 10.249 10.989 279 10.252 10.998 32 2007.. 10.989 11.615 350 10.998 11.630 46 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderate Profile 2005.. 9.994 10.466 111 10.008 10.469 10 2006.. 10.466 11.501 624 10.469 11.510 57 2007.. 11.501 12.324 926 11.510 12.340 74 ---- ------ ------ --- ------ ------ --- Lincoln VIPT Wilshire Moderately Aggressive Profile 2005.. 9.996 10.643 33 N/A N/A N/A 2006.. 10.643 11.913 223 11.256 11.923 10 2007.. 11.913 12.830 337 11.923 12.847 27 ---- ------ ------ --- ------ ------ --- MFS VIT Total Return Series 2005.. 12.320 12.427 70 10.015 10.124 14 2006.. 12.427 13.637 193 10.124 11.116 33 2007.. 13.637 13.935 281 11.116 11.364 45 ---- ------ ------ --- ------ ------ ---
B-4
with EEB with EGMDB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Utilities Series 2005.. 19.180 21.872 1 12.594 14.398 5 2006.. 21.872 28.035 1 14.398 18.491 34 2007.. 28.035 35.000 2 18.491 23.132 45 ---- ------ ------ - ------ ------ -- Neuberger Berman AMT Mid-Cap Growth Portfolio 2005.. 14.180 15.785 1 11.907 13.281 3 2006.. 15.785 17.720 1 13.281 14.939 7 2007.. 17.720 21.250 1 14.939 17.951 11 ---- ------ ------ - ------ ------ -- Neuberger Berman AMT Regency Portfolio 2005.. N/A N/A N/A 15.630 17.167 9 2006.. 18.712 19.816 1 17.167 18.716 6 2007.. 19.816 20.035 1 18.716 18.960 9 ---- ------ ------ --- ------ ------ -- with GOP Acct Value DB ---------------------------------- ---------------------------------- Accumulation unit Accumulation unit value value -------------------- Number of -------------------- Number of Beginning End of accumulation Beginning End of accumulation of period period units of period period units ----------- -------- ------------- ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) MFS VIT Utilities Series 2005.. 12.697 14.552 23 10.018 11.056 2 2006.. 14.552 18.736 70 11.056 14.242 9 2007.. 18.736 23.496 159 14.242 17.870 22 ---- ------ ------ --- ------ ------ -- Neuberger Berman AMT Mid-Cap Growth Portfolio 2005.. 12.004 13.423 13 12.024 13.452 1 2006.. 13.423 15.136 31 13.452 15.177 4 2007.. 15.136 18.233 35 15.177 18.291 5 ---- ------ ------ --- ------ ------ -- Neuberger Berman AMT Regency Portfolio 2005.. 15.755 17.349 34 15.777 17.381 1 2006.. 17.349 18.961 72 17.381 19.005 1 2007.. 18.961 19.256 91 19.005 19.311 2 ---- ------ ------ --- ------ ------ --
* All numbers less than 500 were rounded up to one. (1) Effective April 30, 2007, the Lincoln Core Fund was reorganized into the LVIP S&P 500 Index Fund, a series of Lincoln Variable Insurance Products Trust. (2) Effective April 30, 2007, the Lincoln Growth Fund, was reorganized into the LVIP Janus Capital Appreciation Fund, a series of Lincoln Variable Insurance Products Trust. (3) Effective June 11, 2007, the Lincoln Growth Opportunities Fund was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. (4)Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund. B-5 [THIS PAGE INTENTIONALLY LEFT BLANK] 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.
1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) LINCOLN LIFETIME INCOME(SM) ADVANTAGE GUARANTEED INCOME LINCOLN BENEFIT LINCOLN LIFETIME SMART INCOME(SM) 3) i4LIFE(R) SECURITY(R) ADVANTAGE ADVANTAGE LINCOLN ADVANTAGE (WITH OR GUARANTEED SMART 1-YR. WITHOUT INCOME SECURITY(R) AUTOMATIC LINCOLN BENEFIT ADVANTAGE STEP-UP LIFETIME (VERSION 2) 5-YR. (PRIOR INCOME(SM) (PRIOR ELECTIVE VERSIONS ADVANTAGE i4LIFE(R) 4LATER(R) VERSIONS STEP-UP MAY VARY) PLUS) ADVANTAGE ADVANTAGE MAY VARY) ------------------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to Designed to Designed to Designed to Designed to Designed to use guarantee that at guarantee that if guarantee that if provide an guarantee today a the Income Base least the entire you make your you make your income program future minimum established under amount of your first withdrawal first withdrawal that combines payout floor for 4LATER(R) purchase payments on or after the on or after the variable lifetime i4LIFE(R) Advantage (if will be returned date you reach date you reach income payments Advantage regular 4LATER(R) to you through age 65, you are age 59 1/2 (age and a death income payments, Advantage periodic guaranteed 65 under Joint benefit with the regardless of Guaranteed Income withdrawals, income Life), you are ability to make investment Benefit is regardless of the for your life guaranteed income withdrawals performance, by elected) or the investment (and your for your life during a defined providing an Guaranteed Amount performance of spouse's, under (and your period. Income Base under LINCOLN the contract. Joint Life spouse's, under . during the Lifetime version), even Joint Life accumulation INCOME(SM) after the entire version). period that can Advantage (if amount of . be used to LINCOLN LIFETIME purchase payments LINCOLN LIFETIME establish in the INCOME(SM) has been returned INCOME(SM) future a Advantage to you through Advantage Plus is Guaranteed Income Guaranteed Income periodic designed to Benefit with Benefit is withdrawals. If guarantee that i4LIFE(R) elected) or the lifetime contract value Advantage. Account Value* withdrawals are will not be less . established under not in effect, than the initial i4LIFE(R) you may make purchase payment Advantage (if periodic (or contract i4LIFE(R) withdrawals of value on rider Advantage the Guaranteed date) at the end Guaranteed Income Amount. of a 7-year Benefit is period IF you elected) to make no provide a minimum withdrawals and payout floor for cancel the i4LIFE(R) LINCOLN LIFETIME Advantage regular INCOME(SM) income payments, Advantage at that regardless of time. investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage 2. Current Fee 0.45% of 0.65% (Single 0.75% of Varies based on 0.50% of Income 0.50% added to Guaranteed Amount Life) or 0.80% Guaranteed Amount product and death Base the i4LIFE(R) (Joint Life) of benefit option Advantage charge Guaranteed (0.90% with Amount LINCOLN LIFETIME (assessed as a % (assessed as a % INCOME(SM) of account value, of account value, Advantage Plus) and only during and only during annuity payout annuity payout phase) phase) 3. Guaranteed 0.95% of 1.50% of 1.50% of Same as current 1.50% of Income 1.50% added to Maximum Fee Guaranteed Amount Guaranteed Amount Guaranteed Amount fee Base the i4LIFE(R) Advantage charge (assessed as a % of account value, and only during annuity payout phase)
4. Withdrawals Yes-7% annually Yes-5% annually Yes-5% annually Yes, during Yes, only after No Permitted Access Period you elect Withdrawals i4LIFE(R) negate LINCOLN Advantage Lifetime INCOME(SM) Advantage Plus 5. Payments for Life No Yes (if Yes (if Yes (if If elect Yes (if conditions are conditions are conditions are i4LIFE(R) conditions are met) met) met) Advantage met) 6. Potential Increases Purchase Payments Purchase Payments Purchase Payments N/A Purchase Payments Automatic 3-Year to Guaranteed Step-Ups Amount, Income Optional 5-Year Automatic Annual 5% Enhancements 15% Enhancements Base, or Step-Ups Step-Ups (every 3 years) (if conditions Guaranteed Income Automatic Annual are met) Benefit (as (if conditions (if conditions Step-Ups Resets to applicable) are met) are met) contract value 200% Step-Up (if conditions (if conditions are met) are met) 7. Investment Option 1 Option 1 Option 2 None Option 1 Option 1 Requirements Option 2 for LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit 8. Ability to Make Yes Yes, after the Yes--may impact No (non-qualified Yes No Additional first rider the charge contracts) Purchase anniversary, if Payments if cumulative Yes, during Contract Value is payments are over Access Period, greater than zero $100,000 and unless 4LATER(R) prior Home Office Advantage approval is Guaranteed provided Income Benefit or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) 9. Spousal Yes Yes No No Yes (prior to No Continuation Periodic Income Commencement Date) 10. Ability to Cancel Yes, after 5 Yes, after 5 Yes, after 7 No (non-qualified Yes, after 3 Yes, after 3 Rider years following years following Years contracts) years following years following the later of the later of the later of the later of rider effective rider effective Yes, at any time rider effective rider effective date or date or (qualified date or most date or most contractowner- contractowner- contracts) recent Reset recent Reset (if elected step-up elected step-up 4LATER(R) Advantage Guaranteed Income Benefit or LINCOLN LIFETIME INCOME(SM) Advantage Guaranteed Income Benefit is elected) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) 11. Nursing Home No No Yes No No No Benefit 12. May Elect Other No No No Limited to No (prior to the Limited to Living Benefit Guaranteed Income Periodic Income i4LIFE(R) Riders Benefit Commencement Advantage Date)
Lincoln ChoicePlus AssuranceSM (C Share) 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 ChoicePlus AssuranceSM (C Share) prospectus of Lincoln Life Variable Annuity Account N dated April 30, 2008. You may obtain a copy of the Lincoln ChoicePlus AssuranceSM (C Share) prospectus on request and without charge. Please write Lincoln Life Customer Service, The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, IN 46802-7866, 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 Advertising B-5 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is April 30, 2008. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm The financial statements of the VAA and the consolidated financial statements of Lincoln Life appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, 2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as set forth in their reports, also appearing in this SAI and in the Registration Statement. The financial statements audited by Ernst & Young LLP have been included herein in reliance on their 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 Mellon Bank, N.A., 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, our affiliate. 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. Lincoln Life (prior to May 1, 2007) and LFD (on or after May 1, 2007) acting as Principal Underwriter paid, $115,249,891, $162,288,944 and $223,104,195 to LFA and Selling Firms in 2005, 2006 and 2007, 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%
Formula (1 + Index A)n ------------------------------ -1 (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment 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 INTEREST ADJUSTMENT 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% 15-year Access Period 30-Year Access Period Regular Income Payment .............. $ 10,813.44 $10,004.94
A 10% withdrawal from the account value will reduce the regular income payments by 10% to $9,732.10 with the 15-year access period and $9,004.45 with the 30-year access period. At the end of the 15-year access period, the remaining account value of $135,003.88 (assuming no withdrawals) will be used to continue the $10,813.44 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. Advertising The Lincoln National Life Insurance Company (Lincoln Life) is ranked and rated by independent financial rating services, including Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The purpose of these ratings is to reflect the financial strength or claims-paying ability of Lincoln Life. The ratings are not intended to reflect the investment experience or financial strength of the VAA. B-5 We may advertise these ratings from time to time. In addition, 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. More About the S&P 500 Index. Investors look to indexes as a standard of market performance. Indexes are model portfolios, that is, 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 seeks to approximate as closely as possible, before fees and expenses, the total return of the S&P 500 Index. To accomplish this objective the fund's sub-adviser, SSgA Funds Management, Inc. ("SFM"), attempts to buy and sell all of the index's securities in the same proportion as they are reflected in the S&P 500 Index, although the fund reserves the right not to invest in every security in the S&P 500 Index if it is not practical to do so under the circumstances. SFM does not seek to beat the S&P 500 Index and does not seek temporary defensive positions when markets appear to be overvalued. SFM makes no attempt to apply economic, financial or market analysis when managing the fund. Including a security among the fund's holdings implies no opinion as to its attractiveness as an investment. The fund may invest in stock index futures and options on stock index futures as a substitute for a comparable market position in the underlying securities. A stock index future obligates one party to deliver (and the other party to take), effectively, an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. Instead, the buyer and seller settle the difference in cash between the contract price and the market price on the agreed upon date. The buyer pays the difference if the actual price is lower than the contract price and the seller pays the difference if the actual price is higher. There can be no assurance that a liquid market will exist at the time when the fund seeks to close out a futures contract or a futures option position. Lack of a liquid market may prevent liquidation of an unfavorable position. The 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, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts. 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 $2,000 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. 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. Cross Reinvestment Program/Earnings Sweep Program - Under this option, account value in a designated variable subaccount of the contract that exceeds a certain baseline amount is automatically transferred to another specific variable subaccount(s) of the contract at specific intervals. You may elect to participate in the cross reinvestment program at the time of application or at any time before the annuity commencement date by sending a written request to us or by telephone if we have your telephone authorization on file. You designate the holding account, the receiving account(s), and the baseline amount. Cross reinvestment will continue until we receive authorization to terminate the program. The minimum holding account value required to establish cross-reinvestment is $10,000. A transfer under this program is not considered a transfer for purposes of limiting the number of transfers that may be made. We reserve the right to discontinue this service at any time. 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. Once the portfolio rebalancing option is activated, any variable subaccount transfers executed outside of the portfolio rebalancing program will terminate the portfolio rebalancing program. Any subsequent purchase payment or withdrawal that modifies the account balance within each variable subaccount may also cause termination of the portfolio rebalancing program. Any such termination will be confirmed to 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 Financial statements of the VAA and the 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, 2007, 2006 AND 2005 S-2 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, ------------------- 2007 2006 -------- --------- ASSETS Investments: Available-for-sale securities, at fair value: Fixed maturity (amortized cost: 2007 -- $53,250; 2006 -- $53,846) $ 53,405 $ 54,697 Equity (cost: 2007 -- $132; 2006 -- $205) 134 218 Trading securities 2,533 2,820 Mortgage loans on real estate 7,117 7,344 Real estate 258 409 Policy loans 2,798 2,755 Derivative investments 172 245 Other investments 986 783 -------- -------- Total investments 67,403 69,271 Cash and invested cash 1,395 1,762 Deferred acquisition costs and value of business acquired 8,574 7,609 Premiums and fees receivable 382 331 Accrued investment income 801 838 Reinsurance recoverables 7,939 7,949 Goodwill 3,539 3,514 Other assets 2,030 1,765 Separate account assets 82,263 71,777 -------- -------- Total assets $174,326 $164,816 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Future contract benefits $ 13,619 $ 13,645 Other contract holder funds 58,168 58,718 Short-term debt 173 21 Long-term debt 1,675 1,439 Reinsurance related derivative liability 211 218 Funds withheld reinsurance liabilities 1,862 1,816 Deferred gain on indemnity reinsurance 696 760 Payables for collateral under securities loaned 1,135 1,504 Other liabilities 2,083 2,073 Separate account liabilities 82,263 71,777 -------- -------- Total liabilities 161,885 151,971 -------- -------- CONTINGENCIES AND COMMITMENTS (SEE NOTE 13) STOCKHOLDER'S EQUITY Common stock-- 10,000,000 shares, authorized, issued and outstanding 9,105 9,088 Retained earnings 3,283 3,341 Accumulated other comprehensive income 53 416 -------- -------- Total stockholder's equity 12,441 12,845 -------- -------- Total liabilities and stockholder's equity $174,326 $164,816 ======== ========
See accompanying notes to the Consolidated Financial Statements S-3 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- REVENUES Insurance premiums $ 1,560 $ 1,118 $ 67 Insurance fees 2,994 2,439 1,575 Net investment income 4,188 3,869 2,592 Realized loss (112) (2) (16) Amortization of deferred gain on indemnity reinsurance 83 76 77 Other revenues and fees 325 289 316 ------- ------- ------- Total revenues 9,038 7,789 4,611 ------- ------- ------- BENEFITS AND EXPENSES Interest credited 2,398 2,241 1,506 Benefits 2,329 1,757 616 Underwriting, acquisition, insurance and other expenses 2,472 2,086 1,544 Interest and debt expenses 96 84 78 ------- ------- ------- Total benefits and expenses 7,295 6,168 3,744 ------- ------- ------- Income before taxes 1,743 1,621 867 Federal income taxes 504 460 223 ------- ------- ------- Net income $ 1,239 $ 1,161 $ 644 ======= ======= =======
See accompanying notes to the Consolidated Financial Statements S-4 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2007 2006 2005 -------- -------- ------- COMMON STOCK Balance at beginning-of-year $ 9,088 $ 2,125 $ 2,106 Lincoln National Corporation purchase price (9) 6,932 -- Stock compensation/issued for benefit plans 26 31 19 -------- -------- ------- Balance at end-of-year 9,105 9,088 2,125 -------- -------- ------- RETAINED EARNINGS Balance at beginning-of-year 3,341 2,748 2,304 Cumulative effect of adoption of SOP 05-1 (41) -- -- Cumulative effect of adoption of FIN 48 (14) -- -- Comprehensive income 876 1,124 315 Less other comprehensive loss, net of tax (363) (37) (329) -------- -------- ------- Net income 1,239 1,161 644 Dividends declared (1,242) (568) (200) -------- -------- ------- Balance at end-of-year 3,283 3,341 2,748 -------- -------- ------- NET UNREALIZED GAIN ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning-of-year 421 452 781 Change during the year (345) (31) (329) -------- -------- ------- Balance at end-of-year 76 421 452 -------- -------- ------- NET UNREALIZED GAIN ON DERIVATIVE INSTRUMENTS Balance at beginning-of-year (9) 7 14 Change during the year (10) (16) (7) -------- -------- ------- Balance at end-of-year (19) (9) 7 -------- -------- ------- MINIMUM PENSION LIABILITY ADJUSTMENT Balance at beginning-of-year -- (6) (13) Change during the year -- 6 7 -------- -------- ------- Balance at end-of-year -- -- (6) -------- -------- ------- FUNDED STATUS OF EMPLOYEE BENEFIT PLANS Balance at beginning-of-year 4 -- -- Change during the year (8) 4 -- -------- -------- ------- Balance at end-of-year (4) 4 -- -------- -------- ------- Total stockholder's equity at end-of-year $ 12,441 $ 12,845 $ 5,326 ======== ======== =======
See accompanying notes to the Consolidated Financial Statements S-5 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
For the Years Ended December 31, --------------------------- 2007 2006 2005 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,239 $ 1,161 $ 644 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs and value of business acquired deferrals and interest, net of amortization (1,101) (722) (430) Change in premiums and fees receivable (53) 16 54 Change in accrued investment income 13 21 (4) Change in contract accruals 574 170 (1,082) Net trading securities purchases, sales and maturities 316 165 (72) Gain on reinsurance embedded derivative/trading securities (2) (4) (5) Change in contract holder funds 453 741 1,893 Change in net periodic benefit accruals (5) (3) (11) Change in amounts recoverable from reinsurers (539) 199 101 Change in federal income tax accruals 310 150 148 Stock-based compensation expense 26 31 19 Depreciation, amortization and accretion, net 64 54 64 Increase in funds withheld liability 46 105 131 Realized loss on investments and derivative instruments 114 6 21 Amortization of deferred gain on indemnity reinsurance (83) (76) (77) Other (71) (706) (601) ------- ------- ------- Net adjustments 62 147 149 ------- ------- ------- Net cash provided by operating activities 1,301 1,308 793 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Available-for-sale securities: Purchases (8,606) (9,323) (5,725) Sales 3,453 5,328 3,767 Maturities 4,087 3,326 2,392 Purchases of other investments (2,018) (696) (1,008) Sales or maturities of other investments 1,880 585 1,151 Increase (decrease) in cash collateral on loaned securities (369) 538 45 Cash acquired from Jefferson-Pilot merger -- 154 -- Other (84) 58 9 ------- ------- ------- Net cash provided by (used in) investing activities (1,657) (30) 631 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of long-term debt -- -- (47) Issuance of long-term debt 375 140 -- Net increase (decrease) in short-term debt 13 (13) 2 Universal life and investment contract deposits 9,481 7,444 4,783 Universal life and investment contract withdrawals (6,645) (6,660) (3,755) Investment contract transfers (2,448) (1,821) (1,483) Dividends paid (787) (568) (200) ------- ------- ------- Net cash used in financing activities (11) (1,478) (700) ------- ------- ------- Net increase (decrease) in cash and invested cash (367) (200) 724 ------- ------- ------- Cash and invested cash at beginning-of-year 1,762 1,962 1,238 ------- ------- ------- Cash and invested cash at end-of-period $ 1,395 $ 1,762 $ 1,962 ======= ======= =======
See accompanying notes to the Consolidated Financial Statements S-6 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 and several U.S. territories (see Note 20). BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). On April 3, 2006, LNC completed its merger with Jefferson-Pilot Corporation ("Jefferson-Pilot"). On February 15, 2007, the North Carolina Department of Insurance approved the merger of Jefferson-Pilot Life Insurance Company ("JPL") into LNL with LNL being the survivor and Jefferson Pilot LifeAmerica Insurance Company ("JPLA") into LLANY, with JPLA being the survivor. JPLA then changed its name to LLANY. The effective date of these transactions was April 2, 2007. On May 3, 2007, LNL made a dividend to LNC that transferred ownership of our formerly wholly-owned subsidiary, First Penn-Pacific Life Insurance Company ("FPP"), to LNC. On July 2, 2007, the Nebraska Insurance Department approved the merger of Jefferson Pilot Financial Insurance Company ("JPFIC"), formerly a wholly-owned subsidiary of Jefferson-Pilot, into LNL. Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141"), excludes transfers of net assets or exchanges of shares between entities under common control, and notes that certain provisions under Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," provide a source of guidance for such transactions. In accordance with APB Opinion No. 16, the consolidated financial statements are presented as if on April 3, 2006, LNL completed the merger with JPL, JPLA and JPFIC, and has included the results of operations and financial condition of JPL, JPLA and JPFIC in our consolidated financial statements beginning on April 3, 2006 and all comparative financial statements are restated and presented as if the entities had been previously combined, in a manner similar to a pooling-of-interests. The consolidated financial statements for the period from January 1, 2006 through April 2, 2006 and for the year ended December 31, 2005 exclude the results of operations and financial condition of JPL, JPLA and JPFIC. The consolidated financial statements include the results of operations and financial condition of FPP from January 1, 2007 through May 3, 2007 and for the years ended December 31, 2006 and 2005. FPP's results subsequent to May 3, 2007 are excluded from 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 18 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 including a $2.1 billion increase to common stock offset by a decrease to retained earnings for each of the years ended December 31, 2006, 2005, and 2004 to properly classify historical capital contributions received and stock compensation expense incurred. These reclassifications have 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. All material intercompany accounts and transactions have been eliminated in consolidation. 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 policy acquisition costs ("DAC"), goodwill, value of business acquired ("VOBA"), future contract benefits and other contract holder funds, deferred front-end loads ("DFEL"), pension plans, income taxes and the potential effects of resolving litigated matters. BUSINESS COMBINATIONS For all business combination transactions excluding mergers of entities under common control as discussed above initiated after June 30, 2001, 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 fair values are subject to adjustment of the initial allocation for 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. AVAILABLE-FOR-SALE SECURITIES Securities classified as available-for-sale consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included as a separate component of S-7 accumulated other comprehensive income ("OCI"), net of associated DAC, VOBA, other contract holder funds and deferred income taxes. The fair value of actively traded securities is based on quoted market prices from observable market data or estimates from independent pricing services. 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: 1) the discount rate used in calculating expected future cash flows; 2) credit quality; 3) industry sector performance; and 4) expected maturity. 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. Realized gains and losses on the sale of investments are determined using the specific identification method. LNC regularly reviews available-for-sale securities for impairments in value deemed to be other-than-temporary. The cost basis of securities that are determined to be other-than-temporarily impaired is written down to current fair value with a corresponding charge to realized loss in net income. A write-down for impairment can be recognized for both credit-related events and for change in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery in value cannot be recognized in net income until the security is sold. However, in the event that the security is written down due to an interest-rate related impairment, the write-down is accreted through investment income over the life of the security. In evaluating whether a decline in value is other-than-temporary, LNC considers several factors including, but not limited to: 1) the severity (generally if greater than 20%) and duration (generally if greater than six months) of the decline; 2) our ability and intent to hold the security for a sufficient period of time to allow for a recovery in value; 3) the cause of the decline; and 4) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer. TRADING SECURITIES Trading securities consist of fixed maturity and equity securities in designated portfolios, which support modified coinsurance ("Modco") and coinsurance with funds withheld ("CFW") reinsurance arrangements. Investment results for these portfolios, 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, offset by corresponding changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance arrangements, are recorded in net investment income as they occur. For asset-backed and mortgage-backed securities, included in the trading and available-for-sale 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 effective yield is recalculated prospectively to reflect actual payments to date plus anticipated future payments. Any adjustments resulting from changes in effective yield are reflected in net investment income. 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 along with mortgage loan fees, which are recorded as they are incurred. 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: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price; or 3) 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. 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. We do not accrue interest on impaired loans and loans 90 days past due and any interest received on these loans is either applied to the principal or recorded in net investment income when received, depending on the assessment of the collectability of the loan. Mortgage loans deemed to be 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 loss on our Consolidated Statements of Income. 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 and 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 loss on our Consolidated Statements of Income. 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. S-8 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 loss on our Consolidated Statements of Income. Real estate acquired through foreclosure proceedings is recorded at fair value at the settlement date. POLICY LOANS Policy loans are carried at unpaid principal balances. SECURITIES LENDING Securities loaned are treated as collateralized financing transactions, and a liability is recorded equal to the cash collateral received, which is typically greater than the market value of the related securities loaned. This liability is included within payables for collateral under securities loaned on our Consolidated Balance Sheets. Our pledged securities are included in fixed maturities 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 equivalents, short-term investments or fixed maturity securities. 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. REVERSE REPURCHASE AGREEMENTS Reverse repurchase agreements are treated as collateralized financing transactions and a liability is recorded equal to the cash collateral received. This liability is included within payables for collateral under securities loaned on our Consolidated Balance Sheets. Our pledged securities are included in fixed maturities 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 securities. 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. REALIZED LOSS Realized loss includes realized gains and losses from the sale of investments, 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 on Modco and CFW reinsurance arrangements. Realized loss is recognized in net income, net of associated amortization of DAC, VOBA, deferred sales inducements ("DSI") and DFEL and changes in other contract holder funds. Realized loss is also net of allocations of investment gains and losses to certain contract holders and certain reinsurance arrangements for which we have a contractual obligation. 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. 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 operation. As of December 31, 2007 and 2006, we had derivative instruments that were designated and qualified as cash flow hedges and fair value hedges. In addition, we had derivative instruments that were economic hedges but were not designated as hedging instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). 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 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 are economic hedges, the gain or loss is recognized in net income during the period of change in the corresponding income statement line as the transaction being hedged. See Note 5 for additional discussion of our derivative instruments. CASH AND CASH EQUIVALENTS Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a maturity of three months or less. DAC, VOBA, DSI AND DFEL Commissions and other costs of acquiring universal life insurance, variable universal life insurance, traditional life insurance, annuities and other investment contracts, which vary with and are primarily related to the production of new business, have been deferred (i.e., DAC) to the extent recoverable. The methodology for determining the amortization of DAC varies by product type based on two different accounting pronouncements: SFAS No. 97, "Accounting and Reporting by Insurance S-9 Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("SFAS 97") and SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("SFAS 60"). Under SFAS 97, acquisition costs for universal life and variable universal life 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 or loss on investments. Contract lives for universal and variable universal life policies are estimated to be 30 years, based on the expected lives of the policies. Contract lives for fixed and variable deferred annuities are 14 to 20 years for the traditional, long surrender charge period products and 8 to 10 years for the more recent short-term or no surrender charge variable products. 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. Under SFAS 60, acquisition costs for traditional life insurance products, which include individual whole life, group business and term life insurance contracts, are amortized over periods of 10 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 balance or related amortization under SFAS 60 for fixed and variable payout annuities. For all SFAS 97 and SFAS 60 contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract form adjusted for emerging experience and expected trends. 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. VOBA is amortized over the expected lives of the block of insurance business in relation to the incidence of estimated profits expected to be generated on universal life, variable universal life and investment-type products, (i.e., variable deferred annuities) and over the premium paying period for insurance products, (i.e., traditional life insurance products). Amortization is based upon assumptions used in pricing the acquisition of the block of business and is adjusted for emerging experience. Accordingly, amortization periods and methods of amortization for VOBA vary depending upon the particular characteristics of the underlying blocks of acquired insurance business. VOBA is amortized in a manner consistent with DAC. Both DAC and VOBA amortization is reported within underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. The carrying amounts of DAC and VOBA are adjusted for the effect of realized gains and losses and the effects of unrealized gains and losses on debt securities classified as available-for-sale. Amortization expense of DAC and VOBA 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 and VOBA amortization within realized gains and losses reflecting the incremental impact of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility period-to-period in net realized gains and losses. Bonus 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. DSI is amortized over the expected life of the contract as an expense in interest credited on our Consolidated Statements of Income. Amortization is computed using the same methodology and assumptions used in amortizing DAC. Contract sales charges that are collected in the early years of an insurance contract are deferred (referred to as "DFEL"), and are amortized into income over the life of the contract in a manner consistent with that used for DAC. The deferral and amortization of DFEL is reported within insurance fees on our Consolidated Statements of Income. See Note 2 for discussion of the adoption and impact of Statement of Position ("SOP") 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). On a quarterly basis, LNC may record an adjustment to the amounts included on our Consolidated Balance Sheets for DAC, VOBA, DSI and DFEL with an offsetting benefit or charge to revenues or expenses for the impact of the difference between the estimates of future gross profits used in the prior quarter and the emergence of actual and updated estimates of future gross profits in the current quarter ("retrospective unlocking"). In addition, in the third quarter of each year, LNC conducts an 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 annuity and life insurance products with certain guarantees. These assumptions include investment margins, mortality, retention and rider utilization. Based on LNC's review, the cumulative balances of DAC, VOBA, DSI and DFEL are adjusted with an offsetting benefit or charge to revenues or amortization expense to reflect such change ("prospective unlocking"). The distinction between these two types of unlocking is that retrospective unlocking is driven by the emerging experience period-over-period, while prospective unlocking is driven by changes in assumptions or projection models related to estimated future gross profits. DAC, VOBA, DSI and DFEL are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts. No significant impairments occurred during the three years ended December 31, 2007. S-10 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, 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. Premiums, benefits and DAC are reported net of insurance ceded. GOODWILL We recognize the excess of the purchase price over the fair value of 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. When an impairment occurs, the carrying amounts are written down and a charge is recorded against net income using a combination of fair value and discounted cash flows. No impairments occurred during the three years ended December 31, 2007. SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS Specifically identifiable intangible assets, net of accumulated amortization are reported in other assets. The carrying values of specifically identifiable intangible assets are reviewed periodically for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: 1) the economic or competitive environments in which the company operates; 2) profitability analyses; 3) cash flow analyses; and 4) 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. Sales force intangibles are attributable to the value of the distribution system acquired in the Individual Markets - Life Insurance segment. These assets are amortized on a straight-line basis over their useful life of 25 years. PROPERTY AND EQUIPMENT 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. IMPAIRMENT OF LONG-LIVED ASSETS 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 disposed of. 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 Separate account assets and liabilities represent segregated funds administered and invested by our insurance subsidiaries for the exclusive benefit of pension and variable life and annuity contract holders. Separate account assets are carried at fair value and the related liabilities are measured at an equivalent amount 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 us with respect to certain accounts. See Note 10 for additional information regarding arrangements with contractual guarantees. The revenues earned by our insurance subsidiaries for administrative and contract holder maintenance services performed for these separate accounts are included in insurance fees on our Consolidated Statements of Income. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS The liabilities for future contract benefits and claim reserves for universal and variable universal life 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 7.00% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 0.75% 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. S-11 The liabilities for future claim reserves for variable annuity products containing guaranteed minimum death benefit ("GMDB") features are calculated by multiplying the benefit ratio (present value of total expected GMDB payments over the life of the contract divided by the present value of total expected assessments over the life of the contract) by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GMDB payments plus interest. The change in the reserve for a period is the benefit ratio multiplied by the assessments recorded for the period less GMDB 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: 1) overall reserve position; 2) reserving techniques; and 3) 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. As of December 31, 2007 and 2006, participating policies comprised approximately 1.5% and 1.3%, respectively, of the face amount of insurance in force, and dividend expenses were $85 million for the years ended December 31, 2007 and 2006, and $78 million for the year ended December 31, 2005. Universal life and variable universal life products with secondary guarantees represented approximately 32% and 34% of permanent life insurance in force as of December 31, 2007 and 2006, respectively, and approximately 73% and 77% of sales for these products for the years ended December 31, 2007 and 2006, respectively. Liabilities for the secondary guarantees on universal life-type products are calculated by multiplying the benefit ratio (present value of total expected secondary guarantee benefits over the life of the contract divided by the present value of total expected assessments over the life of the contract) 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. 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. Any premium or discount on borrowed funds is amortized over the term of the borrowings. 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. PREMIUMS AND FEES ON INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include universal life insurance, variable universal life 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. Revenues for investment products and universal life insurance products consist of net investment income, asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that have been assessed and earned against contract account balances and premiums received during the period. 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. PREMIUMS ON TRADITIONAL LIFE INSURANCE PRODUCTS 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. Premiums for traditional life insurance products are recognized as revenue when due from the contract holder. OTHER REVENUES AND FEES Other revenues and fees primarily consist of amounts earned by our retail distributor, LFA, from sales of third party insurance and investment products. Such revenue is recorded as earned at the time of sale. BENEFITS Benefits for universal life and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also includes the change in reserves for life insurance products with secondary guarantee benefits and annuity products with guaranteed benefits, such as GMDB, and the change in fair values of guarantees for annuity products with guaranteed minimum S-12 withdrawal benefits ("GMWB") and guaranteed income benefits ("GIB"). For traditional life, group health and disability income products, benefits and expenses, other than DAC and VOBA, are recognized when incurred in a manner consistent with the related premium recognition policies. INTEREST CREDITED Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in our general account during 2005 through 2007 ranged from 3.00% to 9.00%. INTEREST AND DEBT EXPENSES Interest and debt expenses includes interest on short-term commercial paper, long-term senior debt that we issue and junior subordinated debentures issued to affiliated trusts. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Pursuant to the accounting rules for LNC's obligations to employees under LNC's various pension and other postretirement benefit plans, LNC is required to make a number of assumptions to estimate related liabilities and expenses. LNC uses assumptions for the weighted-average discount rate and expected return on plan assets. 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 initially established at the beginning of the plan year based on historical and projected future rates of return and is the average rate of earnings expected on the funds invested or to be 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 16 for more information on our accounting for employee benefit plans. STOCK-BASED COMPENSATION LNC expenses the fair value of stock awards included in LNC's 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. 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 service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholder's equity. Stock-based compensation expense is reflected in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. For additional information on stock-based incentive compensation see Note 17. INCOME TAXES We and our eligible subsidiaries have elected to file consolidated Federal and state income tax returns with LNC and certain LNC 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 6 for additional information. -------------------------------------------------------------------------------- 2. NEW ACCOUNTING STANDARDS ADOPTION OF NEW ACCOUNTING STANDARDS SOP 05-1 -- ACCOUNTING BY INSURANCE ENTERPRISES FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH MODIFICATIONS OR EXCHANGES OF INSURANCE CONTRACTS In September 2005, the American Institute of Certified Public Accountants issued SOP 05-1, which provides guidance on accounting for DAC on internal replacements of insurance and investment contracts other than those specifically described in SFAS 97. An internal replacement, defined by SOP 05-1, is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, VOBA, DFEL and DSI from the replaced contract must be written-off. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We adopted SOP 05-1 effective January 1, 2007 by recording decreases to the following categories (in millions) on our Consolidated Balance Sheets: ASSETS DAC $31 VOBA 35 Other assets -- DSI 3 --- Total assets $69 === LIABILITIES AND STOCKHOLDER'S EQUITY Future contract benefits -- GMDB annuity reserves $ 4 Other contract holder funds -- DFEL 2 Other liabilities -- income tax liabilities 22 --- Total liabilities 28 --- Retained earnings 41 --- Total liabilities and stockholder's equity $69 ===
The adoption of this new guidance primarily impacted our Individual Markets -- Annuities and Employer Markets -- Group Protection businesses and our accounting policies regarding the assumptions for lapsation used in the amortization of DAC S-13 and VOBA. In addition, the adoption of SOP 05-1 resulted in an approximately $17 million increase to underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income for the year ended December 31, 2007, which was attributable to changes in DAC and VOBA deferrals and amortization. FASB INTERPRETATION NO. 48 -- ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. FIN 48 requires companies to determine whether it is "more likely than not" that an individual tax position will be sustained upon examination by the appropriate taxing authority prior to any part of the benefit being recognized in the financial statements. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. In addition, FIN 48 expands disclosure requirements to include additional information related to unrecognized tax benefits, including accrued interest and penalties, and uncertain tax positions where the estimate of the tax benefit may change significantly in the next twelve months. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007 by recording an increase in the liability for unrecognized tax benefits of $14 million on our Consolidated Balance Sheets, offset by a reduction to the beginning balance of retained earnings. See Note 6 for more information regarding our adoption of FIN 48. SFAS NO. 155 -- ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS -- AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140 In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS 155"), which permits fair value remeasurement for a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Under SFAS 155, an entity may make an irrevocable election to measure a hybrid financial instrument at fair value, in its entirety, with changes in fair value recognized in earnings. SFAS 155 also: (a) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (b) eliminates the interim guidance in SFAS 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," and establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are either freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation; (c) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (d) eliminates restrictions on a qualifying special-purpose entity's ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. In December 2006, the FASB issued Derivative Implementation Group ("DIG") Statement 133 Implementation Issue No. B40, "Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets" ("DIG B40"). Since SFAS 155 eliminated the interim guidance related to securitized financial assets, DIG B40 provides a narrow scope exception for securitized interests that contain only an embedded derivative related to prepayment risk. Under DIG B40, a securitized interest in prepayable financial assets would not be subject to bifurcation if: (a) the right to accelerate the settlement of the securitized interest cannot be controlled by the investor and (b) the securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. Any other terms in the securitized financial asset that may affect cash flow in a manner similar to a derivative instrument would be subject to the requirements of paragraph 13(b) of SFAS 133. The guidance in DIG B40 is to be applied upon the adoption of SFAS 155. We adopted the provisions of SFAS 155 and DIG B40 on January 1, 2007. Prior period restatement was not permitted. The adoption of SFAS 155 did not have a material impact on our financial condition or results of operations. SFAS NO. 158 -- EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS -- AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R) In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). The guidance requires us to recognize on the balance sheets the funded status of our defined benefit postretirement plans as either an asset or liability, depending on the plans' funded status, with changes in the funded status recognized through OCI. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation, for pension plans, or the accumulated postretirement benefit obligation for postretirement benefit plans. Prior service costs or credits and net gains or losses which are not recognized in current net periodic benefit cost, pursuant to SFAS No. 87, "Employers' Accounting for Pensions" or SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," must be recognized in OCI, net of tax, in the period in which they occur. As these items are recognized in net periodic benefit cost, the amounts accumulated in OCI are adjusted. Under SFAS 158, disclosure requirements have also been expanded to separately provide information on the prior service costs or credits and net gains and losses recognized in OCI and their effects on net periodic benefit costs. Retroactive application of SFAS 158 was not permitted. We applied the recognition provisions of SFAS 158 as of December 31, 2006 by recording an increase in the asset of $38 million and an increase in the S-14 liability of $34 million, offset by an increase in accumulated OCI of $4 million. STAFF ACCOUNTING BULLETIN NO. 108 -- CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS In September 2006, the U.S. Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance for evaluating the effects of prior year uncorrected errors when quantifying misstatements in the current year financial statements. Under SAB 108, the impact of correcting misstatements occurring in the current period and those that have accumulated over prior periods must both be considered when quantifying the impact of misstatements in current period financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006, and may be adopted by either restating prior financial statements or recording the cumulative effect of initially applying the approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006, with an offsetting adjustment to retained earnings. We adopted the provisions of SAB 108 as of December 31, 2006. The adoption of SAB 108 did not have a material effect on our financial statements. SFAS NO. 123(R) -- SHARE-BASED PAYMENT In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which is a revision of SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123(R) requires us to recognize at fair value all costs resulting from share-based payments to employees, except for equity instruments held by employee share ownership plans. Similar to SFAS 123, under SFAS 123(R), the fair value of share-based payments is recognized as a reduction to earnings over the period an employee is required to provide service in exchange for the award. We had previously adopted the retroactive restatement method under SFAS No. 148, "Accounting for Stock-based Compensation -Transition and Disclosure," and restated all periods presented to reflect stock-based employee compensation cost under the fair value accounting method for all employee awards granted, modified or settled in fiscal years beginning after December 15, 1994. Effective January 1, 2006, we adopted SFAS 123(R), using the modified prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results from prior periods have not been restated. The adoption of SFAS 123(R) did not have a material effect on our income before federal income taxes and net income. SFAS 123(R) eliminates the alternative under SFAS 123 permitting the recognition of forfeitures as they occur. Expected forfeitures, resulting from the failure to satisfy service or performance conditions, must be estimated at the grant date, thereby recognizing compensation expense only for those awards expected to vest. In accordance with SFAS 123(R), we have included estimated forfeitures in the determination of compensation costs for all share-based payments. Estimates of expected forfeitures must be reevaluated at each balance sheet date, and any change in the estimates will be recognized retrospectively in net income in the period of the revised estimates. Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows on our Statements of Cash Flows. SFAS 123(R) requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation costs recognized to be classified as financing cash flows. Our excess tax benefits are classified as financing cash flows, prospectively, on our Statements of Cash Flows for the years ended December 31, 2007 and 2006. We issue share-based compensation awards under an authorized plan, subject to specific vesting conditions. Generally, compensation expense is recognized ratably over a three-year vesting period, but recognition may be accelerated upon the occurrence of certain events. For awards that specify an employee will vest upon retirement and an employee is eligible to retire before the end of the normal vesting period, we record compensation expense over the period from the grant date to the date of retirement eligibility. As a result of adopting SFAS 123(R), we have revised the prior method of recording unrecognized compensation expense upon retirement and use the non-substantive vesting period approach for all new share-based awards granted after January 1, 2006. Under the non-substantive vesting period approach, we recognize compensation cost immediately for awards granted to retirement-eligible employees, or ratably over a period from the grant date to the date retirement eligibility is achieved. If we would have applied the non-substantive vesting period approach to all share based compensation awards granted prior to January 1, 2006, it would not have a material effect on our results of operations or financial position. See Note 17 for more information regarding our stock-based compensation plans. FASB STAFF POSITION SFAS 115-1 AND SFAS 124-1 -- THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS In November 2005, the FASB issued FASB Staff Position ("FSP") Nos. SFAS 115-1 and SFAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"). The guidance in FSP 115-1 nullifies the accounting and measurement provisions of Emerging Issues Task Force ("EITF") No. 03-1 - "The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments" and supersedes EITF Topic No. D-44 "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." S-15 FSP 115-1 was effective for reporting periods beginning after December 15, 2005, on a prospective basis. Our existing policy for recognizing other-than-temporary impairments is consistent with the guidance in FSP 115-1, and includes the recognition of other-than-temporary impairments of securities resulting from credit related issues as well as declines in fair value related to rising interest rates, where we do not have the intent to hold the securities until either maturity or recovery. We adopted FSP 115-1 effective January 1, 2006. The adoption of FSP 115-1 did not have a material effect on our financial condition or results of operations. FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS SFAS NO. 157 -- FAIR VALUE MEASUREMENTS In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement and enhances disclosures about fair value instruments. SFAS 157 retains the exchange price notion, but clarifies that exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (exit price) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (entry price). Fair value measurement 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 nonperformance risk which would include the reporting entity's own credit risk. SFAS 157 establishes a three-level fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The highest priority, Level 1, is given to quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs, other than quoted prices included in Level 1, for the asset or liability. Level 3 inputs, the lowest priority, include unobservable inputs in situations where there is little or no market activity for the asset or liability and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk. We have certain guaranteed benefit features that, prior to January 1, 2008, were recorded using fair value pricing. These benefits will continue to be measured on a fair value basis with the adoption of SFAS 157, utilizing a number for Level 3, with some Level 2 inputs, which are reflective of the hypothetical market participant perspective for fair value measurement. In addition, SFAS 157 expands the disclosure requirements for annual and interim reporting to focus on the inputs used to measure fair value, including those measurements using significant unobservable inputs, and the effects of the measurements on earnings. We adopted SFAS 157 for all of our financial instruments effective January 1, 2008 and expect to record a charge of between $25 million and $75 million to net income attributable to changes in the fair value of guaranteed benefit reserves and indexed annuities reported in our Individual Markets - Annuities segment. SFAS NO. 159 -- THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which allows an entity to make an irrevocable election, on specific election dates, to measure eligible items at fair value. The election to measure an item at fair value may be determined on an instrument by instrument basis, with certain exceptions. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date, and any upfront costs and fees related to the item will be recognized in earnings as incurred. In addition, the presentation and disclosure requirements of SFAS 159 are designed to assist in the comparison between entities that select different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. At the effective date, the fair value option may be elected for eligible items that exist on that date. Effective January 1, 2008, we elected not to adopt the fair value option for any financial assets or liabilities that existed as of January 1, 2008. SFAS NO. 141(R) -- BUSINESS COMBINATIONS In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS 141(R)") - a revision to SFAS 141, which aims to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) retains the fundamental requirements of SFAS 141, broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things, that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, liabilities related to contingent consideration be recognized at the acquisition date and remeasured at fair value in each subsequent reporting period, acquisition-related costs be expensed as incurred and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. SFAS 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. SFAS NO. 160 -- NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS -- AN AMENDMENT OF ACCOUNTING RESEARCH BULLETIN NO. 51 In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51A" ("SFAS 160"), which aims to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards surrounding noncontrolling interests, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in S-16 subsidiaries held by parties other than the parent shall be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent's equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary must be accounted for consistently as equity transactions. A parent's ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or sells some of its ownership interests in its subsidiary and if the subsidiary reacquires some of its ownership interests or issues additional ownership interests. When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. Entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We expect to adopt SFAS 160 effective January 1, 2009, and are currently evaluating the effects of SFAS 160 on our consolidated financial condition and results of operations. DERIVATIVE IMPLEMENTATION GROUP STATEMENT 133 IMPLEMENTATION ISSUE NO. E23 -- ISSUES INVOLVING THE APPLICATION OF THE SHORTCUT METHOD UNDER PARAGRAPH 68 In December 2007, the FASB issued DIG Statement 133 Implementation Issue No. E23, "Issues Involving the Application of the Shortcut Method under Paragraph 68" ("DIG E23"), which gives clarification to the application of the shortcut method of accounting for qualifying fair value hedging relationship involving an interest-bearing financial instrument and/or an interest rate swap, originally outlined in paragraph 68 in SFAS 133. DIG E23 clarifies that the shortcut method may be applied to a qualifying fair value hedge when the relationship is designated on the trade date of both the swap and the hedged item (for example, debt), even though the hedged item is not recognized for accounting purposes until the transaction settles (that is, until its settlement date), provided that the period of time between the trade date and the settlement date of the hedged item is within established conventions for that marketplace. DIG E23 also clarifies that Paragraph 68(b) is met for an interest rate swap that has a non-zero fair value at the inception of the hedging relationship provided that the swap was entered into at the hedge's inception for a transaction price of zero and the non-zero fair value is due solely to the existence of a bid-ask spread in the entity's principal market (or most advantageous market, as applicable) under SFAS 157. The interest rate swap would be reported at its fair value as determined under SFAS 157. DIG E23 is effective for hedging relationships designated on or after January 1, 2008. The adoption of DIG E23 is not expected to have a material impact on our consolidated financial condition or results of operations. FSP FAS140-3 -- ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS AND REPURCHASE FINANCING TRANSACTIONS In February 2008, the FASB issued FSP No. FAS 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP 140-3"). The guidance in FSP 140-3 provides accounting and reporting standards for transfers of financial assets. This FSP applies to a repurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP 140-3 shall be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after the beginning of the fiscal year in which FSP 140-3 is initially applied. We are evaluating the expected effect on our consolidated financial condition and results of operations. -------------------------------------------------------------------------------- 3. ACQUISITION AND DIVIDEND OF FPP JEFFERSON-PILOT MERGER On April 3, 2006, LNC completed its merger with Jefferson-Pilot by acquiring 100% of the outstanding shares of Jefferson-Pilot in a transaction accounted for under the purchase method of accounting prescribed by SFAS 141. At that time, JPL, JPLA and JPFIC became wholly-owned by LNC. SFAS 141 requires that the total purchase price be allocated to the assets acquired and liabilities assumed based on their fair values at the merger date. The associated fair values of JPL, JPLA and JPFIC at April 3, 2006 were "pushed down" to LNL's consolidated financial statements in accordance with push down accounting rules. The fair value of the specifically identifiable net assets acquired in the merger was $4.3 billion. Goodwill of $2.6 billion resulted from the excess of purchase price over the fair value of the net assets. The amount of goodwill that was expected to be deductible for tax purposes was approximately $23 million. LNC paid a premium over the fair value of the net assets for a number of potential strategic and financial benefits that are expected to be realized as a result of the merger including, but not limited to, the following: - Greater size and scale with improved earnings diversification and strong financial flexibility; - Broader, more balanced product portfolio; - Larger distribution organization; and - Value creation opportunities through expense savings and revenue enhancements across business units. S-17 The following table summarizes the fair values of the net assets acquired (in millions) as of the acquisition date:
FAIR VALUE ---------- Investments $ 27,384 Reinsurance recoverables 1,193 Value of business acquired 2,489 Goodwill 2,622 Other assets 1,135 Separate account assets 2,574 Future contract benefits and other contract holder funds (26,677) Income tax liabilities (382) Accounts payable, accruals and other liabilities (841) Separate accounts liabilities (2,574) ---------- Total purchase price $ 6,923 ==========
The goodwill (in millions) resulting from the merger was allocated to the following segments:
GOODWILL -------- Individual Markets: Life Insurance $ 1,346 Annuities 1,002 -------- Total Individual Markets 2,348 Employer Markets: Group Protection 274 -------- Total goodwill $ 2,622 ========
DIVIDEND OF FPP On May 3, 2007, LNL made a dividend to LNC that transferred ownership of our formerly wholly-owned subsidiary, FPP, to LNC. The following table summarizes the dividend of FPP to LNC (in millions):
DIVIDENDED VALUE ---------- Investments $ 1,809 Cash and invested cash 20 Deferred acquisition costs and value of business acquired 246 Premiums and fees receivable 2 Accrued investment income 24 Reinsurance recoverables 669 Goodwill 2 Future contract benefits (705) Other contract holder funds (1,509) Other liabilities (66) ---------- Total dividend of FPP $ 492 ==========
The caption dividends declared, in the accompanying Consolidated Statements of Stockholder's Equity, includes the $492 million dividend of FPP presented above. 4. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities (in millions) were as follows:
AS OF DECEMBER 31, 2007 ---------------------------------------- GROSS UNREALIZED AMORTIZED ---------------- FAIR COST GAINS LOSSES VALUE --------- ----- ------ ------- Corporate bonds $ 42,041 $1,049 $ 904 $42,186 U.S. Government bonds 153 14 -- 167 Foreign government bonds 586 39 4 621 Asset and mortgage-backed securities 10,224 146 195 10,175 State and municipal bonds 143 2 -- 145 Redeemable preferred stocks 103 9 1 111 --------- ----- ------ ------- Total fixed maturity securities 53,250 1,259 1,104 53,405 Equity securities 132 9 7 134 --------- ----- ------ ------- Total available-for-sale securities $ 53,382 $1,268 $1,111 $53,539 ========= ====== ====== =======
S-18
AS OF DECEMBER 31, 2006 ---------------------------------------- GROSS UNREALIZED AMORTIZED ---------------- FAIR COST GAINS LOSSES VALUE --------- ------ ------ ------- Corporate bonds $ 44,049 $1,043 $ 283 $44,809 U.S. Government bonds 218 7 -- 225 Foreign government bonds 689 58 2 745 Asset and mortgage-backed securities 8,607 88 69 8,626 State and municipal bonds 194 2 2 194 Redeemable preferred stocks 89 9 -- 98 --------- ------ ------ ------- Total fixed maturity securities 53,846 1,207 356 54,697 Equity securities 205 15 2 218 --------- ------ ------ ------- Total available-for-sale securities $ 54,051 $1,222 $ 358 $54,915 ========= ====== ====== =======
The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities (in millions) were as follows:
AS OF DECEMBER 31, 2007 ------------------------ AMORTIZED FAIR COST VALUE --------- ------- Due in one year or less $ 2,261 $ 2,267 Due after one year through five years 11,217 11,489 Due after five years through ten years 15,437 15,315 Due after ten years 14,111 14,159 --------- ------- Subtotal 43,026 43,230 Asset and mortgage-backed securities 10,224 10,175 --------- ------- Total available-for-sale fixed maturity securities $ 53,250 $53,405 ========= =======
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 of available-for-sale securities (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, 2007 ----------------------------------------------------------- LESS THAN OR EQUAL TO GREATER THAN TWELVE MONTHS TWELVE MONTHS TOTAL ------------------- ------------------ ------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------- ---------- ------ ---------- ------- ---------- Corporate bonds $11,038 $ 657 $4,142 $ 247 $15,180 $ 904 U.S. Government bonds -- -- 3 -- 3 -- Foreign government bonds 81 4 -- -- 81 4 Asset and mortgage-backed securities 2,194 142 1,793 53 3,987 195 State and municipal bonds 29 -- 15 -- 44 -- Redeemable preferred stocks 13 1 -- -- 13 1 ------- ---------- ------ ---------- ------- ---------- Total fixed maturity securities 13,355 804 5,953 300 19,308 1,104 Equity securities 61 7 -- -- 61 7 ------- ---------- ------ ---------- ------- ---------- Total available-for-sale securities $13,416 $ 811 $5,953 $ 300 $19,369 $ 1,111 ======= ========== ====== ========== ======= ========== Total number of securities in an unrealized loss position 2,263 ==========
S-19
AS OF DECEMBER 31, 2006 ------------------------------------------------------------ LESS THAN OR EQUAL TO GREATER THAN TWELVE MONTHS TWELVE MONTHS TOTAL ------------------- ------------------ ------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------- ---------- ------ ---------- ------- ---------- Corporate bonds $ 8,643 $ 115 $4,892 $ 168 $13,535 $ 283 U.S. Government bonds 43 -- -- -- 43 -- Foreign government bonds 56 1 62 1 118 2 Asset and mortgage-backed securities 1,911 13 2,227 56 4,138 69 State and municipal bonds 20 1 44 1 64 2 Redeemable preferred stocks -- -- 1 -- 1 -- ------- ---------- ------ ---------- ------- ---------- Total fixed maturity securities 10,673 130 7,226 226 17,899 356 Equity securities 50 2 -- -- 50 2 ------- ---------- ------ ---------- ------- ---------- Total available-for-sale securities $10,723 $ 132 $7,226 $ 226 $17,949 $ 358 ======= ========== ====== ========== ======= ========== Total number of securities in an unrealized loss position 1,451 ==========
The fair value, gross unrealized losses (in millions) and number of available-for-sale securities, where the fair value had declined below amortized cost by greater than 20%, were as follows:
AS OF DECEMBER 31, 2007 ------------------------------ GROSS NUMBER FAIR UNREALIZED OF VALUE LOSSES SECURITIES ------ ---------- ---------- Less than six months $ 133 $ 48 22 Six months or greater, but less than nine months 425 137 30 Nine months or greater, but less than twelve months 363 109 17 Twelve months or greater 182 79 57 ------ ---------- ---------- Total available-for-sale securities $1,103 $ 373 126 ====== ========== ==========
AS OF DECEMBER 31, 2006 ------------------------------ GROSS NUMBER FAIR UNREALIZED OF VALUE LOSSES SECURITIES ------ ---------- ---------- Less than six months $ -- $ -- $ 5 Six months or greater, but less than nine months -- -- 2 Nine months or greater, but less than twelve months -- -- 1 Twelve months or greater 9 3 12 ----- ---------- ---------- Total available-for-sale securities $ 9 $ 3 20 ===== ========== ==========
As described more fully in Note 1, LNC regularly reviews our investment holdings for other-than-temporary impairments. Based upon this review, the cause of the decline being principally attributable to changes in interest rates and credit spreads during the holding period and our current ability and intent to hold securities in an unrealized loss position for a period of time sufficient for recovery, LNC believes that these securities were not other-than-temporarily impaired as of December 31, 2007 and 2006. TRADING SECURITIES Trading securities at fair value retained in connection with Modco and CFW reinsurance arrangements (in millions) consisted of the following:
AS OF DECEMBER 31, -------------------- 2007 2006 ------ ------ Corporate bonds $1,817 $2,140 U.S. Government bonds 366 331 Foreign government bonds 45 45 Asset and mortgage-backed securities: Mortgage pass-through securities 21 24 Collateralized mortgage obligations 153 111 Commercial mortgage-backed securities 104 133 Other asset-backed securities -- 8 State and municipal bonds 17 18 Redeemable preferred stocks 8 8 ------ ------ Total fixed maturity securities 2,531 2,818 Equity securities 2 2 ------ ------ Total trading securities $2,533 $2,820 ====== ======
The portion of market adjustment for trading securities still held at December 31, 2007, 2006 and 2005 was a loss of $8 million, $48 million and $70 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 United States, with the largest concentrations in California and Texas, which accounted for approximately 29% of mortgage loans as of December 31, 2007. S-20 NET INVESTMENT INCOME The major categories of net investment income (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2007 2006 2005 ------ ------ ------ Available-for-sale fixed maturity securities $3,264 $2,979 $1,959 Available-for-sale equity securities 19 11 7 Trading securities 163 181 176 Mortgage loans on real estate 491 466 288 Real estate 53 37 48 Policy loans 172 158 118 Invested cash 49 53 46 Other investments 155 147 61 ------ ------ ------ Investment income 4,366 4,032 2,703 Less investment expense 178 163 111 ------ ------ ------ Net investment income $4,188 $3,869 $2,592 ====== ====== ======
REALIZED LOSS The detail of the realized loss (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- Available-for-sale fixed maturity securities: Gross gains $ 120 $ 119 $ 111 Gross losses (176) (97) (89) Available-for-sale equity securities: Gross gains 3 2 10 Gross losses (111) -- -- Gain on other investments 22 5 1 Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 29 (37) (53) ----- ----- ----- Total realized loss on investments, excluding trading securities (113) (8) (20) Loss on derivative instruments, excluding reinsurance embedded derivatives (2) 2 (2) Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 1 -- 1 ----- ----- ----- Total realized loss on investments and derivative instruments (114) (6) (21) Gain on reinsurance embedded derivative/trading securities 2 4 5 ----- ----- ----- Total realized loss $(112) $ (2) $ (16) ===== ===== ===== Write-downs for other-than-temporary impairments included in realized loss on investments above $(257) $ (62) $ (18) ===== ===== =====
SECURITIES LENDING The carrying values of the securities pledged under securities lending agreements were $655 million and $1.0 billion as of December 31, 2007 and 2006. The fair values of these securities were $634 million and $989 million as of December 31, 2007 and 2006, respectively. REVERSE REPURCHASE AGREEMENTS The carrying values of securities pledged under reverse repurchase agreements were $480 million as of December 31, 2007 and 2006. The fair values of these securities were $502 million and $500 million as of December 31, 2007 and 2006, respectively. INVESTMENT COMMITMENTS As of December 31, 2007, our investment commitments for fixed maturity securities, limited partnerships, real estate and mortgage loans on real estate were $1.2 billion, which includes $281 million of standby commitments to purchase real estate upon completion and leasing. CONCENTRATIONS OF FINANCIAL INSTRUMENTS As of December 31, 2007 and 2006, we did not have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S. CREDIT-LINKED NOTES As of December 31, 2007 and 2006, other contract holder funds on our Consolidated Balance Sheets included $1.2 billion and $700 million, respectively, outstanding in funding agreements. We invested the proceeds of $850 million received for issuing three funding agreements in 2006 and 2007 into three separate credit-linked notes originated by third party companies and $300 million of such agreements were assumed as a result of the merger of Jefferson-Pilot into LNL. The $850 million of credit-linked notes are classified as asset-backed securities and are included in our fixed maturity securities on our Consolidated Balance Sheets. The $300 million of investments which were assumed as a result of the merger were classified as corporate bonds and are included in our fixed maturity securities on our Consolidated Balance Sheets. We earn a spread between the coupon received on the credit-linked note and the interest credited on the funding agreement. Our credit linked notes were created using a trust that combines highly rated assets with credit default swaps to produce a multi-class structured security. The asset backing two of these credit-linked notes is a mid-AA rated asset-backed security secured by a pool of credit card receivables. The third credit-linked note is backed by a pool of assets which are guaranteed by MBIA, Inc, a financial guarantor and are mid-AA rated. Our affiliate, Delaware Investments, actively manages the credit default swaps in the underlying portfolio. Consistent with other debt market instruments, we are exposed to credit losses within the structure of the credit-linked notes, which could result in principal losses to our investments if the issuers of the debt market instruments default on their obligations. However, we have attempted to protect our investments from credit losses through the multi-tiered class structure of the credit-linked note, which requires the S-21 subordinated classes of the investment pool to absorb all of the initial credit losses. We own the mezzanine tranche of these investments, which currently carries a mid-AA rating. To date, there have been no defaults in any of the underlying collateral pools. Similar to other debt market instruments our maximum principal loss is limited to our original investment of $850 million as of December 31, 2007. The fair market value of these investments has declined, causing unrealized losses. As of December 31, 2007, we had unrealized losses of $190 million on the $850 million in credit linked notes. As described more fully in Note 1, we regularly review our investment holdings for other-than-temporary impairments. Based upon this review, we believe that these securities were not other-than-temporarily impaired as of December 31, 2007 and 2006. The following summarizes information regarding our investments in these securities (dollars in millions):
AMOUNT AND DATE OF ISSUANCE --------------------------------- $400 $200 $250 DECEMBER APRIL APRIL 2006 2007 2007 -------- ------- ------- Amount of subordination(1) $ 2,184 $ 410 $ 1,167 Maturity 12/20/16 3/20/17 6/20/17 Current rating of tranche(1) AA Aa2 AA Number of entities(1) 125 100 102 Number of countries(1) 20 21 14
---------- (1) As of December 31, 2007. -------------------------------------------------------------------------------- 5. 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 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 currently used as part of our interest rate risk management strategy include interest rate swaps and interest rate caps. Derivative instruments that are used as part of our foreign currency risk management strategy include foreign currency swaps. Call options on LNC stock and call options on the S&P 500 Index(R) 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. As of December 31, 2007 and 2006, we had derivative instruments that were designated and qualified as cash flow hedges. We also had derivative instruments that were economic hedges, but were not designated as hedging instruments under SFAS 133. See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. Our derivative instruments are monitored by LNC's risk management committee as part of that committee's oversight of our derivative activities. LNC's risk management committee is responsible for implementing various hedging strategies that are developed through its analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies. Our hedging strategy is designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with the LINCOLN SMARTSECURITY(R) Advantage GMWB feature, the 4LATER(R) Advantage GIB feature and the i4LIFE(R) Advantage GIB feature that is available in our variable annuity products. This GMWB feature offers the contract holder a guarantee equal to the initial deposit adjusted for any subsequent purchase payments or withdrawals. There are one-year and five-year step-up options, which allow the contract holder to step up the guarantee. GMWB features are considered to be derivatives under SFAS 133, resulting in the guarantees being recognized at estimated fair value, with changes in estimated fair value being reported in net income. The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in the value of the embedded derivative of the GMWB and GIB. As part of our current hedging program, contract holder behavior, available equity, interest rate and volatility in market conditions are monitored on a daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, our hedge positions may not be totally effective to offset changes in assets and liabilities caused by movements in these factors 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, or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off. 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 are recorded in net income as they occur. Offsetting these amounts S-22 are corresponding changes in the estimated fair value of trading securities in portfolios that support these arrangements. We also distribute indexed annuity contracts. These contracts 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 Index(R). Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. At 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 Index(R) 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 impacts net investment income and generally offsets the change in value of the embedded derivative within the indexed annuity, which is recorded as a component of interest credited to contract holders. SFAS 133 requires that we calculate fair values of index options we may purchase in the future to hedge contract holder index allocations in future reset periods. These fair values represent an estimate of the cost of the options we will purchase in the future, discounted back to the date of the Consolidated Balance Sheets, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities are included in interest credited. The notional amounts of contract holder fund balances allocated to the equity-index options were $2.9 billion and $2.4 billion as of December 31, 2007 and 2006, respectively. 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, shown in notional amounts along with their carrying values and estimated fair values (in millions), were as follows:
AS OF DECEMBER 31, ---------------------------------------------- ASSETS (LIABILITIES) ---------------------- NOTIONAL AMOUNTS CARRYING OR FAIR VALUE ------------------ ---------------------- 2007 2006 2007 2006 ------ ------ ----- ----- Cash flow hedges Interest rate swap agreements $1,372 $1,188 $ (5) $ 8 Foreign currency swaps 366 86 (17) (7) Call options (based on LNC stock) -- -- 1 4 ------ ------ ----- ----- Total cash flow hedges 1,738 1,274 (21) 5 ------ ------ ----- ----- All other derivative instruments Interest rate cap agreements 4,100 5,950 2 3 Credit default swaps 60 20 -- -- Call options (based on LNC stock) 1 1 13 18 Call options (based on S&P 500 Index(R)) 2,858 2,357 149 185 ------ ------ ----- ----- Total other derivative instruments 7,019 8,328 164 206 Embedded derivatives per SFAS 133 -- -- (412) (132) ------ ------ ----- ----- Total derivative instruments(1) $8,757 $9,602 $(269) $ 79 ====== ====== ===== =====
---------- (1) Total derivative instruments as of December 31, 2007 were composed of an asset of $172 million recorded in derivative investments, a $230 million liability recorded in other contract holder funds and a liability of $211 million recorded in reinsurance related derivative liability on our Consolidated Balance Sheets. Total derivative instruments as of December 31, 2006 were composed of an asset of $245 million recorded in derivative investments, a $52 million contra-liability recorded in future contract benefits and a liability of $218 million recorded in reinsurance related derivative liability on our Consolidated Balance Sheets. DERIVATIVE INSTRUMENTS DESIGNATED AS CASH FLOW HEDGES We designate and account for the following as cash flow hedges, when they have met the requirements of SFAS 133: 1) interest rate swap agreements; 2) foreign currency swaps; and 3) call options on LNC stock. We recognized a gain (loss) of $1 million and $(1) for the years ended December 31, 2007 and 2006, in net income as a component of realized investment gains and losses, related to the ineffective portion of cash flow hedges. We recognized a loss of $2 million for the year ended December 31, 2007, a gain of $2 million for the year ended December 31, 2006 and a loss of $2 million for the year ended December 31, 2005 in OCI related to the change in market value on derivative instruments that were designated and qualify as cash flow hedges. Gains and losses on derivative contracts that qualify as cash-flow hedges are reclassified from accumulated OCI to current period earnings. As of December 31, 2007, $4 million of the deferred net gains on derivative instruments in accumulated OCI were expected to be reclassified to earnings during 2008. This reclassification is primarily due to the receipt of interest payments associated with variable rate securities and forecasted purchases, S-23 payment of interest on our senior debt, the receipt of interest payments associated with foreign currency securities and the periodic vesting of stock appreciation rights ("SARs"). For the years ended December 31, 2007, 2006 and 2005, 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 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 net receipts/payments from these interest rate swaps are recorded in net investment income. 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 as the related bond interest is accrued. The open interest rate swap positions as of December 31, 2007 expire in 2008 through 2026. 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. 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 as the related bond interest is accrued. The open foreign currency swap positions as of December 31, 2007 expire in 2014 through 2022. 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. Upon option expiration, the payment, if any, is the increase in LNC stock price over the strike price of the option applied to the number of contracts. Call options hedging vested SARs are not eligible for hedge accounting and are marked-to-market through net income. Call options hedging non-vested SARs are eligible for hedge accounting and are accounted for as cash flow hedges of the forecasted vesting of the SAR liabilities. To the extent that the cash flow hedges are effective, changes in the fair value of the call options are recorded in accumulated OCI. Amounts recorded in OCI are reclassified to net income upon vesting of the related SARs. Our call option positions will be maintained until such time the related SARs are either exercised or expire and our SARs liabilities are extinguished. The SARs expire five years from the date of grant. ALL OTHER DERIVATIVE 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 The 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. The purpose of our interest rate cap agreement program is to provide a level of protection from the effect of rising interest rates for our annuity business, within both our Individual Markets and Employer Markets businesses. The interest rate cap agreements provide an economic hedge of the annuity line of business. However, the interest rate cap agreements do not qualify for hedge accounting under SFAS 133. The open interest rate cap agreements as of December 31, 2007 expire in 2008 through 2011. 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 counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. Our credit default swaps are not currently qualified for hedge accounting under SFAS 133, as amounts are insignificant. As of December 31, 2007, we had no outstanding purchased credit default swaps. We also sell credit default swaps to offer credit protection to investors. The credit default swaps hedge the investor 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. The open credit default swaps as of December 31, 2007 expire in 2010 through 2012. CALL OPTIONS (BASED ON LNC STOCK) We use call options on our stock to hedge the expected increase in liabilities arising from SARs granted on our stock. Call options hedging vested SARs are not eligible for hedge accounting treatment under SFAS 133. Mark-to-market changes are recorded in net income in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. CALL OPTIONS (BASED ON S&P 500 INDEX(R)) 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 Index(R). Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. At 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 S-24 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 impacts net investment income and generally offsets the change in value of the embedded derivative within the indexed annuity, which is recorded as a component of interest credited on our Consolidated Statements of Income. The open positions as of December 31, 2007 expire in 2008 through 2009. We also calculate fair values of index options we may purchase in the future to hedge contract holder index allocations in future reset periods. These fair values represent an estimate of the cost of the options we will purchase in the future, discounted back to the date of the Consolidated Balance Sheets, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities are included as a component of interest credited on our Consolidated Statements of Income. EMBEDDED DERIVATIVES DEFERRED COMPENSATION PLANS 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 in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. MODCO AND CFW ARRANGEMENTS We are involved in various Modco and CFW reinsurance arrangements that have embedded derivatives. The change in fair value of the embedded derivatives, as well as the gains or losses on trading securities supporting these arrangements, are recorded in net income as realized gains or losses on our Consolidated Statements of Income. VARIABLE ANNUITY PRODUCTS We have certain variable annuity products with GMWB and GIB features that are embedded derivatives. The change in fair value of the embedded derivatives flows through net income as benefits on our Consolidated Statements of Income. As of December 31, 2007 and 2006, we had approximately $18.9 billion and $13.8 billion, respectively, of separate account values that were attributable to variable annuities with a GMWB feature. As of December 31, 2007 and 2006, we had approximately $4.9 billion and $2.7 billion, respectively, of separate account values that were attributable to variable annuities with a GIB feature. All of the outstanding contracts with a GIB feature are still in the accumulation phase. We implemented a hedging strategy designed to mitigate the income statement volatility caused by changes in the equity markets, interest rates, and volatility associated with GMWB and GIB features. The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in the value of the embedded derivatives of the GMWB and GIB contracts subject to the hedging strategy. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative 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. AVAILABLE-FOR-SALE SECURITIES We own various debt securities that either: 1) contain call options to exchange the debt security for other specified securities of the borrower, usually common stock; or 2) contain call options to receive the return on equity-like indexes. These embedded derivatives have not been qualified for hedge accounting treatment under SFAS 133; therefore, the change in fair value of the embedded derivatives flows through net investment income. ADDITIONAL DERIVATIVE INFORMATION Income other than realized gains and losses for the agreements and contracts described above amounted to $7 million, $78 million and $14 million during the years ended December 31, 2007, 2006 and 2005, respectively. We have used certain other derivative instruments in the past for hedging purposes. Although other derivative instruments may have been used in the past, derivative types that were not outstanding from January 1, 2005 through December 31, 2007 are not discussed in this disclosure. CREDIT RISK We are exposed to credit loss in the event of nonperformance by our counterparties on various derivative contracts. However, we do not anticipate nonperformance by any of the counterparties. 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 and LNC 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 us to post collateral upon significant downgrade. We do not believe the inclusion of termination or collateralization events pose any material threat to our liquidity position. 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, 2007 and 2006, the exposure was $164 million and $176 million, respectively. S-25 -------------------------------------------------------------------------------- 6. FEDERAL INCOME TAXES The federal income tax expense (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- Current $372 $244 $111 Deferred 132 216 112 ---- ---- ---- Total federal income tax expense $504 $460 $223 ==== ==== ====
The effective tax rate on pre-tax income was lower than the prevailing corporate federal income tax rate. Included in tax-preferred investment income was a separate account dividend received deduction benefit of $88 million, $80 million and $55 million for the years ended December 31, 2007, 2006 and 2005, respectively, exclusive of any prior years' tax return resolution. A reconciliation of the effective tax rate differences (dollars in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ----- ----- ----- Tax rate of 35% times pre-tax income $ 610 $ 568 $ 303 Effect of: Tax-preferred investment income (88) (80) (63) Tax credits (22) (21) (14) Other 4 (7) (3) ----- ----- ----- Provision for income taxes $ 504 $ 460 $ 223 ===== ===== ===== Effective tax rate 29% 28% 26% ===== ===== =====
The federal income tax liability (in millions), which is included in other liabilities on our Consolidated Balance Sheets, was as follows:
AS OF DECEMBER 31, 2007 2006 ---- ---- Current $390 $ 13 Deferred 239 615 ---- ---- Total federal income tax liability $629 $628 ==== ====
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
AS OF DECEMBER 31, -------------------- 2007 2006 ------ ------ DEFERRED TAX ASSETS Future contract benefits and other contract holder funds $1,904 $1,473 Reinsurance deferred gain 244 265 Net operating and capital loss carryforwards -- 23 Modco embedded derivative 74 76 Postretirement benefits other than pensions 8 7 Compensation and benefit plans 175 149 Ceding commission asset 7 9 Other 139 147 ------ ------ Total deferred tax assets 2,551 2,149 ------ ------ DEFERRED TAX LIABILITIES DAC 1,962 1,555 Net unrealized gain on available-for-sale securities 47 306 Net unrealized gain on trading securities 71 74 Present value of business in-force 589 619 Other 121 210 ------ ------ Total deferred tax liabilities 2,790 2,764 ------ ------ Net deferred tax liability $ 239 $ 615 ====== ======
LNL and its affiliates, with the exception of JPL, JPFIC and 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 into LNL on April 2, 2007. We are required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years' tax returns. As of December 31, 2007 and 2006, we concluded that it was more likely than not that all gross deferred tax assets will reduce taxes payable in future years. Accordingly, no valuation allowance was necessary as of December 31, 2007 and 2006. Under prior federal income tax law, one-half of the excess of a life insurance company's income from operations over its taxable investment income was not taxed, but was set aside in a special tax account designated as "Policyholders Surplus." On October 22, 2004, President Bush signed into law the "American Jobs Creation Act of 2004." In 2005 and 2006, the additional tax imposed on distributions from the special tax account, "Policyholders Surplus," was suspended. In addition, the statute provided that distributions made during the two-year suspension period would first reduce the Policyholders Surplus account balance. Our 2005 and 2006 dividend activity S-26 along with that of our insurance subsidiaries eliminated the account balance during the suspension period. As discussed in Note 2, we adopted FIN 48 on January 1, 2007 and had unrecognized tax benefits of $272 million, of which $134 million, if recognized, would impact our income tax expense and our effective tax rate. We anticipate a change to our unrecognized tax benefits within the next 12 months in the range of $0 to $12 million. A reconciliation of the unrecognized tax benefits (in millions) was as follows:
FOR THE YEAR ENDED DECEMBER 31, 2007 ------------ Balance at beginning-of-year $ 272 Increases for prior year tax positions 5 Decreases for prior year tax positions (1) Increases for current year tax positions 21 Decreases for current year tax positions (7) ------------ Balance at end-of-year $ 290 ============
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, 2007, 2006 and 2005, we recognized interest and penalty expense related to uncertain tax positions of $19 million, $13 million and $3 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $64 million and $45 million as of December 31, 2007 and 2006, respectively. The LNC consolidated group is subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the first quarter of 2006, the IRS completed its examination for the tax years 1999 through 2002 with assessments resulting in a payment that was not material to the results of operations. In addition to taxes assessed and interest, the payment included a deposit relating to a portion of the assessment, which LNC continues to challenge. LNC believes this portion of the assessment is inconsistent with existing law and is protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our results of operations or financial condition. The LNC consolidated group is currently under audit by the IRS for years 2003 and 2004. The former Jefferson-Pilot Corporation and its subsidiaries are currently under examination by the IRS for the years 2004 and 2005. -------------------------------------------------------------------------------- 7. DAC, VOBA and DSI Changes in DAC (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- Balance at beginning-of-year $ 4,577 $ 3,676 $ 2,904 Cumulative effect of adoption of SOP 05-1 (31) -- -- Dividend of FPP (246) -- -- Deferrals 2,002 1,479 934 Amortization, net of interest: Unlocking 29 25 111 Other amortization (710) (651) (538) Adjustment related to realized (gains) losses on available-for-sale securities and derivatives 48 (38) (48) Adjustment related to unrealized losses on available-for-sale securities and derivatives 96 86 313 ------- ------- ------- Balance at end-of-year $ 5,765 $ 4,577 $ 3,676 ======= ======= =======
For the year ended December 31, 2007, the unlocking total includes $26 million in prospective unlocking from updates to assumptions for experience, $(50) million in model refinements and $53 million in retrospective unlocking. For the year ended December 31, 2006, the unlocking total includes $(9) million in prospective unlocking from updates to assumptions for experience, $(2) million in model refinements and $36 million in retrospective unlocking. For the year ended December 31, 2005, the unlocking total includes $90 million in prospective unlocking from updates to assumptions for experience and $21 million in retrospective unlocking. Changes in VOBA (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2007 2006 2005 ------- ------- ----- Balance at beginning-of-year $ 3,032 $ 742 $ 819 Cumulative effect of adoption of SOP 05-1 (35) -- -- Business acquired 14 2,478 -- Deferrals 46 96 -- Amortization: Unlocking 25 9 (11) Other amortization (416) (347) (111) Accretion of interest 125 111 45 Adjustment related to realized gains on available-for-sale securities and derivatives (6) (9) -- Adjustment related to unrealized (gains) losses on available-for-sale securities and derivatives 24 (48) -- ------- ------- ----- Balance at end-of-year $ 2,809 $ 3,032 $ 742 ======= ======= =====
For the year ended December 31, 2007, the unlocking total includes $14 million in prospective unlocking from updates to assumptions for experience, $(2) million in model refinements and $13 million in retrospective unlocking. For the year ended December 31, 2006, the unlocking total includes $5 million in S-27 prospective unlocking from updates to assumptions for experience and $4 million in retrospective unlocking. For the year ended December 31, 2005, the unlocking total includes $(9) million in prospective unlocking from updates to assumptions for experience and $(2) million in retrospective unlocking. Estimated future amortization of VOBA (in millions), net of interest, as of December 31, 2007 was as follows: 2008 $ 276 2009 252 2010 238 2011 208 2012 191 Thereafter 1,668 ----- Total $2,833 ======
Changes in DSI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- Balance at beginning-of-year $ 194 $ 129 $ 85 Cumulative effect of adoption of SOP 05-1 (3) -- -- Deferrals 117 86 60 Amortization, net of interest: Unlocking 2 4 3 Other amortization (31) (25) (19) ----- ----- ----- Balance at end-of-year $ 279 $ 194 $ 129 ===== ===== =====
For the year ended December 31, 2007, the unlocking total includes $2 million in prospective unlocking from updates to assumptions for experience, $(1) million in model refinements and $1 million in retrospective unlocking. For the year ended December 31, 2006, the unlocking total includes $1 million in prospective unlocking from updates to assumptions for experience and $3 million in retrospective unlocking. For the year ended December 31, 2005, the unlocking total includes $2 million in prospective unlocking from updates to assumptions for experience and $1 million in retrospective unlocking. -------------------------------------------------------------------------------- 8. REINSURANCE Reinsurance transactions included in insurance premiums (in millions), excluding amounts attributable to the indemnity reinsurance transaction with Swiss Re Life & Health America, Inc. ("Swiss Re"), were as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2007 2006 2005 ------- ------- ----- Reinsurance assumed $ 12 $ 8 $ 1 Reinsurance ceded (1,063) (1,021) (767) ------- ------- ----- Net reinsurance premiums and fees $(1,051) $(1,013) $(766) ======= ======= ===== Reinsurance recoveries netted against benefits $ 1,249 $ 904 $ 722 ======= ======= =====
We cede insurance to other companies. The portion of risks exceeding our retention limits is reinsured with other insurers. We seek reinsurance coverage within the businesses that sell life insurance in order to limit our exposure to mortality losses and enhance our capital management. Under our reinsurance program, we reinsure approximately 45% to 50% of the mortality risk on newly issued non-term life insurance contracts and approximately 40% to 45% 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 and variable universal life insurance contracts. Additionally, the retention per single insured life for term life insurance and for corporate owned life insurance is $2 million for each type of insurance. 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, 2007, the reserves associated with these reinsurance arrangements totaled $1.3 billion. To cover products other than life insurance, we acquire other insurance 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 $4.0 billion at December 31, 2007. Swiss Re has funded a trust, with a balance of $1.8 billion as of December 31, 2007, 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 consist of those reported as trading securities and certain mortgage loans. Our liabilities for funds withheld and embedded derivatives as of December 31, 2007, included $1.9 billion and $200 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 S-28 in the liability section of our Consolidated Balance Sheets in accordance with the requirements of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). 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. During 2007, 2006 and 2005 we amortized $55 million, $49 million and $49 million, after-tax, respectively, of deferred gain on the sale of the reinsurance operation. Because of ongoing uncertainty related to personal accident business, the reserves related to these exited business lines carried on our Consolidated Balance Sheets as of December 31, 2007, may ultimately prove to be either excessive or deficient. For instance, in the event that future developments indicate that these reserves should be increased, under SFAS 113 we would record a current period non-cash charge to record the increase in reserves. Because Swiss Re is responsible for paying the underlying claims to the ceding companies, we would record a corresponding increase in reinsurance recoveries from Swiss Re. However, SFAS 113 does not permit us to take the full benefit in earnings for the recording of the increase in the reinsurance recoveries in the period of the change. Rather, we would increase the deferred gain recognized upon the closing of the indemnity reinsurance transaction with Swiss Re and would report a cumulative amortization "catch-up" adjustment to the deferred gain balance as increased earnings recognized in the period of change. Any amount of additional increase to the deferred gain above the cumulative amortization "catch-up" adjustment must continue to be deferred and will be amortized into income in future periods over the remaining period of expected run-off of the underlying business. We would not transfer any cash to Swiss Re as a result of these developments. In the second quarter of 2007, we recognized increased reserves on the business sold and recognized a deferred gain that is being amortized into income at the rate that earnings are expected to emerge within a 15 year period. This adjustment resulted in a non-cash charge of $13 million, after-tax, to increase reserves, which was partially offset by a cumulative "catch-up" adjustment to the deferred gain amortization of $5 million, after-tax, for a total decrease to net income of $8 million. The impact of the accounting for reserve adjustments related to this reinsurance treaty is excluded from our definition of income from operations. -------------------------------------------------------------------------------- 9. 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, 2007 -------------------------------------------- BALANCE AT PURCHASE DIVIDEND BALANCE BEGINNING- ACCOUNTING OF AT END- OF-YEAR ADJUSTMENTS FPP OF-YEAR ---------- ----------- -------- ------- Individual Markets: Life Insurance $ 2,181 $ 20 $ (2) $ 2,199 Annuities 1,032 14 -- 1,046 Employer Markets: Retirement Products 20 -- -- 20 Group Protection 281 (7) -- 274 ---------- ----------- -------- ------- Total goodwill $ 3,514 $ 27 $ (2) $ 3,539 ========== =========== ======== =======
FOR THE YEAR ENDED DECEMBER 31, 2006 -------------------------------------------- BALANCE AT PURCHASE DIVIDEND BALANCE BEGINNING- ACCOUNTING OF AT END- OF-YEAR ADJUSTMENTS FPP OF-YEAR ---------- ----------- -------- ------- Individual Markets: Life Insurance $ 855 $ 1,326 $ -- $ 2,181 Annuities 44 988 -- 1,032 Employer Markets: Retirement Products 20 -- -- 20 Group Protection -- 281 -- 281 ---------- ----------- -------- ------- Total goodwill $ 919 $ 2,595 $ -- $ 3,514 ========== =========== ======== =======
S-29 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, ---------------------------------------------- 2007 2006 ---------------------- ---------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Individual Markets -- Life Insurance: Sales force $ 100 $ 7 $ 100 $ 3 Employer Markets -- Retirement Products: Mutual fund contract rights(1) 3 -- -- -- -------- ------------ -------- ------------ Total $ 103 $ 7 $ 100 $ 3 ======== ============ ======== ============
---------- (1) No amortization recorded as the intangible asset has indefinite life. Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2007 was as follows: 2008 $ 4 2009 4 2010 4 2011 4 2012 4 Thereafter 73 --- Total $93 ===
-------------------------------------------------------------------------------- 10. SEPARATE ACCOUNTS AND GUARANTEED BENEFIT FEATURES We issue variable 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 GMDB, GMWB and GIB features. The GMDB features include those where we contractually guarantee to the contract holder either (a) return of no less than total deposits made to the contract less any partial withdrawals ("return of net deposits"), (b) total deposits made to the contract less any partial withdrawals plus a minimum return ("minimum return"), or (c) the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary ("anniversary contract value"). Information in the event of death on the GMDB features outstanding (dollars in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2007 2006 -------- -------- RETURN OF NET DEPOSIT Separate account value $ 44,833 $ 38,306 Net amount at risk(1) 93 65 Average attained age of contract holders 55 years 54 years MINIMUM RETURN Separate account value $ 355 $ 405 Net amount at risk(1) 25 34 Average attained age of contract holders 68 years 67 years Guaranteed minimum return 5% 5% ANNIVERSARY CONTRACT VALUE Separate account value $ 25,537 $ 22,487 Net amount at risk(1) 359 193 Average attained age of contract holders 64 years 64 years
---------- (1) Represents the amount of death benefit in excess of the current account balance at the balance sheet date. S-30 The determination of GMDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GMDB (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2007 2006 ----- ----- Balance at beginning-of-year $ 23 $ 15 Cumulative effect of adoption of SOP 05-1 (4) -- Changes in reserves 25 14 Benefits paid (6) (6) ----- ----- Balance at end-of-year $ 38 $ 23 ===== =====
The changes to the benefit reserves amounts above are reflected in benefits on our Consolidated Statements of Income. Also included in benefits are the results of the hedging program, which included losses of $2 million and $5 million for GMDB in 2007 and 2006, respectively. We utilize a delta hedging strategy for variable annuity products with a GMDB feature, which uses futures on U.S.-based equity market indices to hedge against movements in equity markets. The hedging strategy is designed so that changes in the value of the hedge contracts move in the opposite direction of equity market driven changes in the reserve for GMDB contracts subject to the hedging strategy. While we actively manage our hedge positions, these hedge positions may not be totally effective to offset changes in the 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 or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off. Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows:
AS OF DECEMBER 31, --------------------- 2007 2006 ------- ------- ASSET TYPE Domestic equity $44,982 $39,260 International equity 8,076 5,905 Bonds 8,034 6,399 Money market 6,545 5,594 ------- ------- Total $67,637 $57,158 ======= ======= Percent of total variable annuity separate account values 97% 87%
-------------------------------------------------------------------------------- 11. OTHER CONTRACT HOLDER FUNDS Details of other contract holder funds (in millions) were as follows:
AS OF DECEMBER 31, --------------------- 2007 2006 ------- ------- Account values and other contract holder funds $56,668 $57,383 Deferred front-end loads 768 572 Contract holder dividends payable 524 531 Premium deposit funds 113 130 Undistributed earnings on participating business 95 102 ------- ------- Total other contract holder funds $58,168 $58,718 ======= =======
S-31 -------------------------------------------------------------------------------- 12. SHORT-TERM AND LONG-TERM DEBT Details underlying short-term and long-term debt (in millions) were as follows:
AS OF DECEMBER 31, -------------------- 2007 2006 ------ ------ Short-term debt(1) $ 18 $ 21 Note due LNC, due September 2008 155 -- ------ ------ Total short-term debt $ 173 $ 21 ====== ====== Long-term debt: Note due LNC, due September 2008 $ -- $ 139 LIBOR + 1.00% note, due 2037 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 $1,675 $1,439 ====== ======
---------- (1) The short-term debt represents short-term notes payable to LNC. A consolidated subsidiary of LNL issued a note for an amount not to exceed $150 million to LNC in 2006. Also in 2006, the Board of Directors of LNC issued a Board Certificate guaranteeing that the consolidated subsidiary of LNL will maintain capital and surplus sufficient to meet the statutory surplus requirements of the insurance regulatory authority for the consolidated subsidiary of LNL and provide funds in cash to the consolidated subsidiary of LNL to ensure the timely payment of its obligations. Pursuant to that Board Certificate, as of December 31, 2007, $155 million had been advanced to us. This note calls for us to pay the principal amount of the notes on or before September 30, 2008 and interest to be paid monthly at a rate equal to the Federal Reserve Board's 30 day AA- financial commercial paper rate plus ten basis points. 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%. During 2007, our surplus note for $50 million to HARCO Capital Corporation was transferred to LNC. This note calls for us to pay the principal amount of the note on or before September 30, 2024 and interest to be paid semiannually at an annual rate of 9.76%. 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 twice per year. Any payment of interest or repayment of principal may be paid only if we have obtained the prior written approval of the Indiana Insurance Commissioner, have adequate earned surplus funds for such payment and if such payment would not cause us to violate the statutory capital requirements as set forth in the General Statutes of Indiana. We issued a surplus note for $500 million to LNC in 1998. This note calls for us to pay the principal amount of the notes 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 notes 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. -------------------------------------------------------------------------------- 13. CONTINGENCIES AND COMMITMENTS CONTINGENCIES REGULATORY AND LITIGATION MATTERS Federal and state regulators continue to focus on issues relating to fixed and variable insurance products, including, but not limited to, suitability, replacements and sales to seniors. Like others in the industry, we have received inquiries including requests for information regarding sales to seniors from the Financial Industry Regulation Authority. We are in the process of responding to these inquiries. We continue to cooperate fully with such authority. In the ordinary course of its business, LNL is 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 S-32 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 in Fort Wayne, Indiana through sale-leaseback agreements. The agreements provide for a 25-year lease period with options to renew for six additional terms of five years each. The agreements also provide us with the right of first refusal to purchase the properties during the terms of the lease, including renewal periods, at a price defined in the agreements. We also have the option to purchase the leased properties at fair market value as defined in the agreements on the last day of the initial 25-year lease period ending in 2009 or the last day of any of the renewal periods. 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 5 years each in accordance with the lease agreement. Total rental expense on operating leases for the years ended December 31, 2007, 2006 and 2005 was $56 million, $47 million and $55 million, respectively. Future minimum rental commitments (in millions) as of December 31, 2007 were as follows: 2008 $ 47 2009 32 2010 21 2011 16 2012 12 Thereafter 33 ---- ---- Total $161 ====
INFORMATION TECHNOLOGY COMMITMENT In February 1998, LNC signed a seven-year contract with IBM Global Services for information technology services for the Fort Wayne operations. In February 2004, LNC completed renegotiations and extended the contract through Febru-ary 2010. Annual costs are dependent on usage but are expected to be approximately $8 million. VULNERABILITY FROM CONCENTRATIONS As of December 31, 2007, we did not have a concentration of: 1) business transactions with a particular customer or lender; 2) sources of supply of labor or services used in the business; or 3) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial position. Although we do not have any significant concentration of customers, our American Legacy Variable Annuity product offered in our Individual Markets - Annuities segment is significant to this segment. The American Legacy Variable Annuity product accounted for 46%, 48% and 48% of Individual Markets - Annuities variable annuity product deposits in December 31, 2007, 2006 and 2005, respectively, and represented approximately 66%, 67% and 67% of our total Individual Markets - Annuities variable annuity product account values as of December 31, 2007, 2006 and 2005 respectively. In addition, fund choices for certain of our other variable annuity products offered in our Individual Markets -Annuities segment include American Fund Insurance Series(SM)("AFIS") funds. For the Individual Markets - Annuities segment, AFIS funds accounted for 55%, 58% and 57% of variable annuity product deposits in 2007, 2006 and 2005 respectively and represented 75% of the segment's total variable annuity product account values as of December 31, 2007, 2006 and 2005. 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. GUARANTEES We have guarantees with off-balance-sheet risks having contractual values of $2 million and $3 million as of December 31, 2007 and 2006, respectively, whose contractual amounts represent credit exposure. We have sold commercial mortgage loans through grantor trusts, which issued pass-through certificates. We have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. In case of default by borrowers, we have recourse to the underlying real estate. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of default, the impact would not be material to us. These guarantees expire in 2009. S-33 -------------------------------------------------------------------------------- 14. STOCKHOLDER'S EQUITY 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, --------------------- 2007 2006 2005 ----- ----- ----- UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning-of-year $ 421 $ 452 $ 781 Other comprehensive income (loss): Unrealized holding losses arising during the year (871) (96) (805) Change in DAC, VOBA and other contract holder funds 177 29 269 Income tax benefit 243 23 188 Change in foreign currency exchange rate adjustment 18 5 5 Less: Reclassification adjustment for gains (losses) included in net income (164) 24 32 Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 29 (37) (53) Income tax benefit 47 5 7 ----- ----- ----- Balance at end-of-year $ 76 $ 421 $ 452 ===== ===== =====
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2007 2006 2005 ---- ---- ---- UNREALIZED GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS Balance at beginning-of-year $ (9) $ 7 $ 14 Other comprehensive income (loss): Unrealized holding gains (losses) arising during the year 14 (22) 5 Change in DAC, VOBA and other contract holder funds (6) 1 (7) Income tax benefit 11 2 (6) Change in foreign currency exchange rate adjustment (30) 4 -- Less: Reclassification adjustment for (gains) losses included in net income (2) 2 (2) Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 1 -- 1 Income tax expense -- (1) -- ---- ---- ---- Balance at end-of-year $(19) $ (9) $ 7 ==== ==== ==== MINIMUM PENSION LIABILITY ADJUSTMENT Balance at beginning-of-year $ -- $ (6) $(13) Other comprehensive income (loss): Adjustment arising during the year -- 6 7 ---- ---- ---- Balance at end-of-year $ -- $ -- $ (6) ==== ==== ==== FUNDED STATUS OF EMPLOYEE BENEFIT PLANS Balance at beginning-of-year $ 4 $ -- $ -- Other comprehensive income (loss): Adjustment arising during the year (13) -- -- Income tax benefit 5 -- -- Adjustment for adoption of SFAS 158, net of tax -- 4 -- ---- ---- ---- Balance at end-of-year $ (4) $ 4 $ -- ==== ==== ====
S-34 -------------------------------------------------------------------------------- 15. 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, --------------------------- 2007 2006 2005 ------- ------- ------- Commissions $ 2,051 $ 1,527 $ 899 General and administrative expenses 1,234 1,093 965 DAC and VOBA deferrals and interest, net of amortization (1,101) (722) (430) Other intangibles amortization 4 3 -- Taxes, licenses and fees 192 158 81 Merger-related expenses 92 27 29 ------- ------- ------- Total $ 2,472 $ 2,086 $ 1,544 ======= ======= =======
All restructuring charges are included in underwriting, acquisition, insurance and other expenses primarily within Other Operations on our Consolidated Statements of Income in the year incurred and are reflected within merger-related expenses in the table above. 2006 RESTRUCTURING PLAN Upon completion of LNC's merger with Jefferson-Pilot, a restructuring plan was implemented relating to the integration of LNC's legacy operations with those of Jefferson-Pilot. The realignment will enhance productivity, efficiency and scalability while positioning LNC and its affiliates for future growth. Details underlying reserves for restructuring charges (in millions) were as follows:
TOTAL ----- Restructuring reserve at December 31, 2006 $ 7 Amounts incurred in 2007 Employee severance and termination benefits 6 Other 14 ----- Total 2007 restructuring charges 20 Amounts expended in 2007 (25) Restructuring reserve at December 31, 2007 $ 2 Additional amounts expended in 2007 that do not qualify as restructuring charges $ 72 Total expected costs 180 Expected completion date: 4th Quarter 2009
The total expected costs include both restructuring charges and additional expenses that do not qualify as restructuring charges that are associated with the integration activities. In addition, involuntary employee termination benefits were recorded in goodwill as part of the purchase price allocation, see Note 3. Merger integration costs relating to employee severance and termination benefits of $13 million were included in other liabilities in the purchase price allocation. In the first quarter of 2007, an additional $9 million was recorded to goodwill and other liabilities as part of the final adjustment to the purchase price allocation related to employee severance and termination benefits. -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFIT PLANS Our employees, other than our U.S. insurance agents, are included in LNC's various benefit plans that provide for pension and other postretirement benefit plans, 401(k) and profit sharing plans and deferred compensation plans. Our U.S. insurance agents are included in various plans sponsored by either LNL or LNC, including pension and other postretirement benefit plans, 401(k) and profit sharing plans and deferred compensation plans. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS LNC maintains funded defined benefit pension plans for most of its U.S. employees, including those of LNL, and prior to January 1, 1995, most full-time agents, including those of LNL. All benefits accruing under the defined benefit plan for agents were frozen as of December 31, 1994. On May 1, 2007, LNC announced plans to change the retirement benefits provided to employees, including those of LNL, including the "freeze" or cessation of benefit accruals under LNC's primary traditional defined benefit pension plans. The freeze became effective December 31, 2007. This prospective change in benefits will not impact any of the pension retirement benefits that were accrued up through December 31, 2007. Effective January 1, 2002, the employees' pension plan was converted to a cash balance formula. Eligible employees retiring before 2012 will have their benefits, which were frozen effective December 31, 2007, calculated under both the old final average pay formula and the cash balance formula and will receive the greater of the two calculations. Employees retiring in 2012 or after will receive their frozen benefit under the cash balance formula. Benefits under the cash balance formula will continue to accrue interest credits. Benefits under the final average pay formula are based on total years of service and the highest 60 months of compensation during the last 10 years of employment. Under the cash balance formula, employees have guaranteed account balances that earn annual benefit credits and interest credits each year. Annual benefit credits are based on years of service and base salary plus bonus. As a result of the merger with Jefferson-Pilot, LNC maintains funded defined benefit pension plans for the former U.S. employees and agents of Jefferson-Pilot. Eligible retiring employees receive benefits based on years of service and final average earnings. The plans were funded through group annuity contracts with LNL. The assets of the plans were those of the related contracts, and were primarily held our separate accounts. During the fourth quarter of 2007, the group annuity S-35 contracts were liquidated. The assets were moved to a tax-exempt trust and are invested as described in the Plan Assets section below. The plans are funded by contributions to tax-exempt trusts. Our funding policy is consistent with the funding requirements of Federal law and regulations. Contributions were intended to provide not only the benefits attributed to service to date, but also those expected to be earned in the future. Effective January 1, 2005, LNC amended the employees' pension plan to include 100% of eligible bonus amounts as compensation under the cash balance formula only. During 2006 and 2007, LNC sponsored three types of unfunded, nonqualified, defined benefit plans for certain U.S. employees and agents, including those of LNL: the Salary Continuation Plan for Executives of Lincoln National Corporation and Affiliates (the "ESC"), the Jefferson-Pilot Executive Special Supplemental Benefit Plan (the "ESSB") and supplemental retirement plans, a salary continuation plan and supplemental executive retirement plans. As a result of the merger with Jefferson-Pilot, LNC also sponsored an unfunded, nonqualified supplemental retirement plan for certain former employees of Jefferson-Pilot. The supplemental retirement plans provided defined benefit pension benefits in excess of limits imposed by Federal tax law. The ESC and ESSB were terminated effective December 31, 2007. The accrued benefits under the ESC and the ESSB on that date were converted to actuarial equivalent lump sum amounts and credited to special opening accounts (the "ESC Opening Balance Account" and the "ESSB Opening Balance Account") in the Lincoln National Corporation Deferred Compensation & Supplemental/Excess Retirement Plan (the "DC SERP"), which was formerly known as The Lincoln National Corporation Executive Deferred Compensation Plan for Employees. In both cases, the accrued benefits were calculated as if our executives had received a distribution at age 62, reduced under the relevant age 62 early retirement reduction factors provided under each plan (as if the executive had remained employed until age 62). The supplemental executive retirement plan provided defined pension benefits for certain executives who became our employees as a result of the acquisition of a block of individual life insurance and annuity business from CIGNA Corporation ("CIGNA"). Effective January 1, 2000, this plan was amended to freeze benefits payable under this plan and a second supplemental executive retirement plan was established for this same group of executives. The benefits payable to the executives under this plan will not be less than they would have been under the pre-acquisition plan. The benefit is based on an average compensation figure that is not less than the minimum three-year average compensation figure in effect for these executives as of December 31, 1999. Any benefits payable from this plan are reduced by benefits payable from our employees' defined benefit pension plan. LNC also sponsors unfunded plans that provide postretirement medical, dental and life insurance benefits to full-time U.S. employees who, depending on the plan, have worked for LNC for 10 years and attained age 55 (age 60 for agents), including those of LNL. Medical and dental benefits are also available to spouses and other dependents of employees and agents. For medical and dental benefits, limited contributions are required from individuals who retired prior to November 1, 1988. Contributions for later retirees, which can be adjusted annually, are based on such items as years of service at retirement and age at retirement. Effective April 1, 2004, the employees' postretirement plan was amended to provide that employees and agents not attaining age 50 by that date will not be eligible to receive life insurance benefits when they retire. Life insurance benefits for retirees are noncontributory for employees and agents that attained the age of 50 by April 1, 2004 and meet the eligibility requirements at the time they retire; however, these participants can elect supplemental contributory life benefits up to age 70. Effective July 1, 1999, the agents' postretirement plan was amended to require agents retiring on or after that date to pay the full medical and dental premium costs. Beginning January 1, 2002, the employees' postretire-ment plan was amended to require employees not yet age 50 with five years of service by the end of 2001 to pay the full medical and dental premium cost when they retire. Effective January 1, 2008, the postretirement plan providing benefits to former employees of Jefferson-Pilot was amended such that only employees attaining age 55 and having 10 years of service by December 31, 2007 who retire on or after age 60 with 15 years of service will be eligible to receive life insurance benefits when they retire. S-36 OBLIGATIONS, FUNDED STATUS AND ASSUMPTIONS Information (in millions) with respect to our defined benefit plan asset activity and defined benefit plan obligations subsequent to the adoption of SFAS 158 was as follows:
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------- 2007 2006 2007 2006 ----- ----- ---- ---- OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------- -------------------------- CHANGE IN PLAN ASSETS Fair value at beginning-of-year $ 141 $ 93 $ -- $ -- Actual return on plan assets 8 15 -- -- Company contributions (1) -- 2 2 Benefits paid (8) (7) (2) (2) Purchase accounting adjustments -- 40 -- -- ----- ----- ---- ---- Fair value at end-of-year 140 141 -- -- ----- ----- ---- ---- CHANGE IN BENEFIT OBLIGATION Balance at beginning-of-year 117 92 19 22 Interest cost 7 6 1 1 Plan participants' contributions -- -- 1 1 Actuarial gains -- (3) (4) (3) Benefits paid (8) (7) (3) (2) Purchase accounting adjustments -- 29 -- -- ----- ----- ---- ---- Balance at end-of-year 116 117 14 19 ----- ----- ---- ---- Funded status of the plans $ 24 $ 24 $(14) $(19) ===== ===== ==== ==== AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS Other assets $ 25 $ 25 $ -- $ -- Other liabilities (1) (1) (14) (19) ----- ----- ---- ---- Net amount recognized $ 24 $ 24 $(14) $(19) ===== ===== ==== ==== AMOUNTS RECOGNIZED IN ACCUMULATED OCI, NET OF TAX Net (gain) loss $ 8 $ (2) $ (4) $ (2) ----- ----- ---- ---- Net amount recognized $ 8 $ (2) $ (4) $ (2) ===== ===== ==== ==== WEIGHTED-AVERAGE ASSUMPTIONS Weighted-average discount rate 6.00% 5.75% 6.00% 5.75% Expected return on plan assets 8.00% 8.00% 0.00% 0.00% RATE OF INCREASE IN COMPENSATION Salary continuation plan 4.00% 4.00% 4.00% 4.00%
We use December 31 as the measurement date for the pension and postretirement plans. The expected return on plan assets was determined based on historical and expected future returns of the various asset classes, using the target plan allocations. LNC reevaluates this assumption at an interim date each plan year. For 2008, the expected return on plan assets for the pension plan will be 8%. The calculation of the accumulated postretirement benefits obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) of 12% for 2007. It further assumes the rate will gradually decrease to 5% by 2017 and remain at that level in future periods. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point increase and decrease in assumed health care cost trend rates would have an immaterial effect on accumulated postretirement benefit obligations and total service and interest cost components. S-37 Information for our pension plans with accumulated benefit obligations in excess of plan assets (in millions) was as follows:
AS OF DECEMBER 31, ------------------ 2007 2006 ---- ---- Accumulated benefit obligation $ 1 $ 1 Projected benefit obligation 1 1 Fair value of plan assets(1) -- --
---------- (1) The plan is unfunded. COMPONENTS OF NET PERIODIC BENEFIT COST The components of net defined benefit pension plan and postretirement benefit plan expense (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS --------------------- ------------------------------ 2007 2006 2005 2007 2006 2005 ---- ---- ---- ---- ---- ---- Interest cost $ 7 $ 6 $ 5 $ 1 $ 1 $ 1 Expected return on plan assets (11) (9) (6) -- -- -- Recognized net actuarial (gain) loss -- 1 1 (1) -- -- ---- ---- ---- ---- ---- ---- Net periodic benefit expense (recovery) $ (4) $(2) $ -- $ -- $ 1 $ 1 ==== === ==== ==== ==== ====
LNC maintains a defined contribution plan for its U.S. financial planners and advisors ("agents"), including those of LNL. Contributions to this plan are based on a percentage of the agents' annual compensation as defined in the plan. Effective January 1, 1998, LNC assumed the liabilities for a non-contributory defined contribution plan covering certain highly compensated former CIGNA agents and employees. Contributions to this plan are made annually based upon varying percentages of annual eligible earnings as defined in the plan. Contributions to this plan are in lieu of any contributions to the qualified agent defined contribution plan. Effective January 1, 2000, this plan was expanded to include certain highly compensated LNC agents. The combined expenses for these plans were $4 million for the year ended December 31, 2007 and $3 million for the years ended December 31, 2006 and 2005. These expenses reflect both the contribution as well as changes in the measurement of the liabilities under these plans. PLAN ASSETS Our pension plan asset allocations by asset category (in millions) based on estimated fair values were as follows:
AS OF DECEMBER 31, ------------------ 2007 2006 ---- ---- Equity securities 52% 66% Fixed income securities 48% 32% Cash and cash equivalents 0% 2% ---- ---- Total plan asset allocations 100% 100% ==== ====
The primary investment objective of our defined benefit pension plan is for capital appreciation with an emphasis on avoiding undue risk. Investments can be made using the following asset classes: domestic and international equity, fixed income securities, real estate and other asset classes the investment managers deem prudent. Three- and five-year time horizons are utilized as there are inevitably short-run fluctuations, which will cause variations in investment performance. Each managed fund is expected to rank in the upper 50% of similar funds over the three-year periods and above an appropriate index over five-year periods. Managers are monitored for adherence to guidelines, changes in material factors and legal or regulatory actions. Managers not meeting these criteria will be subject to additional due diligence review, corrective action or possible termination. The following short-term ranges have been established for weightings in the various asset categories:
WEIGHTING RANGE --------------- TARGET RANGE ------ ----- Domestic large cap equity 35% 30%-40% International equity 15% 10%-20% Fixed income 50% 45%-55% Cash equivalents 0% 0%-5%
Within the broad ranges provided above, we currently target asset weightings as follows: domestic equity allocations (35%) are split into large cap growth (15%), large cap value (15%) and small cap (5%). Fixed income allocations are weighted between core fixed income and long term bonds to track changes in the plan's liability duration. The performance of the plan and the managed funds are monitored on a quarterly basis relative to the plan's objectives. The performance of the managed fund is measured against the following indices: Russell 1000, Europe, Australia and Far East, Lehman Aggregate and Citi-group 90-day T-Bill. LNC reviews this investment policy on an annual basis. The expected return on plan assets was determined based on historical and expected future returns of the various asset classes, using the plan target allocations. LNC reevaluates this assumption at an interim date each plan year. S-38 Prior to 2007, our plan assets were principally managed by LNC's Investment Management segment. During 2007, the management of the equity portion of the plan assets was transferred to third-party managers. LNC's Investment Management segment continues to manage the plan's fixed income securities, which comprise approximately 50% of plan assets. PLAN CASH FLOWS LNC does not expect to contribute to the qualified defined benefit pension plans in 2008. LNC expects to fund approximately the following amounts (in millions) for benefit payments for LNC's unfunded non-qualified defined benefit plan and postretirement benefit plan:
PENSION PLANS POSTRETIREMENT PLANS ------------------------------- ------------------------------ NON- QUALIFIED NOT DEFINED REFLECTING REFLECTING BENEFIT MEDICARE MEDICARE MEDICARE PENSION PART D PART D PART D PLANS SUBSIDY SUBSIDY SUBSIDY --------- ---------- -------- ---------- 2008 $ -- $1 $(1) $2 2009 -- 1 (1) 2 2010 -- 1 (1) 2 2011 -- 1 (1) 2 2012 -- 1 (1) 2 Thereafter -- 6 (1) 7
401(k), MONEY PURCHASE AND PROFIT SHARING PLANS LNC also sponsors contributory defined contribution plans for eligible U.S. employees and agents, including those of LNL. These plans include 401(k) plans and defined contribution money purchase plans for eligible agents of the former Jefferson-Pilot. LNC's contribution to both the employees' and agents' 401(k) plans, excluding the former Jefferson-Pilot agents, is equal to 50% of each participant's pre-tax contribution, not to exceed 6% of eligible compensation, and is invested as directed by the participant. As of April 3, 2006, LNC's contributions to the employees' 401(k) plan on behalf of the former Jefferson-Pilot employees were the same as the contribution provided to eligible Lincoln participants. LNC's contributions to the agents' 401(k) Plan on behalf of the former Jefferson-Pilot agents is equal to 10% of each participant's pre-tax contributions, not to exceed 6% of eligible compensation. An additional discretionary contribution of up to 100% may be made with respect to a participant's pre-tax contribution (up to 6% of base pay plus cash bonus). The amount of discretionary contribution varies according to whether LNC has met certain performance-based criteria as determined by the Compensation Committee of LNC's Board of Directors. On May 1, 2007, simultaneous with LNC's announcement of the freeze of the primary defined benefit pension plans, LNC announced a number of enhancements to their employees' 401(k) plan effective January 1, 2008. For all participants, including those of LNL, a number of new features will apply: 1) an increase in the basic employer match from $0.50 per each $1.00 that a participant contributes each pay period, up to 6% of eligible compensation, to $1.00 per each $1.00 that a participant contributes each pay period, up to 6% of eligible compensation (the 50% match will become a 100% match); 2) a guaranteed "core" employer contribution of 4% of eligible compensation per pay period which will be made regardless of whether the eligible employee elects to defer salary into the Plan; and 3) certain eligible employees will also qualify for a "transition" employer contribution between 0.2% and 8.0% of eligible compensation per pay. Eligibility to receive the additional transition employer contributions will be based on a combination of age and years of service, with a minimum 10-year service requirement for legacy LNC employees and a minimum 5-year service requirement for former Jefferson-Pilot employees. Eligibility for transition employer contributions will be determined based on age and service on December 31, 2007 (i.e., participants will not "grow" into transition credits thereafter). Transition employer contributions will cease on December 31, 2017. The discretionary employer match feature will be eliminated effective January 1, 2008. The Jefferson-Pilot Life Insurance Company Agents' Retirement Plan is a money purchase plan for eligible agents that provides for an employer contribution equal to 5% of a participant's eligible compensation. Expense for the 401(k) and profit sharing plans was $31 million, $22 million and $25 million for the years ended December 31, 2007, 2006 and 2005, respectively. DEFERRED COMPENSATION PLANS LNC sponsors the DC SERP for certain U.S. employees, including those of LNL, and deferred compensation plans for certain agents, including those of LNL. Plan participants may elect to defer payment of a portion of their compensation as defined by the plans. Plan participants may select from a menu of "phantom" investment options (identical to those offered under LNC's qualified savings plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of these plans, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals when participants exceed applicable limits of the Internal Revenue Code. The amount of LNC's contribution is calculated in a manner similar to the employer match calculation described in the 401(k) plans section above. Expense for these plans was $11 million, $17 million and $11 million for the years ended December 31, 2007, 2006 and 2005, respectively. These expenses reflect both our employer matching contributions of $1 million, $4 million and $3 million, respectively, as well as increases in the measurement of our liabilities net of the total return swap, described in Note 5, under these plans of $10 million, $13 million and $8 million for the years ended December 31, 2007, 2006 and 2005, respectively. The terms of the deferred compensation plans provide that plan participants who select LNC stock as the measure for their investment return will receive shares of LNC stock in settlement of this portion of their accounts at the time of distribution. In addition, participants are precluded from S-39 diversifying any portion of their deferred compensation plan account that has been credited to the stock unit fund. Consequently, changes in value of our stock do not affect the expenses associated with this portion of the deferred compensation plans. LNC also sponsors a deferred compensation plan for certain eligible agents, including those of LNL. Plan participants receive contributions based on their earnings. Plan participants may select from a menu of "phantom" investment options used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of these plans, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. As a result of the merger with Jefferson-Pilot, LNC also sponsors a deferred compensation plan for former agents of Jefferson-Pilot. Plan participants 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 used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of the plan, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC does not make matching contributions to this plan, and LNC stock is not an investment option of the plan. LNC also sponsors a deferred compensation plan for certain former agents of Jefferson-Pilot that participate in the Jefferson-Pilot Life Insurance Company Agents' Retirement Plan. The Plan provides for company contributions equal to 5% of eligible compensation for earnings in excess of the limits imposed by the Federal government. The total liabilities associated with the employee and agent plans were $137 million and $158 million as of December 31, 2007 and 2006, respectively. -------------------------------------------------------------------------------- 17. STOCK-BASED INCENTIVE COMPENSATION PLANS Our employees are included in LNC's various incentive plans that provide for the issuance of stock options, stock incentive awards, SARs, restricted stock awards, performance shares (performance-vested shares as opposed to time-vested shares) and deferred stock units - also referred to as "restricted stock units." 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, ------------------- 2007 2006 2005 ---- ---- ---- Stock options $ 10 $ 3 $ -- Shares 3 19 14 Cash awards -- 1 1 SARs 5 (1) 2 Restricted stock 6 1 1 ---- ---- ---- Total stock-based incentive compensation expense $ 24 $ 23 $ 18 ==== ==== ==== Recognized tax benefit $ 8 $ 8 $ 6
-------------------------------------------------------------------------------- 18. STATUTORY INFORMATION AND RESTRICTIONS We prepare financial statements on the basis of SAP prescribed or permitted by the insurance departments of LNL and LLANY's states of domicile. 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. SAP differs from GAAP primarily due to charging policy acquisition costs to expense as incurred instead of deferring them to the extent recoverable and amortizing them as described in Note 1 above, establishing future contract benefit liabilities using different actuarial assumptions and valuing investments on a different basis. Statutory net income was $971 million, $299 million and $544 million for the years ended December 31, 2007, 2006 and 2005. The increase in statutory net income from 2006 to 2007 was driven primarily by two factors. The first factor was the release of statutory reserves as a result of the merger of JPL and JPFIC into LNL as described in Note 1. The second factor was an internal transfer of ownership of FPP from LNL to our parent company, LNC, as referenced in Note 1. As a result of this transfer, we recognized a realized gain for the cumulative unrealized gain of our investment in FPP as the date of the transfer. Statutory capital and surplus was $5.1 billion and $3.0 billion as of December 31, 2007 and 2006, respectively. LNL is domiciled in Indiana. The state of Indiana has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. We calculate reserves on universal life policies based on the Indiana universal life method, which caused statutory surplus to be higher than NAIC statutory surplus by $246 million and $227 million as of December 31, 2007 and 2006, respectively. We are also permitted by Indiana to use a more conservative valuation interest rate on certain S-40 annuities, which caused statutory surplus to be lower than NAIC statutory surplus by $14 million as of December 31, 2007 and 2006. A new statutory reserving standard, Actuarial Guideline VACARVM, is being developed by the NAIC with an expected effective date of December 31, 2008. This standard could lead to higher benefit reserves, lower risk-based capital ratios and potentially reduce future dividend capacity from our insurance subsidiaries. LNL is subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Generally, these restrictions pose no short-term liquidity concerns for the holding company. For example, under Indiana laws and regulations, we may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the "Commissioner"), or 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, exceed the statutory limitation. The current statutory limitation is the greater of (i) 10% of the insurer's policyholders' surplus, as shown on its last annual statement on file with the Commissioner; or (ii) the insurer's statutory net gain from operations for the previous twelve months. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. We paid dividends of $144 million, $568 million and $200 million to LNC during the years ended December 31, 2007, 2006 and 2005, respectively, which did not require prior approval of the Commissioner. In addition, we paid cash dividends of $626 million and a non-cash dividend of $292 million (attributable to the FPP dividend) in 2007 after approval was received from the Commissioner. Based upon anticipated ongoing positive statutory earnings and favorable credit markets, LNL expects that we could pay dividends of approximately $895 million in 2008 without prior approval from the Commissioner. -------------------------------------------------------------------------------- 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments. Considerable judgment is required to develop these fair values. 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. FIXED MATURITY AND EQUITY SECURITIES Fair values for fixed maturity securities are based upon quoted market prices, where available. The fair value of private placements are estimated by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality and maturity of the investments. For securities that are not actively traded and are not private placements, fair values are estimated using values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices. 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. Fair values for impaired mortgage loans are based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's market price; or 3) the fair value of the collateral if the loan is collateral dependent. DERIVATIVE INSTRUMENTS We employ several different methods for determining the fair value of our derivative instruments. Fair values for derivative contracts are based on current settlement values. These values are based on: 1) quoted market prices; 2) industry standard models that are commercially available; and 3) 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 determine the derivatives' current fair market value. OTHER INVESTMENTS AND CASH AND INVESTED CASH The carrying value of our assets classified as other investments and cash and invested cash on our Consolidated Balance Sheets approximates their fair value. Other investments include limited partnership and other privately held investments that are accounted for using the equity method of accounting. OTHER CONTRACT HOLDER FUNDS Future contract benefits and other contract holder funds on our Consolidated Balance Sheets include account values of investment contracts and certain guaranteed interest contracts. The fair values for the investment contracts are based on their approximate surrender values. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. The remainder of other contract holder funds that do not fit the definition of "investment type insurance contracts" are considered insurance contracts. Fair value disclosures are not required for these insurance contracts, nor have we determined the fair value of such contracts. SHORT-TERM AND LONG-TERM DEBT Fair values for our senior notes and capital securities are based on quoted market prices or estimated using discounted cash S-41 flow analysis based on our incremental borrowing rate at the balance sheet date for similar types of borrowing arrangements where quoted prices are not available. Fair values for junior subordinated debentures issued to affiliated trusts are based on quoted market prices. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value. GUARANTEES Our guarantees relate to mortgage loan pass-through certificates. Based on historical performance where repurchases have been negligible and the current status of the debt, none of the loans are delinquent and the fair value liability for the guarantees related to mortgage loan pass-through certificates is insignificant. INVESTMENT COMMITMENTS Fair values for commitments to make investments in fixed maturity securities (primarily private placements), limited partnerships, mortgage loans on real estate and real estate are based on the difference between the value of the committed investments as of the date of the accompanying Consolidated Balance Sheets and the commitment date. These estimates take into account changes in interest rates, the counterparties' credit standing and the remaining terms of the commitments. SEPARATE ACCOUNTS We report assets held in separate accounts at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
AS OF DECEMBER 31, ----------------------------------------- 2007 2006 ------------------ ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- ASSETS Available-for-sale securities: Fixed maturities $ 53,405 $ 53,405 $ 54,697 $ 54,697 Equity 134 134 218 218 Trading securities 2,533 2,533 2,820 2,820 Mortgage loans on real estate 7,117 7,291 7,344 7,530 Derivative instruments 172 172 245 245 Other investments 986 986 783 783 Cash and invested cash 1,395 1,395 1,762 1,762 LIABILITIES Other contract holder funds: Account value of certain investment contracts (21,173) (20,515) (28,628) (28,605) Remaining guaranteed interest and similar contracts (619) (619) (668) (668) Embedded derivative instruments -- living benefits (liabilities) contra liabilities (229) (229) 52 52 Reinsurance related derivative liability (211) (211) (218) (218) Short-term debt (173) (173) (21) (21) Long-term debt (1,675) (1,569) (1,439) (1,394) OFF-BALANCE-SHEET Guarantees -- (2) -- (3) Investment commitments -- -- -- (1,308)
S-42 -------------------------------------------------------------------------------- 20. SEGMENT INFORMATION We provide products and services in two operating businesses, Individual Markets and Employer Markets, and report results through four business segments. 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 current 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. INDIVIDUAL MARKETS The Individual Markets business provides its products through two segments: Annuities and Life Insurance. 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 Annuities segment also offers broker-dealer services. The Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a universal life insurance policy linked with riders that provide for long-term care costs) and both single and survivorship versions of universal life and variable universal life. EMPLOYER MARKETS The Employer Markets business provides its products through two segments: Retirement Products and Group Protection. The Retirement Products segment includes two major lines of business: Defined Contribution and Executive Benefits. The Defined Contribution business provides employer-sponsored fixed and variable annuities and mutual fund-based programs in the 401(k), 403(b) and 457 plan marketplaces through a wide range of intermediaries including advisors, consultants, brokers, banks, wirehouses, third-party administrators and individual planners. The Executive Benefits business offers corporate-owned universal and variable universal life insurance and bank-owned universal and variable universal life insurance to small to mid-sized banks and mid to large-sized corporations, mostly through executive benefit brokers. The Group Protection segment offers group term life, disability and dental insurance to employers. OTHER OPERATIONS Other Operations includes the financial data for operations that are not directly related to the business segments, unallocated corporate items (such as investment income on investments related to the amount of statutory surplus that is not allocated to our business units and other corporate investments, interest expense on short-term and long-term borrowings, and certain expenses, including restructuring and merger-related expenses), along with the ongoing amortization of deferred gain on the indemnity reinsurance portion of the transaction with Swiss Re. Other Operations also includes the eliminations of intercompany transactions. Segment operating revenues and income (loss) from operations are internal measures used by our management to evaluate and assess the results of our segments. Operating revenues are GAAP revenues excluding net realized gains and losses and the amortization of deferred gain arising from reserve development on business sold through reinsurance. Income (loss) from operations is GAAP net income excluding net realized investment gains and losses, losses on early retirement of debt and reserve development net of related amortization on business sold through reinsurance. Our management and Board of Directors believe that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations. Segment information (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- REVENUES Operating revenues: Individual Markets: Annuities $ 2,237 $ 1,914 $ 1,309 Life Insurance 3,696 3,178 1,840 ------- ------- ------- Total Individual Markets 5,933 5,092 3,149 ------- ------- ------- Employer Markets: Retirement Products 1,423 1,356 1,168 Group Protection 1,500 1,032 -- ------- ------- ------- Total Employer Markets 2,923 2,388 1,168 ------- ------- ------- Other Operations 285 310 309 Realized loss(1) (112) (2) (16) Amortization of deferred gain on indemnity reinsurance related to reserve developments 9 1 1 ------- ------- ------- Total revenues $ 9,038 $ 7,789 $ 4,611 ======= ======= =======
---------- (1) See Note 4 for the pre-tax detail of the realized loss. S-43
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2007 2006 2005 ------- ------- ----- NET INCOME Operating income: Individual Markets: Annuities $ 401 $ 323 $ 197 Life Insurance 623 470 238 ------- ------- ----- Total Individual Markets 1,024 793 435 ------- ------- ----- Employer Markets: Retirement Products 225 249 206 Group Protection 114 99 -- ------- ------- ----- Total Employer Markets 339 348 206 ------- ------- ----- Other Operations (45) 20 12 Realized loss(1) (72) (1) (10) Reserve development, net of related amortization on business sold through indemnity reinsurance (7) 1 1 ------- ------- ----- Net income $ 1,239 $ 1,161 $ 644 ======= ======= =====
---------- (1) See Note 4 for the pre-tax detail of the realized loss.
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------ ------ ------ NET INVESTMENT INCOME Individual Markets: Annuities $1,028 $1,033 $ 608 Life Insurance 1,762 1,502 907 ------ ------ ------ Total Individual Markets 2,790 2,535 1,515 ------ ------ ------ Employer Markets: Retirement Products 1,100 1,054 892 Group Protection 115 80 -- ------ ------ ------ Total Employer Markets 1,215 1,134 892 ------ ------ ------ Other Operations 183 200 185 ------ ------ ------ Total net investment income $4,188 $3,869 $2,592 ====== ====== ======
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2007 2006 2005 ---- ---- ----- AMORTIZATION OF DAC AND VOBA, NET OF INTEREST Individual Markets: Annuities $337 $316 $ 183 Life Insurance 467 436 259 ---- ---- ----- Total Individual Markets 804 752 442 ---- ---- ----- Employer Markets: Retirement Products 112 84 63 Group Protection 31 16 -- ---- ---- ----- Total Employer Markets 143 100 63 ---- ---- ----- Other Operations -- 1 (1) ---- ---- ----- Total amortization of DAC and VOBA $947 $853 $ 504 ==== ==== =====
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2007 2006 2005 ----- ---- ----- FEDERAL INCOME TAX EXPENSE (BENEFIT) Individual Markets: Annuities $ 114 $ 46 $ 40 Life Insurance 317 235 115 ----- ---- ----- Total Individual Markets 431 281 155 ----- ---- ----- Employer Markets: Retirement Products 90 97 80 Group Protection 61 53 -- ----- ---- ----- Total Employer Markets 151 150 80 ----- ---- ----- Other Operations (35) 29 (6) Realized loss (39) -- (6) Loss on early retirement of debt -- -- -- Amortization of deferred gain on idemnity reinsurance related to reserve developments (4) -- -- ----- ---- ----- Total income tax expense $ 504 $460 $223 ===== ==== ====
S-44
AS OF DECEMBER 31, ------------------ 2007 2006 -------- -------- ASSETS Individual Markets: Annuities $ 81,112 $ 70,736 Life Insurance 40,780 42,177 -------- -------- Total Individual Markets 121,892 112,913 -------- -------- Employer Markets: Retirement Products 38,271 37,274 Group Protection 1,471 1,849 -------- -------- Total Employer Markets 39,742 39,123 -------- -------- Other Operations 12,692 12,780 -------- -------- Total assets $174,326 $164,816 ======== ========
-------------------------------------------------------------------------------- 21. TRANSACTIONS WITH AFFILIATES Cash and short-term investments at December 31, 2007 and 2006 include our participation in a cash management agreement with LNC of $420 million and $389 million, respectively. Related investment income was $30 million, $14 million and $6 million in 2007, 2006 and 2005, respectively. Short-term debt represents notes payable to LNC of $18 million and $21 million at December 31, 2007 and 2006, respectively. Total interest expense for this short-term debt was $1 million, $2 million and $1 million for the years ended December 31, 2007, 2006 and 2005, respectively. As shown in Note 12, LNC supplied funding to us totaling $1.7 billion in 2007 and $1.4 billion in 2006, in exchange for notes. The interest expense on these notes was $96 million, $84 million and $78 million for the years ended December 31, 2007, 2006 and 2005, respectively. 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. This resulted in net payments of $99 million, $59 million and $122 million for the years ended December 31, 2007, 2006 and 2005, respectively, which is reflected in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. Our related accounts payable to affiliates, which is included in other assets on our Consolidated Balance Sheets, was $10 million and $8 million as of December 31, 2007 and 2006, respectively. A transfer pricing arrangement is in place between LFD and Delaware Management Holdings, Inc. ("DMH"), a wholly owned subsidiary of LNC, related to the wholesaling of DMH's investment products. As a result, we received fees of $62 million, $36 million and $41 million from DMH for transfer pricing in 2007, 2006, and 2005. DMH is responsible for the management of our general account investments. We paid fees of $38 million, $57 million and $72 million for the years ended December 31, 2007, 2006 and 2005, respectively, to DMH for investment management services. These fees are reflected in net investment income on our Consolidated Statements of Income. We cede and accept reinsurance from affiliated companies. As discussed in Note 8, we cede certain Guaranteed Benefit risks (including certain GMDB and GMWB benefits) to Lincoln National Reinsurance Company (Barbados) Ltd. ("LNR Barbados"). We also cede certain risks for certain UL policies, which resulted from recent actuarial reserving guidelines, to LNR Barbados. The caption insurance premiums, on the accompanying Consolidated Statements of Income, was reduced for premiums paid on these contracts for the years ended December 31, 2007, 2006 and 2005 by $308 million, $234 million and $219 million, respectively. Future contract benefits on the accompanying Consolidated Balance Sheets have been reduced by $1.3 billion and $1.1 billion as of December 31, 2007 and 2006, respectively. 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 $1.4 billion and $1.1 billion at December 31, 2007 and 2006, respectively. The letters of credit are issued by banks and represent guarantees of performance under the reinsurance agreement, and are guaranteed by LNC. S-45 22. Supplemental Disclosures of Cash Flow Information The following summarizes our supplemental cash flow data (in millions):
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2007 2006 2005 ------- -------- ---- Interest paid $ 104 $ 85 $59 Income taxes paid 194 310 75 Significant non-cash investing and financing transactions: Business combinations: Fair value of assets acquired (includes cash and invested cash) $ 41 $ 37,356 $-- Fair value of liabilities assumed (50) (30,424) -- ------- -------- ---- Total purchase price $ (9) $ 6,932 $-- ======= ======== ==== Dividend of FPP: Carrying value of assets (includes cash and invested cash) $ 2,772 $ -- $-- Carrying value of liabilities (2,280) -- -- ------- -------- ---- Total dividend of FPP $ 492 $ -- $-- ======= ======== ====
S-46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors The Lincoln National Life Insurance Company We have audited the accompanying consolidated balance sheets of The Lincoln National Life Insurance Company and its subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2007. 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 its subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 2007 the Company changed its method of accounting for deferred acquisition costs in connection with modifications or exchanges of insurance contracts as well as its method of accounting for uncertainty in income taxes. Also, as discussed in Note 2 of the consolidated financial statements, in 2006 the Company changed its method of accounting for defined benefit pension and other post retirement plans. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 28, 2008 S-47 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N N-1 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2007
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO THE LINCOLN THE LINCOLN THE LINCOLN NATIONAL LIFE NATIONAL LIFE NATIONAL LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Capital Appreciation $ 7,878,192 $ -- $ 7,878,192 $ 11,640 $ 950 $ 7,865,602 AIM V.I. Capital Appreciation Class II 4,499,470 245 4,499,715 -- 596 4,499,119 AIM V.I. Core Equity 21,027,797 -- 21,027,797 77,635 2,552 20,947,610 AIM V.I. Core Equity Class II 6,678,152 -- 6,678,152 78 867 6,677,207 AIM V.I. International Growth 10,319,777 -- 10,319,777 4,355 1,255 10,314,167 AIM V.I. International Growth Class II 8,471,166 -- 8,471,166 178 1,110 8,469,878 ABVPSF Global Technology Class B 33,758,869 13,331 33,772,200 -- 4,559 33,767,641 ABVPSF Growth and Income Class B 238,613,108 -- 238,613,108 27,325 32,189 238,553,594 ABVPSF International Value Class B 169,874,991 374,371 170,249,362 -- 24,044 170,225,318 ABVPSF Large Cap Growth Class B 29,328,284 -- 29,328,284 1,896 3,820 29,322,568 ABVPSF Small/Mid Cap Value Class B 109,928,662 231,987 110,160,649 -- 15,443 110,145,206 American Century VP Inflation Protection Class 2 144,664,346 115,543 144,779,889 -- 19,838 144,760,051 American Funds Global Growth Class 2 278,143,329 501,608 278,644,937 -- 38,906 278,606,031 American Funds Global Small Capitalization Class 2 358,401,071 655,605 359,056,676 -- 48,344 359,008,332 American Funds Growth Class 2 1,771,798,093 877,648 1,772,675,741 -- 245,282 1,772,430,459 American Funds Growth-Income Class 2 1,837,232,780 384,491 1,837,617,271 -- 254,406 1,837,362,865 American Funds International Class 2 904,026,860 991,660 905,018,520 -- 123,946 904,894,574 Delaware VIPT Capital Reserves Service Class 18,252,313 -- 18,252,313 40,346 2,512 18,209,455 Delaware VIPT Diversified Income Service Class 301,534,841 664,074 302,198,915 -- 41,714 302,157,201 Delaware VIPT Emerging Markets Service Class 256,459,929 290,234 256,750,163 -- 35,600 256,714,563 Delaware VIPT High Yield 15,883,038 -- 15,883,038 1,382 1,850 15,879,806 Delaware VIPT High Yield Service Class 202,613,694 53,018 202,666,712 -- 27,536 202,639,176 Delaware VIPT International Value Equity 1,792,597 -- 1,792,597 78,202 211 1,714,184 Delaware VIPT REIT 13,655,772 -- 13,655,772 13,131 1,591 13,641,050 Delaware VIPT REIT Service Class 191,854,557 -- 191,854,557 1,013,612 25,782 190,815,163 Delaware VIPT Small Cap Value 20,442,282 -- 20,442,282 18,903 2,384 20,420,995 Delaware VIPT Small Cap Value Service Class 327,906,080 1,180 327,907,260 -- 45,815 327,861,445 Delaware VIPT Trend 19,118,056 -- 19,118,056 23,720 2,239 19,092,097 Delaware VIPT Trend Service Class 115,979,763 -- 115,979,763 137,749 15,660 115,826,354 Delaware VIPT U.S. Growth Service Class 38,695,689 3,066 38,698,755 -- 5,090 38,693,665 Delaware VIPT Value 14,979,503 -- 14,979,503 53,758 1,749 14,923,996 Delaware VIPT Value Service Class 158,706,539 190,308 158,896,847 -- 22,369 158,874,478 DWS VIP Equity 500 Index 51,894,736 -- 51,894,736 12,151 6,559 51,876,026 DWS VIP Equity 500 Index Service Class 47,234,485 24,932 47,259,417 -- 6,467 47,252,950 DWS VIP Small Cap Index 13,417,109 -- 13,417,109 10,091 1,743 13,405,275 DWS VIP Small Cap Index Service Class 37,471,746 3,693 37,475,439 -- 5,226 37,470,213 Fidelity VIP Contrafund Service Class 2 723,330,643 853,939 724,184,582 -- 101,703 724,082,879 Fidelity VIP Equity-Income 19,799,959 -- 19,799,959 1,995 2,305 19,795,659 Fidelity VIP Equity-Income Service Class 2 104,863,578 18,751 104,882,329 -- 13,920 104,868,409 Fidelity VIP Growth 13,812,813 -- 13,812,813 18,089 1,608 13,793,116 Fidelity VIP Growth Service Class 2 78,381,564 217,356 78,598,920 -- 10,840 78,588,080 Fidelity VIP Mid Cap Service Class 2 266,111,382 590,333 266,701,715 -- 37,777 266,663,938 Fidelity VIP Overseas 6,649,271 -- 6,649,271 65,376 777 6,583,118 Fidelity VIP Overseas Service Class 2 130,997,497 155,158 131,152,655 -- 17,812 131,134,843 FTVIPT Franklin Income Securities Class 2 349,074,572 1,000,371 350,074,943 -- 50,668 350,024,275 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 99,569,494 45,416 99,614,910 -- 13,673 99,601,237 FTVIPT Mutual Shares Securities Class 2 222,625,391 420,499 223,045,890 -- 31,644 223,014,246
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 LIFE NATIONAL LIFE NATIONAL LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ----------------------------------------------------------------------------------------------------------------------------------- FTVIPT Templeton Global Income Securities Class 2 $172,928,844 $388,551 $173,317,395 $ -- $25,123 $173,292,272 FTVIPT Templeton Growth Securities Class 2 184,256,757 -- 184,256,757 71,638 25,360 184,159,759 Janus Aspen Series Balanced Service Shares 35,527,593 -- 35,527,593 356 4,594 35,522,643 Janus Aspen Series Mid Cap Growth Service Shares 17,595,201 -- 17,595,201 628 2,320 17,592,253 Janus Aspen Series Worldwide Growth Service Shares 4,318,401 -- 4,318,401 32 553 4,317,816 Lincoln VIPT Baron Growth Opportunities Service Class 36,408,548 141,669 36,550,217 -- 5,172 36,545,045 Lincoln VIPT Capital Growth Service Class 1,287,070 17,677 1,304,747 -- 172 1,304,575 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 31,810,592 163,374 31,973,966 -- 4,430 31,969,536 Lincoln VIPT Delaware Bond 292,721,178 -- 292,721,178 358,807 38,479 292,323,892 Lincoln VIPT Delaware Bond Service Class 525,052,299 337,438 525,389,737 -- 72,729 525,317,008 Lincoln VIPT Delaware Growth and Income Service Class 22,158,220 294,717 22,452,937 -- 3,097 22,449,840 Lincoln VIPT Delaware Social Awareness 25,219,967 -- 25,219,967 49,675 3,342 25,166,950 Lincoln VIPT Delaware Social Awareness Service Class 75,368,754 45,202 75,413,956 -- 10,020 75,403,936 Lincoln VIPT Delaware Special Opportunities Service Class 3,327,057 -- 3,327,057 5 457 3,326,595 Lincoln VIPT FI Equity-Income Service Class 23,238,266 55,098 23,293,364 -- 3,215 23,290,149 Lincoln VIPT Janus Capital Appreciation 4,575,105 -- 4,575,105 81,097 630 4,493,378 Lincoln VIPT Janus Capital Appreciation Service Class 34,441,219 82,740 34,523,959 -- 4,945 34,519,014 Lincoln VIPT Marsico International Growth Service Class 20,536,613 147,018 20,683,631 -- 2,985 20,680,646 Lincoln VIPT MFS Value Service Class 11,223,892 101,076 11,324,968 -- 1,672 11,323,296 Lincoln VIPT Mid-Cap Growth Service Class 11,963,179 71,771 12,034,950 -- 1,729 12,033,221 Lincoln VIPT Mid-Cap Value Service Class 13,800,406 2,384 13,802,790 -- 1,948 13,800,842 Lincoln VIPT Mondrian International Value 60,109,653 -- 60,109,653 18,385 8,216 60,083,052 Lincoln VIPT Mondrian International Value Service Class 185,606,633 294,048 185,900,681 -- 25,282 185,875,399 Lincoln VIPT Money Market 124,694,780 -- 124,694,780 466,543 16,113 124,212,124 Lincoln VIPT Money Market Service Class 273,031,697 364,285 273,395,982 -- 38,424 273,357,558 Lincoln VIPT S&P 500 Index 240,882 19,126 260,008 -- 28 259,980 Lincoln VIPT S&P 500 Index Service Class 19,175,977 281,886 19,457,863 -- 2,816 19,455,047 Lincoln VIPT Small-Cap Index Service Class 6,657,882 51,368 6,709,250 -- 904 6,708,346 Lincoln VIPT T. Rowe Price Growth Stock Service Class 6,698,095 28,933 6,727,028 -- 959 6,726,069 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 2,744,934 1,356 2,746,290 -- 368 2,745,922 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 17,488,737 -- 17,488,737 74,972 2,509 17,411,256 Lincoln VIPT Templeton Growth Service Class 45,237,582 325,703 45,563,285 -- 6,484 45,556,801 Lincoln VIPT UBS Global Asset Allocation 36,193,743 -- 36,193,743 2,259 5,327 36,186,157 Lincoln VIPT UBS Global Asset Allocation Service Class 59,235,757 162,400 59,398,157 -- 8,781 59,389,376 Lincoln VIPT Value Opportunities Service Class 809,610 5,077 814,687 -- 115 814,572
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 LIFE NATIONAL LIFE NATIONAL LIFE INSURANCE INSURANCE INSURANCE SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS ---------------------------------------------------------------------------------------- ------------------------------------------ Lincoln VIPT Wilshire 2010 Profile Service Class $ 1,280,956 $ -- $ 1,280,956 $ -- $ 208 $ 1,280,748 Lincoln VIPT Wilshire 2020 Profile Service Class 2,107,447 60,801 2,168,248 -- 294 2,167,954 Lincoln VIPT Wilshire 2030 Profile Service Class 934,272 -- 934,272 -- 150 934,122 Lincoln VIPT Wilshire 2040 Profile Service Class 397,256 -- 397,256 -- 77 397,179 Lincoln VIPT Wilshire Aggressive Profile Service Class 112,963,679 279,121 113,242,800 -- 16,341 113,226,459 Lincoln VIPT Wilshire Conservative Profile Service Class 153,835,348 -- 153,835,348 419,138 22,022 153,394,188 Lincoln VIPT Wilshire Moderate Profile Service Class 639,744,807 2,680,112 642,424,919 -- 93,387 642,331,532 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 467,260,752 1,829,358 469,090,110 -- 67,429 469,022,681 MFS VIT Core Equity Service Class 6,075,850 -- 6,075,850 56 818 6,074,976 MFS VIT Emerging Growth 6,782,299 -- 6,782,299 6,881 793 6,774,625 MFS VIT Emerging Growth Service Class 10,824,308 -- 10,824,308 190 1,453 10,822,665 MFS VIT Total Return 31,246,004 -- 31,246,004 10,660 3,636 31,231,708 MFS VIT Total Return Service Class 346,652,602 57,617 346,710,219 -- 47,936 346,662,283 MFS VIT Utilities 32,828,161 -- 32,828,161 18,745 3,843 32,805,573 MFS VIT Utilities Service Class 264,953,998 1,581,766 266,535,764 -- 36,630 266,499,134 NB AMT Mid-Cap Growth 114,745,371 -- 114,745,371 106,042 15,636 114,623,693 NB AMT Regency 122,158,632 23,575 122,182,207 -- 16,609 122,165,598 Putnam VT Growth & Income Class IB 5,674,146 103 5,674,249 -- 751 5,673,498 Putnam VT Health Sciences Class IB 5,316,572 -- 5,316,572 30 695 5,315,847
See accompanying notes. N-4 [THIS PAGE INTENTIONALLY LEFT BLANK] STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation $ -- $ (129,072) $ (129,072) AIM V.I. Capital Appreciation Class II -- (76,522) (76,522) AIM V.I. Core Equity 238,184 (344,081) (105,897) AIM V.I. Core Equity Class II 64,330 (120,133) (55,803) AIM V.I. International Growth 42,625 (167,771) (125,146) AIM V.I. International Growth Class II 32,110 (140,420) (108,310) ABVPSF Global Technology Class B -- (392,737) (392,737) ABVPSF Growth and Income Class B 2,899,549 (3,918,509) (1,018,960) ABVPSF International Value Class B 1,136,327 (1,959,046) (822,719) ABVPSF Large Cap Growth Class B -- (477,637) (477,637) ABVPSF Small/Mid Cap Value Class B 755,553 (1,758,046) (1,002,493) American Century VP Inflation Protection Class 2 5,823,892 (2,139,402) 3,684,490 American Funds Global Growth Class 2 6,441,028 (3,612,272) 2,828,756 American Funds Global Small Capitalization Class 2 9,308,171 (5,051,770) 4,256,401 American Funds Growth Class 2 13,319,076 (26,732,683) (13,413,607) American Funds Growth-Income Class 2 28,027,998 (29,324,040) (1,296,042) American Funds International Class 2 12,559,368 (12,461,841) 97,527 Delaware VIPT Capital Reserves Service Class 606,611 (222,036) 384,575 Delaware VIPT Diversified Income Service Class 6,223,181 (4,036,073) 2,187,108 Delaware VIPT Emerging Markets Service Class 2,301,842 (3,086,427) (784,585) Delaware VIPT High Yield 950,045 (207,117) 742,928 Delaware VIPT High Yield Service Class 12,400,183 (3,324,441) 9,075,742 Delaware VIPT International Value Equity 54,306 (34,903) 19,403 Delaware VIPT REIT 303,546 (286,419) 17,127 Delaware VIPT REIT Service Class 2,831,272 (4,047,937) (1,216,665) Delaware VIPT Small Cap Value 143,918 (374,998) (231,080) Delaware VIPT Small Cap Value Service Class 862,866 (5,710,923) (4,848,057) Delaware VIPT Trend -- (313,510) (313,510) Delaware VIPT Trend Service Class -- (1,897,855) (1,897,855) Delaware VIPT U.S. Growth Service Class -- (587,568) (587,568) Delaware VIPT Value 294,097 (252,441) 41,656 Delaware VIPT Value Service Class 1,970,565 (2,647,384) (676,819) DWS VIP Equity 500 Index 892,027 (879,912) 12,115 DWS VIP Equity 500 Index Service Class 583,800 (788,092) (204,292) DWS VIP Small Cap Index 138,314 (241,692) (103,378) DWS VIP Small Cap Index Service Class 237,397 (652,534) (415,137) Fidelity VIP Contrafund Service Class 2 5,084,067 (10,050,884) (4,966,817) Fidelity VIP Equity-Income 378,572 (336,206) 42,366 Fidelity VIP Equity-Income Service Class 2 1,773,948 (1,854,197) (80,249) Fidelity VIP Growth 124,016 (198,573) (74,557) Fidelity VIP Growth Service Class 2 200,547 (959,676) (759,129) Fidelity VIP Mid Cap Service Class 2 1,001,432 (3,436,645) (2,435,213) Fidelity VIP Overseas 232,403 (99,328) 133,075 Fidelity VIP Overseas Service Class 2 3,601,622 (2,004,895) 1,596,727 FTVIPT Franklin Income Securities Class 2 6,740,454 (3,739,596) 3,000,858 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 -- (1,472,770) (1,472,770) FTVIPT Mutual Shares Securities Class 2 1,934,185 (2,438,080) (503,895) FTVIPT Templeton Global Income Securities Class 2 2,788,267 (1,922,043) 866,224 FTVIPT Templeton Growth Securities Class 2 2,591,631 (3,112,553) (520,922) Janus Aspen Series Balanced Service Shares 825,946 (584,740) 241,206 Janus Aspen Series Mid Cap Growth Service Shares 11,549 (270,343) (258,794) Janus Aspen Series Worldwide Growth Service Shares 26,518 (74,056) (47,538) Lincoln VIPT Baron Growth Opportunities Service Class -- (362,454) (362,454) Lincoln VIPT Capital Growth Service Class -- (5,874) (5,874) Lincoln VIPT Cohen & Steers Global Real Estate Service Class 110,201 (185,287) (75,086) Lincoln VIPT Core -- (1,325) (1,325) Lincoln VIPT Core Service Class -- (21,254) (21,254)
See accompanying notes. N-6
DIVIDENDS NET CHANGE NET INCREASE NET FROM TOTAL IN UNREALIZED (DECREASE) REALIZED NET REALIZED NET REALIZED APPRECIATION IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) OR DEPRECIATION RESULTING FROM SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS OPERATIONS --------------------------------------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation $ 192,968 $ -- $ 192,968 $ 832,511 $ 896,407 AIM V.I. Capital Appreciation Class II AIM V.I. Core Equity 79,296 -- 79,296 458,305 461,079 AIM V.I. Core Equity Class II 827,697 -- 827,697 848,477 1,570,277 AIM V.I. International Growth 298,760 -- 298,760 242,087 485,044 AIM V.I. International Growth Class II 1,842,547 -- 1,842,547 (289,630) 1,427,771 ABVPSF Global Technology Class B 1,046,433 -- 1,046,433 108,004 1,046,127 ABVPSF Growth and Income Class B 668,204 -- 668,204 3,562,342 3,837,809 ABVPSF International Value Class B 6,262,356 11,927,102 18,189,458 (9,635,624) 7,534,874 ABVPSF Large Cap Growth Class B 750,551 4,259,120 5,009,671 (3,224,018) 962,934 ABVPSF Small/Mid Cap Value Class B 1,071,475 -- 1,071,475 2,791,338 3,385,176 American Century VP Inflation Protection Class 2 1,832,681 7,066,641 8,899,322 (10,839,028) (2,942,199) American Funds Global Growth Class 2 (552,690) -- (552,690) 6,771,604 9,903,404 American Funds Global Small Capitalization Class 2 2,408,827 8,468,561 10,877,388 10,683,739 24,389,883 American Funds Growth Class 2 10,138,194 23,113,776 33,251,970 10,420,843 47,929,214 American Funds Growth-Income Class 2 24,527,302 108,559,881 133,087,183 30,583,664 150,257,240 American Funds International Class 2 22,981,761 57,128,874 80,110,635 (29,519,413) 49,295,180 Delaware VIPT Capital Reserves Service Class 16,305,545 36,031,948 52,337,493 70,044,516 122,479,536 Delaware VIPT Diversified Income Service Class (746) -- (746) (39,312) 344,517 Delaware VIPT Emerging Markets Service Class 982,924 548,484 1,531,408 9,377,803 13,096,319 Delaware VIPT High Yield 8,517,047 11,242,422 19,759,469 36,429,906 55,404,790 Delaware VIPT High Yield Service Class 502,132 -- 502,132 (922,051) 323,009 Delaware VIPT International Value Equity 2,002,091 -- 2,002,091 (9,934,694) 1,143,139 Delaware VIPT REIT 24,898 964,570 989,468 (887,134) 121,737 Delaware VIPT REIT Service Class 1,881,555 4,542,964 6,424,519 (9,149,166) (2,707,520) Delaware VIPT Small Cap Value 1,009,137 51,158,549 52,167,686 (90,327,296) (39,376,275) Delaware VIPT Small Cap Value Service Class 2,719,447 2,286,419 5,005,866 (6,429,443) (1,654,657) Delaware VIPT Trend 3,961,084 25,876,276 29,837,360 (56,466,731) (31,477,428) Delaware VIPT Trend Service Class 1,644,318 159,507 1,803,825 631,676 2,121,991 Delaware VIPT U.S. Growth Service Class 5,936,171 793,239 6,729,410 4,831,492 9,663,047 Delaware VIPT Value 1,237,396 -- 1,237,396 3,053,799 3,703,627 Delaware VIPT Value Service Class 1,197,245 464,197 1,661,442 (2,270,849) (567,751) DWS VIP Equity 500 Index 3,502,739 3,618,898 7,121,637 (15,069,686) (8,624,868) DWS VIP Equity 500 Index Service Class 3,197,545 -- 3,197,545 (897,717) 2,311,943 DWS VIP Small Cap Index 1,308,311 -- 1,308,311 323,569 1,427,588 DWS VIP Small Cap Index Service Class 772,702 1,013,618 1,786,320 (2,122,461) (439,519) Fidelity VIP Contrafund Service Class 2 391,844 2,483,850 2,875,694 (4,151,136) (1,690,579) Fidelity VIP Equity-Income 4,246,328 173,518,194 177,764,522 (89,013,123) 83,784,582 Fidelity VIP Equity-Income Service Class 2 1,119,779 1,668,607 2,788,386 (2,554,099) 276,653 Fidelity VIP Growth 2,759,566 8,938,463 11,698,029 (11,564,010) 53,770 Fidelity VIP Growth Service Class 2 (549,268) 11,329 (537,939) 3,730,072 3,117,576 Fidelity VIP Mid Cap Service Class 2 3,792,818 48,902 3,841,720 8,694,876 11,777,467 Fidelity VIP Overseas 556,857 13,764,832 14,321,689 9,678,350 21,564,826 Fidelity VIP Overseas Service Class 2 680,656 500,179 1,180,835 (297,200) 1,016,710 FTVIPT Franklin Income Securities Class 2 5,689,056 7,806,068 13,495,124 1,718,988 16,810,839 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 144,186 1,250,040 1,394,226 (6,212,996) (1,817,912) FTVIPT Mutual Shares Securities Class 2 2,157,292 6,302,860 8,460,152 166,369 7,153,751 FTVIPT Templeton Global Income Securities Class 2 72,968 4,735,506 4,808,474 (7,792,676) (3,488,097) FTVIPT Templeton Growth Securities Class 2 1,043,366 -- 1,043,366 7,544,234 9,453,824 Janus Aspen Series Balanced Service Shares 4,229,179 8,269,105 12,498,284 (11,221,346) 756,016 Janus Aspen Series Mid Cap Growth Service Shares 1,841,890 -- 1,841,890 1,021,091 3,104,187 Janus Aspen Series Worldwide Growth Service Shares 1,352,216 91,983 1,444,199 1,821,964 3,007,369 Lincoln VIPT Baron Growth Opportunities Service Class 552,948 -- 552,948 (163,348) 342,062 Lincoln VIPT Capital Growth Service Class (38,508) 1,732,326 1,693,818 (2,212,221) (880,857) Lincoln VIPT Cohen & Steers Global Real Estate Service Class 26,861 -- 26,861 44,905 65,892 Lincoln VIPT Core (94,548) -- (94,548) (3,119,975) (3,289,609) Lincoln VIPT Core Service Class 14,065 -- 14,065 (15,944) (3,204) 330,340 -- 330,340 (277,420) 31,666
N-7
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ------------------------------------------------------------------------------------- Lincoln VIPT Delaware Bond $14,533,969 $(4,932,448) $ 9,601,521 Lincoln VIPT Delaware Bond Service Class 23,764,534 (7,985,187) 15,779,347 Lincoln VIPT Delaware Growth and Income Service Class 194,020 (272,370) (78,350) Lincoln VIPT Delaware Social Awareness 229,417 (438,053) (208,636) Lincoln VIPT Delaware Social Awareness Service Class 506,588 (1,275,355) (768,767) Lincoln VIPT Delaware Special Opportunities Service Class 19,054 (17,380) 1,674 Lincoln VIPT FI Equity-Income Service Class 223,468 (336,432) (112,964) Lincoln VIPT Growth -- (278) (278) Lincoln VIPT Growth Service Class -- (41,701) (41,701) Lincoln VIPT Growth Opportunities Service Class -- (30,536) (30,536) Lincoln VIPT Janus Capital Appreciation 11,882 (76,295) (64,413) Lincoln VIPT Janus Capital Appreciation Service Class 19,196 (417,356) (398,160) Lincoln VIPT Marsico International Growth Service Class 74,628 (79,978) (5,350) Lincoln VIPT MFS Value Service Class 58,938 (46,334) 12,604 Lincoln VIPT Mid-Cap Growth Service Class -- (55,225) (55,225) Lincoln VIPT Mid-Cap Value Service Class 22,678 (78,507) (55,829) Lincoln VIPT Mondrian International Value 1,202,374 (1,053,623) 148,751 Lincoln VIPT Mondrian International Value Service Class 3,284,117 (2,973,239) 310,878 Lincoln VIPT Money Market 5,643,061 (1,838,539) 3,804,522 Lincoln VIPT Money Market Service Class 10,134,083 (3,723,874) 6,410,209 Lincoln VIPT S&P 500 Index 2,491 (2,166) 325 Lincoln VIPT S&P 500 Index Service Class 103,776 (101,074) 2,702 Lincoln VIPT Small-Cap Index Service Class 25,293 (30,150) (4,857) Lincoln VIPT T. Rowe Price Growth Stock Service Class 5,910 (29,822) (23,912) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth -- (41,580) (41,580) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class -- (237,252) (237,252) Lincoln VIPT Templeton Growth Service Class 555,835 (227,107) 328,728 Lincoln VIPT UBS Global Asset Allocation 640,748 (680,067) (39,319) Lincoln VIPT UBS Global Asset Allocation Service Class 712,551 (792,740) (80,189) Lincoln VIPT Value Opportunities Service Class 3,033 (4,533) (1,500) Lincoln VIPT Wilshire 2010 Profile Service Class 2,423 (5,350) (2,927) Lincoln VIPT Wilshire 2020 Profile Service Class 2,733 (7,017) (4,284) Lincoln VIPT Wilshire 2030 Profile Service Class 1,754 (4,794) (3,040) Lincoln VIPT Wilshire 2040 Profile Service Class 2,189 (2,219) (30) Lincoln VIPT Wilshire Aggressive Profile Service Class 634,530 (1,478,665) (844,135) Lincoln VIPT Wilshire Conservative Profile Service Class 2,107,216 (1,895,621) 211,595 Lincoln VIPT Wilshire Moderate Profile Service Class 6,390,458 (8,845,378) (2,454,920) Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 5,562,720 (6,211,357) (648,637) MFS VIT Core Equity Service Class 5,893 (105,682) (99,789) MFS VIT Emerging Growth -- (101,033) (101,033) MFS VIT Emerging Growth Service Class -- (173,687) (173,687) MFS VIT Total Return 966,160 (513,051) 453,109 MFS VIT Total Return Service Class 7,897,260 (5,718,171) 2,179,089 MFS VIT Utilities 348,897 (490,181) (141,284) MFS VIT Utilities Service Class 1,418,633 (3,296,367) (1,877,734) NB AMT Mid-Cap Growth -- (1,800,592) (1,800,592) NB AMT Regency 574,332 (2,189,848) (1,615,516) Putnam VT Growth & Income Class IB 90,700 (109,035) (18,335) Putnam VT Health Sciences Class IB 54,661 (103,358) (48,697)
See accompanying notes. N-8
DIVIDENDS NET CHANGE NET INCREASE FROM TOTAL IN UNREALIZED (DECREASE) NET REALIZED NET REALIZED NET REALIZED APPRECIATION IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) OR DEPRECIATION RESULTING FROM SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS OPERATIONS --------------------------------------------------------------------------------------------------------------------- Lincoln VIPT Delaware Bond $ (415,139) $ -- $ (415,139) $ 1,997,972 $11,184,354 Lincoln VIPT Delaware Bond Service Class (458,513) -- (458,513) 1,214,489 16,535,323 Lincoln VIPT Delaware Growth and Income Service Class 198,893 -- 198,893 213,752 334,295 Lincoln VIPT Delaware Social Awareness 1,469,068 -- 1,469,068 (845,273) 415,159 Lincoln VIPT Delaware Social Awareness Service Class 2,698,443 -- 2,698,443 (1,100,388) 829,288 Lincoln VIPT Delaware Special Opportunities Service Class (25,697) 94,195 68,498 (218,927) (148,755) Lincoln VIPT FI Equity-Income Service Class 69,677 1,963,778 2,033,455 (1,674,791) 245,700 Lincoln VIPT Growth 14,677 -- 14,677 (8,994) 5,405 Lincoln VIPT Growth Service Class 942,550 -- 942,550 (392,026) 508,823 Lincoln VIPT Growth Opportunities Service Class 296,067 -- 296,067 (100,716) 164,815 Lincoln VIPT Janus Capital Appreciation 472,605 -- 472,605 376,791 784,983 Lincoln VIPT Janus Capital Appreciation Service Class 818,493 -- 818,493 3,640,243 4,060,576 Lincoln VIPT Marsico International Growth Service Class 210,688 -- 210,688 439,786 645,124 Lincoln VIPT MFS Value Service Class (16,475) -- (16,475) (65,525) (69,396) Lincoln VIPT Mid-Cap Growth Service Class (124,145) -- (124,145) 270,519 91,149 Lincoln VIPT Mid-Cap Value Service Class (104,253) -- (104,253) (1,211,196) (1,371,278) Lincoln VIPT Mondrian International Value 5,500,338 1,594,405 7,094,743 (1,298,205) 5,945,289 Lincoln VIPT Mondrian International Value Service Class 6,964,046 4,663,811 11,627,857 3,830,340 15,769,075 Lincoln VIPT Money Market -- -- -- -- 3,804,522 Lincoln VIPT Money Market Service Class -- -- -- -- 6,410,209 Lincoln VIPT S&P 500 Index 248 -- 248 (5,372) (4,799) Lincoln VIPT S&P 500 Index Service Class (152,089) -- (152,089) (358,828) (508,215) Lincoln VIPT Small-Cap Index Service Class (3,497) -- (3,497) (291,716) (300,070) Lincoln VIPT T. Rowe Price Growth Stock Service Class 13,545 -- 13,545 (40,879) (51,246) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 121,629 -- 121,629 181,714 261,763 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 660,790 -- 660,790 868,489 1,292,027 Lincoln VIPT Templeton Growth Service Class (38,228) -- (38,228) (809,786) (519,286) Lincoln VIPT UBS Global Asset Allocation 972,911 1,757,636 2,730,547 (1,023,294) 1,667,934 Lincoln VIPT UBS Global Asset Allocation Service Class 333,791 2,179,049 2,512,840 (927,488) 1,505,163 Lincoln VIPT Value Opportunities Service Class 2,616 -- 2,616 (40,266) (39,150) Lincoln VIPT Wilshire 2010 Profile Service Class 2,872 -- 2,872 23,314 23,259 Lincoln VIPT Wilshire 2020 Profile Service Class (2,146) -- (2,146) 27,482 21,052 Lincoln VIPT Wilshire 2030 Profile Service Class 162 -- 162 15,491 12,613 Lincoln VIPT Wilshire 2040 Profile Service Class 22 -- 22 (5,328) (5,336) Lincoln VIPT Wilshire Aggressive Profile Service Class 2,331,509 1,199,436 3,530,945 3,392,713 6,079,523 Lincoln VIPT Wilshire Conservative Profile Service Class 2,083,936 461,762 2,545,698 2,903,120 5,660,413 Lincoln VIPT Wilshire Moderate Profile Service Class 5,564,394 2,474,859 8,039,253 25,707,114 31,291,447 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 2,975,090 4,204,863 7,179,953 16,061,556 22,592,872 MFS VIT Core Equity Service Class 390,630 -- 390,630 281,063 571,904 MFS VIT Emerging Growth (470,617) -- (470,617) 1,833,003 1,261,353 MFS VIT Emerging Growth Service Class 991,847 -- 991,847 996,122 1,814,282 MFS VIT Total Return 1,729,387 923,764 2,653,151 (1,948,416) 1,157,844 MFS VIT Total Return Service Class 4,226,087 8,231,952 12,458,039 (7,457,600) 7,179,528 MFS VIT Utilities 3,725,165 2,528,970 6,254,135 1,895,815 8,008,666 MFS VIT Utilities Service Class 7,019,255 12,180,306 19,199,561 25,228,694 42,550,521 NB AMT Mid-Cap Growth 6,430,815 -- 6,430,815 14,951,317 19,581,540 NB AMT Regency 4,069,011 3,451,275 7,520,286 (3,699,995) 2,204,775 Putnam VT Growth & Income Class IB 249,157 1,042,217 1,291,374 (1,727,719) (454,680) Putnam VT Health Sciences Class IB 457,374 -- 457,374 (477,929) (69,252)
N-9 STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2006 AND 2007
AIM V.I. AIM V.I. CAPITAL AIM V.I. AIM V.I. CAPITAL APPRECIATION CORE CORE EQUITY APPRECIATION CLASS II EQUITY CLASS II SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ -- $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) (91,336) (52,084) (118,893) (44,587) - Net realized gain (loss) on investments (115,634) (20,847) 67,266 15,179 - Net change in unrealized appreciation or depreciation on investments 7,066 (21,163) 2,014,836 637,261 ----------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (199,904) (94,094) 1,963,209 607,853 Changes From Unit Transactions: Accumulation Units: - Contract purchases 219,036 35,351 293,638 95,169 - Contract withdrawals and transfers to annuity reserves (1,468,565) (210,774) (3,260,684) (811,043) - Contract transfers 10,861,873 5,178,342 26,613,005 8,345,514 ----------- ---------- ----------- ----------- 9,612,344 5,002,919 23,645,959 7,629,640 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,014) -- (2,059) -- - Receipt (reimbursement) of mortality guarantee adjustments 233 -- 63 -- ----------- ---------- ----------- ----------- (781) -- (1,996) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 9,611,563 5,002,919 23,643,963 7,629,640 ----------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 9,411,659 4,908,825 25,607,172 8,237,493 ----------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 9,411,659 4,908,825 25,607,172 8,237,493 Changes From Operations: - Net investment income (loss) (129,072) (76,522) (105,897) (55,803) - Net realized gain (loss) on investments 192,968 79,296 827,697 298,760 - Net change in unrealized appreciation or depreciation on investments 832,511 458,305 848,477 242,087 ----------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 896,407 461,079 1,570,277 485,044 Changes From Unit Transactions: Accumulation Units: - Contract purchases 68,832 105,707 172,596 30,380 - Contract withdrawals and transfers to annuity reserves (1,718,232) (491,990) (4,315,369) (1,563,907) - Contract transfers (791,301) (484,502) (2,083,577) (511,803) ----------- ---------- ----------- ----------- (2,440,701) (870,785) (6,226,350) (2,045,330) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (2,018) -- (3,558) -- - Receipt (reimbursement) of mortality guarantee adjustments 255 -- 69 -- ----------- ---------- ----------- ----------- (1,763) -- (3,489) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,442,464) (870,785) (6,229,839) (2,045,330) ----------- ---------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,546,057) (409,706) (4,659,562) (1,560,286) ----------- ---------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $ 7,865,602 $4,499,119 $20,947,610 $ 6,677,207 =========== ========== =========== ===========
N-10
AIM V.I. ABVPSF AIM V.I. INTERNATIONAL GLOBAL ABVPSF ABVPSF INTERNATIONAL GROWTH TECHNOLOGY GROWTH AND INTERNATIONAL GROWTH CLASS II CLASS B INCOME CLASS B VALUE CLASS B SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $11,255,535 $ 6,449,458 $15,883,898 $206,322,630 $ -- Changes From Operations: - Net investment income (loss) (57,942) (41,486) (263,899) (959,435) (91,316) - Net realized gain (loss) on investments 1,272,288 371,545 (618,267) 14,622,839 30,220 - Net change in unrealized appreciation or depreciation on investments 1,459,736 1,398,584 1,765,515 17,572,384 2,334,992 ------------ ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,674,082 1,728,643 883,349 31,235,788 2,273,896 Changes From Unit Transactions: Accumulation Units: - Contract purchases 150,259 108,137 2,429,250 24,600,651 16,294,001 - Contract withdrawals and transfers to annuity reserves (1,793,126) (616,404) (1,389,816) (17,455,101) (270,642) - Contract transfers (410,257) 876,213 1,813,157 (7,110,595) 16,127,228 ------------ ----------- ----------- ------------ ------------ (2,053,124) 367,946 2,852,591 34,955 32,150,587 Annuity Reserves: - Transfer from accumulation units and between subaccounts 14,963 -- -- 45,205 -- - Annuity Payments (3,775) -- (5,098) (35,746) -- - Receipt (reimbursement) of mortality guarantee adjustments 230 -- 33 2,381 -- ------------ ----------- ----------- ------------ ------------ 11,418 -- (5,065) 11,840 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,041,706) 367,946 2,847,526 46,795 32,150,587 ------------ ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 632,376 2,096,589 3,730,875 31,282,583 34,424,483 ------------ ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 11,887,911 8,546,047 19,614,773 237,605,213 34,424,483 Changes From Operations: - Net investment income (loss) (125,146) (108,310) (392,737) (1,018,960) (822,719) - Net realized gain (loss) on investments 1,842,547 1,046,433 668,204 18,189,458 5,009,671 - Net change in unrealized appreciation or depreciation on investments (289,630) 108,004 3,562,342 (9,635,624) (3,224,018) ------------ ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,427,771 1,046,127 3,837,809 7,534,874 962,934 Changes From Unit Transactions: Accumulation Units: - Contract purchases 51,809 58,281 9,373,479 23,809,101 108,320,348 - Contract withdrawals and transfers to annuity reserves (2,352,920) (806,909) (4,958,586) (22,470,046) (5,709,611) - Contract transfers (678,555) (373,668) 5,905,881 (7,862,815) 32,211,128 ------------ ----------- ----------- ------------ ------------ (2,979,666) (1,122,296) 10,320,774 (6,523,760) 134,821,865 Annuity Reserves: - Transfer from accumulation units and between subaccounts 5,680 -- -- 28,037 16,547 - Annuity Payments (27,528) -- (5,711) (91,341) (724) - Receipt (reimbursement) of mortality guarantee adjustments (1) -- (4) 571 213 ------------ ----------- ----------- ------------ ------------ (21,849) -- (5,715) (62,733) 16,036 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,001,515) (1,122,296) 10,315,059 (6,586,493) 134,837,901 ------------ ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (1,573,744) (76,169) 14,152,868 948,381 135,800,835 ------------ ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $10,314,167 $ 8,469,878 $33,767,641 $238,553,594 $170,225,318 ============ =========== =========== ============ ============ AMERICAN ABVPSF CENTURY LARGE CAP ABVPSF VP INFLATION AMERICAN GROWTH SMALL/MID CAP PROTECTION FUNDS GLOBAL CLASS B VALUE CLASS B CLASS 2 GROWTH CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $38,794,594 $ 53,499,928 $100,042,811 $ 59,479,022 Changes From Operations: - Net investment income (loss) (531,050) (942,011) 1,942,558 (819,921) - Net realized gain (loss) on investments 493,387 5,356,268 (476,728) 997,353 - Net change in unrealized appreciation or depreciation on investments (908,680) 3,515,362 (1,445,528) 18,050,559 ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (946,343) 7,929,619 20,302 18,227,991 Changes From Unit Transactions: Accumulation Units: - Contract purchases 560,055 19,267,922 24,336,929 59,192,035 - Contract withdrawals and transfers to annuity reserves (2,810,470) (4,199,871) (8,198,612) (4,436,144) - Contract transfers (3,892,766) 4,974,853 6,361,870 20,692,018 ----------- ------------ ------------ ------------ (6,143,181) 20,042,904 22,500,187 75,447,909 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 8,086 -- - Annuity Payments (5,227) (5,411) (32,173) (9,608) - Receipt (reimbursement) of mortality guarantee adjustments 27 29 127 153 ----------- ------------ ------------ ------------ (5,200) (5,382) (23,960) (9,455) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (6,148,381) 20,037,522 22,476,227 75,438,454 ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (7,094,724) 27,967,141 22,496,529 93,666,445 ----------- ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 31,699,870 81,467,069 122,539,340 153,145,467 Changes From Operations: - Net investment income (loss) (477,637) (1,002,493) 3,684,490 2,828,756 - Net realized gain (loss) on investments 1,071,475 8,899,322 (552,690) 10,877,388 - Net change in unrealized appreciation or depreciation on investments 2,791,338 (10,839,028) 6,771,604 10,683,739 ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,385,176 (2,942,199) 9,903,404 24,389,883 Changes From Unit Transactions: Accumulation Units: - Contract purchases 200,911 30,163,584 20,765,216 80,024,563 - Contract withdrawals and transfers to annuity reserves (4,038,220) (6,088,654) (8,165,995) (9,843,667) - Contract transfers (1,919,729) 7,551,323 (256,496) 30,877,122 ----------- ------------ ------------ ------------ (5,757,038) 31,626,253 12,342,725 101,058,018 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 6,760 28,016 - Annuity Payments (5,437) (5,915) (32,518) (15,433) - Receipt (reimbursement) of mortality guarantee adjustments (3) (2) 340 80 ----------- ------------ ------------ ------------ (5,440) (5,917) (25,418) 12,663 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (5,762,478) 31,620,336 12,317,307 101,070,681 ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (2,377,302) 28,678,137 22,220,711 125,460,564 ----------- ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $29,322,568 $110,145,206 $144,760,051 $278,606,031 =========== ============ ============ ============
N-11
AMERICAN FUNDS AMERICAN GLOBAL SMALL AMERICAN FUNDS FUNDS CAPITALIZATION AMERICAN FUNDS GROWTH-INCOME INTERNATIONAL CLASS 2 GROWTH CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2006 $146,086,924 $1,027,944,645 $1,158,679,589 $413,015,292 Changes From Operations: - Net investment income (loss) (2,223,715) (9,076,695) 736,535 1,119,738 - Net realized gain (loss) on investments 16,381,244 19,206,302 42,762,358 12,510,452 - Net change in unrealized appreciation or depreciation on investments 23,251,088 90,916,755 130,816,178 69,604,313 ------------ -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 37,408,617 101,046,362 174,315,071 83,234,503 Changes From Unit Transactions: Accumulation Units: - Contract purchases 53,651,291 311,111,946 305,952,629 136,675,439 - Contract withdrawals and transfers to annuity reserves (13,265,650) (84,829,449) (97,709,386) (34,186,111) - Contract transfers 14,237,135 37,669,944 39,757,318 33,376,555 ------------ -------------- -------------- ------------ 54,622,776 263,952,441 248,000,561 135,865,883 Annuity Reserves: - Transfer from accumulation units and between subaccounts 17,571 95,172 134,674 85,789 - Annuity Payments (19,826) (205,336) (337,744) (136,695) - Receipt (reimbursement) of mortality guarantee adjustments 1,159 (1,541) (3,644) 6,215 ------------ -------------- -------------- ------------ (1,096) (111,705) (206,714) (44,691) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 54,621,680 263,840,736 247,793,847 135,821,192 ------------ -------------- -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 92,030,297 364,887,098 422,108,918 219,055,695 ------------ -------------- -------------- ------------ NET ASSETS AT DECEMBER 31, 2006 238,117,221 1,392,831,743 1,580,788,507 632,070,987 Changes From Operations: - Net investment income (loss) 4,256,401 (13,413,607) (1,296,042) 97,527 - Net realized gain (loss) on investments 33,251,970 133,087,183 80,110,635 52,337,493 - Net change in unrealized appreciation or depreciation on investments 10,420,843 30,583,664 (29,519,413) 70,044,516 ------------ -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 47,929,214 150,257,240 49,295,180 122,479,536 Changes From Unit Transactions: Accumulation Units: - Contract purchases 80,472,258 345,288,976 338,236,577 172,903,198 - Contract withdrawals and transfers to annuity reserves (25,821,972) (123,130,960) (138,885,811) (59,030,181) - Contract transfers 18,312,841 7,318,877 8,332,853 36,597,845 ------------ -------------- -------------- ------------ 72,963,127 229,476,893 207,683,619 150,470,862 Annuity Reserves: - Transfer from accumulation units and between subaccounts 14,293 93,533 78,991 17,757 - Annuity Payments (16,971) (230,144) (488,134) (151,499) - Receipt (reimbursement) of mortality guarantee adjustments 1,448 1,194 4,702 6,931 ------------ -------------- -------------- ------------ (1,230) (135,417) (404,441) (126,811) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 72,961,897 229,341,476 207,279,178 150,344,051 ------------ -------------- -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 120,891,111 379,598,716 256,574,358 272,823,587 ------------ -------------- -------------- ------------ NET ASSETS AT DECEMBER 31, 2007 $359,008,332 $1,772,430,459 $1,837,362,865 $904,894,574 ============ ============== ============== ============
See accompanying notes. N-12
DELAWARE DELAWARE VIPT DELAWARE DELAWARE VIPT CAPITAL DIVERSIFIED VIPT EMERGING DELAWARE VIPT RESERVES INCOME MARKETS VIPT HIGH YIELD SERVICE CLASS SERVICE CLASS SERVICE CLASS HIGH YIELD SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 4,142,143 $117,668,130 $ 63,653,626 $ 15,016,454 $151,343,314 Changes From Operations: - Net investment income (loss) 217,898 (599,409) (684,442) 775,284 7,439,096 - Net realized gain (loss) on investments (17,182) 279,321 4,953,776 235,354 1,092,952 - Net change in unrealized appreciation or depreciation on investments 46,069 9,318,826 17,812,559 482,036 7,965,123 ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 246,785 8,998,738 22,081,893 1,492,674 16,497,171 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,854,596 45,305,947 43,839,656 61,037 35,987,846 - Contract withdrawals and transfers to annuity reserves (1,355,606) (9,461,351) (4,949,251) (2,185,905) (12,439,495) - Contract transfers (1,614,842) 24,453,000 5,294,374 15,907 (4,648,154) ------------ ------------ ------------ ------------ ------------ 5,884,148 60,297,596 44,184,779 (2,108,961) 18,900,197 Annuity Reserves: - Transfer from accumulation units and between subaccounts 776,475 28,789 (733) 162 24,813 - Annuity Payments (170,808) (9,799) (187) (973) (36,097) - Receipt (reimbursement) of mortality guarantee adjustments 109 323 -- 248 269 ------------ ------------ ------------ ------------ ------------ 605,776 19,313 (920) (563) (11,015) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 6,489,924 60,316,909 44,183,859 (2,109,524) 18,889,182 ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 6,736,709 69,315,647 66,265,752 (616,850) 35,386,353 ------------ ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 10,878,852 186,983,777 129,919,378 14,399,604 186,729,667 Changes From Operations: - Net investment income (loss) 384,575 2,187,108 (784,585) 742,928 9,075,742 - Net realized gain (loss) on investments (746) 1,531,408 19,759,469 502,132 2,002,091 - Net change in unrealized appreciation or depreciation on investments (39,312) 9,377,803 36,429,906 (922,051) (9,934,694) ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 344,517 13,096,319 55,404,790 323,009 1,143,139 Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,461,905 68,102,044 61,279,813 82,753 41,143,172 - Contract withdrawals and transfers to annuity reserves (1,194,224) (16,521,595) (12,621,632) (2,747,229) (16,276,614) - Contract transfers 2,886,525 50,434,127 22,715,453 3,825,795 (10,072,423) ------------ ------------ ------------ ------------ ------------ 7,154,206 102,014,576 71,373,634 1,161,319 14,794,135 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 85,630 17,216 (3,615) 11,299 - Annuity Payments (167,969) (23,342) (709) (535) (39,550) - Receipt (reimbursement) of mortality guarantee adjustments (151) 241 254 24 486 ------------ ------------ ------------ ------------ ------------ (168,120) 62,529 16,761 (4,126) (27,765) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 6,986,086 102,077,105 71,390,395 1,157,193 14,766,370 ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 7,330,603 115,173,424 126,795,185 1,480,202 15,909,509 ------------ ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $ 18,209,455 $302,157,201 $256,714,563 $ 15,879,806 $202,639,176 ============ ============ ============ ============ ============ DELAWARE DELAWARE VIPT DELAWARE VIPT INTERNATIONAL DELAWARE VIPT REIT SMALL CAP VALUE EQUITY VIPT REIT SERVICE CLASS VALUE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2006 $ 2,813,892 $ 22,971,856 $161,758,580 $32,285,750 Changes From Operations: - Net investment income (loss) 39,463 124,456 (174,617) (366,463) - Net realized gain (loss) on investments 380,655 3,772,459 16,443,617 4,967,354 - Net change in unrealized appreciation or depreciation on investments 104,853 2,461,794 37,317,795 (216,661) ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 524,971 6,358,709 53,586,795 4,384,230 Changes From Unit Transactions: Accumulation Units: - Contract purchases 711 122,841 44,809,819 243,175 - Contract withdrawals and transfers to annuity reserves (689,370) (4,313,859) (15,307,272) (5,227,475) - Contract transfers 87,468 (703,317) 6,764,272 (1,020,116) ----------- ------------ ------------ ----------- (601,191) (4,894,335) 36,266,819 (6,004,416) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- (26,492) 42,781 (4,396) - Annuity Payments -- (19,192) (48,073) (4,587) - Receipt (reimbursement) of mortality guarantee adjustments -- 701 1,377 951 ----------- ------------ ------------ ----------- -- (44,983) (3,915) (8,032) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (601,191) (4,939,318) 36,262,904 (6,012,448) ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (76,220) 1,419,391 89,849,699 (1,628,218) ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2006 2,737,672 24,391,247 251,608,279 30,657,532 Changes From Operations: - Net investment income (loss) 19,403 17,127 (1,216,665) (231,080) - Net realized gain (loss) on investments 989,468 6,424,519 52,167,686 5,005,866 - Net change in unrealized appreciation or depreciation on investments (887,134) (9,149,166) (90,327,296) (6,429,443) ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 121,737 (2,707,520) (39,376,275) (1,654,657) Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,171 97,442 32,306,436 122,751 - Contract withdrawals and transfers to annuity reserves (610,149) (4,178,191) (18,017,917) (5,564,258) - Contract transfers (552,292) (3,957,054) (35,660,128) (3,099,525) ----------- ------------ ------------ ----------- (1,161,270) (8,037,803) (21,371,609) (8,541,032) Annuity Reserves: - Transfer from accumulation units and between subaccounts 16,547 17,962 5,956 (5,631) - Annuity Payments (715) (23,076) (52,466) (35,085) - Receipt (reimbursement) of mortality guarantee adjustments 213 240 1,278 (132) ----------- ------------ ------------ ----------- 16,045 (4,874) (45,232) (40,848) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,145,225) (8,042,677) (21,416,841) (8,581,880) ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,023,488) (10,750,197) (60,793,116) (10,236,537) ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 $ 1,714,184 $ 13,641,050 $190,815,163 $20,420,995 =========== ============ ============ ===========
N-13
DELAWARE DELAWARE VIPT DELAWARE VIPT U.S. SMALL CAP VALUE DELAWARE VIPT TREND GROWTH SERVICE CLASS VIPT TREND SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $196,817,038 $30,707,868 $107,820,967 $38,980,114 Changes From Operations: - Net investment income (loss) (4,073,655) (393,458) (1,818,264) (566,622) - Net realized gain (loss) on investments 18,261,754 860,216 3,557,104 1,106,999 - Net change in unrealized appreciation or depreciation on investments 17,289,797 1,144,760 4,223,173 (399,202) ------------ ----------- ------------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 31,477,896 1,611,518 5,962,013 141,175 Changes From Unit Transactions: Accumulation Units: - Contract purchases 79,459,219 158,953 13,296,569 1,401,748 - Contract withdrawals and transfers to annuity reserves (15,120,468) (4,948,804) (7,446,016) (2,495,432) - Contract transfers 14,327,485 (2,632,333) (5,083,349) (2,491,767) ------------ ----------- ------------- ----------- 78,666,236 (7,422,184) 767,204 (3,585,451) Annuity Reserves: - Transfer from accumulation units and between subaccounts 21,663 -- -- 32,329 - Annuity Payments (131,249) (12,244) (98,885) (7,303) - Receipt (reimbursement) of mortality guarantee adjustments 562 4,551 509 14 ------------ ----------- ------------- ----------- (109,024) (7,693) (98,376) 25,040 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 78,557,212 (7,429,877) 668,828 (3,560,411) ------------ ----------- ------------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 110,035,108 (5,818,359) 6,630,841 (3,419,236) ------------ ----------- ------------- ----------- NET ASSETS AT DECEMBER 31, 2006 306,852,146 24,889,509 114,451,808 35,560,878 Changes From Operations: - Net investment income (loss) (4,848,057) (313,510) (1,897,855) (587,568) - Net realized gain (loss) on investments 29,837,360 1,803,825 6,729,410 1,237,396 - Net change in unrealized appreciation or depreciation on investments (56,466,731) 631,676 4,831,492 3,053,799 ------------ ----------- ------------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (31,477,428) 2,121,991 9,663,047 3,703,627 Changes From Unit Transactions: Accumulation Units: - Contract purchases 86,717,339 149,359 8,961,055 3,473,433 - Contract withdrawals and transfers to annuity reserves (22,101,313) (5,407,922) (9,739,492) (2,721,615) - Contract transfers (12,012,071) (2,655,663) (7,404,768) (1,320,371) ------------ ----------- ------------- ----------- 52,603,955 (7,914,226) (8,183,205) (568,553) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- 6,760 - Annuity Payments (117,050) (9,745) (105,263) (10,067) - Receipt (reimbursement) of mortality guarantee adjustments (178) 4,568 (33) 1,020 ------------ ----------- ------------- ----------- (117,228) (5,177) (105,296) (2,287) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 52,486,727 (7,919,403) (8,288,501) (570,840) ------------ ----------- ------------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 21,009,299 (5,797,412) 1,374,546 3,132,787 ------------ ----------- ------------- ----------- NET ASSETS AT DECEMBER 31, 2007 $327,861,445 $19,092,097 $115,826,354 $38,693,665 ============ =========== ============= ===========
See accompanying notes. N-14
DWS VIP DWS VIP DELAWARE DWS VIP EQUITY 500 DWS VIP SMALL CAP DELAWARE VIPT VALUE EQUITY 500 INDEX SMALL CAP INDEX VIPT VALUE SERVICE CLASS INDEX SERVICE CLASS INDEX SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $17,634,039 $ 68,306,425 $ 68,258,386 $29,602,529 $16,288,832 $19,247,425 Changes From Operations: - Net investment income (loss) 33,953 (439,010) (198,782) (249,635) (151,625) (326,118) - Net realized gain (loss) on investments 1,570,123 2,975,658 2,377,142 534,881 2,044,284 1,356,200 - Net change in unrealized appreciation or depreciation on investments 1,994,667 16,421,133 5,975,654 4,246,380 521,619 2,516,367 ----------- ------------ ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,598,743 18,957,781 8,154,014 4,531,626 2,414,278 3,546,449 Changes From Unit Transactions: Accumulation Units: - Contract purchases 201,421 29,433,315 1,420,007 10,408,755 577,031 9,381,891 - Contract withdrawals and transfers to annuity reserves (4,125,796) (5,571,580) (10,548,216) (1,810,700) (2,112,332) (1,183,345) - Contract transfers 1,275,046 17,897,320 (5,262,177) (25,995) (383,782) 1,955,443 ----------- ------------ ------------ ----------- ----------- ----------- (2,649,329) 41,759,055 (14,390,386) 8,572,060 (1,919,083) 10,153,989 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- (35,683) -- (58,916) -- - Annuity Payments (7,816) (5,898) (66,269) (2,743) (10,276) -- - Receipt (reimbursement) of mortality guarantee adjustments 1,357 303 17,035 88 63 -- ----------- ------------ ------------ ----------- ----------- ----------- (6,459) (5,595) (84,917) (2,655) (69,129) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,655,788) 41,753,460 (14,475,303) 8,569,405 (1,988,212) 10,153,989 ----------- ------------ ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 942,955 60,711,241 (6,321,289) 13,101,031 426,066 13,700,438 ----------- ------------ ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 18,576,994 129,017,666 61,937,097 42,703,560 16,714,898 32,947,863 Changes From Operations: - Net investment income (loss) 41,656 (676,819) 12,115 (204,292) (103,378) (415,137) - Net realized gain (loss) on investments 1,661,442 7,121,637 3,197,545 1,308,311 1,786,320 2,875,694 - Net change in unrealized appreciation or depreciation on investments (2,270,849) (15,069,686) (897,717) 323,569 (2,122,461) (4,151,136) ----------- ------------ ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (567,751) (8,624,868) 2,311,943 1,427,588 (439,519) (1,690,579) Changes From Unit Transactions: Accumulation Units: - Contract purchases 136,856 42,180,878 544,704 7,492,249 255,103 5,639,486 - Contract withdrawals and transfers to annuity reserves (3,390,987) (9,538,988) (8,710,005) (2,452,991) (1,611,352) (1,547,364) - Contract transfers 176,176 5,834,353 (4,149,446) (1,914,531) (1,503,861) 2,120,807 ----------- ------------ ------------ ----------- ----------- ----------- (3,077,955) 38,476,243 (12,314,747) 3,124,727 (2,860,110) 6,212,929 Annuity Reserves: - Transfer from accumulation units and between subaccounts 12,801 -- (17,644) -- -- -- - Annuity Payments (21,535) 5,386 (57,064) (2,934) (9,988) -- - Receipt (reimbursement) of mortality guarantee adjustments 1,442 51 16,441 9 (6) -- ----------- ------------ ------------ ----------- ----------- ----------- (7,292) 5,437 (58,267) (2,925) (9,994) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,085,247) 38,481,680 (12,373,014) 3,121,802 (2,870,104) 6,212,929 ----------- ------------ ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (3,652,998) 29,856,812 (10,061,071) 4,549,390 (3,309,623) 4,522,350 ----------- ------------ ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $14,923,996 $158,874,478 $ 51,876,026 $47,252,950 $13,405,275 $37,470,213 =========== ============ ============ =========== =========== =========== FIDELITY VIP FIDELITY VIP CONTRAFUND FIDELITY VIP EQUITY-INCOME SERVICE CLASS 2 EQUITY-INCOME SERVICE CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $242,707,287 $28,049,062 $108,463,653 Changes From Operations: - Net investment income (loss) (2,044,138) 501,850 1,518,431 - Net realized gain (loss) on investments 37,954,270 3,874,525 15,269,208 - Net change in unrealized appreciation or depreciation on investments (1,652,574) 78,421 1,757,899 ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 34,257,558 4,454,796 18,545,538 Changes From Unit Transactions: Accumulation Units: - Contract purchases 166,103,875 147,736 1,987,053 - Contract withdrawals and transfers to annuity reserves (17,209,029) (4,893,711) (7,739,636) - Contract transfers 47,410,307 (1,643,614) (3,227,847) ------------ ----------- ------------ 196,305,153 (6,389,589) (8,980,430) Annuity Reserves: - Transfer from accumulation units and between subaccounts 9,938 -- 26,731 - Annuity Payments (7,984) (18,209) (42,459) - Receipt (reimbursement) of mortality guarantee adjustments 108 1,091 400 ------------ ----------- ------------ 2,062 (17,118) (15,328) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 196,307,215 (6,406,707) (8,995,758) ------------ ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 230,564,773 (1,951,911) 9,549,780 ------------ ----------- ------------ NET ASSETS AT DECEMBER 31, 2006 473,272,060 26,097,151 118,013,433 Changes From Operations: - Net investment income (loss) (4,966,817) 42,366 (80,249) - Net realized gain (loss) on investments 177,764,522 2,788,386 11,698,029 - Net change in unrealized appreciation or depreciation on investments (89,013,123) (2,554,099) (11,564,010) ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 83,784,582 276,653 53,770 Changes From Unit Transactions: Accumulation Units: - Contract purchases 171,852,579 114,662 1,935,778 - Contract withdrawals and transfers to annuity reserves (37,817,234) (5,770,621) (9,823,162) - Contract transfers 32,959,236 (917,625) (5,270,262) ------------ ----------- ------------ 166,994,581 (6,573,584) (13,157,646) Annuity Reserves: - Transfer from accumulation units and between subaccounts 12,801 -- -- - Annuity Payments 18,937 (5,778) (41,176) - Receipt (reimbursement) of mortality guarantee adjustments (82) 1,217 28 ------------ ----------- ------------ 31,656 (4,561) (41,148) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 167,026,237 (6,578,145) (13,198,794) ------------ ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 250,810,819 (6,301,492) (13,145,024) ------------ ----------- ------------ NET ASSETS AT DECEMBER 31, 2007 $724,082,879 $19,795,659 $104,868,409 ============ =========== ============
N-15
FIDELITY VIP FIDELITY VIP FIDELITY GROWTH MID CAP VIP SERVICE SERVICE FIDELITY VIP GROWTH CLASS 2 CLASS 2 OVERSEAS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $19,401,348 $40,555,043 $ 29,265,696 $ 7,809,350 Changes From Operations: - Net investment income (loss) (167,939) (630,933) (1,311,003) (37,482) - Net realized gain (loss) on investments (1,569,744) 513,669 4,753,694 583,828 - Net change in unrealized appreciation or depreciation on investments 2,621,536 2,221,336 3,209,519 603,713 ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 883,853 2,104,072 6,652,210 1,150,059 Changes From Unit Transactions: Accumulation Units: - Contract purchases 107,401 7,058,997 64,157,850 4,949 - Contract withdrawals and transfers to annuity reserves (3,368,327) (2,540,943) (3,353,901) (1,128,526) - Contract transfers (2,127,541) (266,697) 37,689,754 (447,451) ----------- ----------- ------------ ----------- (5,388,467) 4,251,357 98,493,703 (1,571,028) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 46,040 -- - Annuity Payments (22,069) (50,124) (4,285) (34,324) - Receipt (reimbursement) of mortality guarantee adjustments 8,903 433 534 14,744 ----------- ----------- ------------ ----------- (13,166) (49,691) 42,289 (19,580) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (5,401,633) 4,201,666 98,535,992 (1,590,608) ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (4,517,780) 6,305,738 105,188,202 (440,549) ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2006 14,883,568 46,860,781 134,453,898 7,368,801 Changes From Operations: - Net investment income (loss) (74,557) (759,129) (2,435,213) 133,075 - Net realized gain (loss) on investments (537,939) 3,841,720 14,321,689 1,180,835 - Net change in unrealized appreciation or depreciation on investments 3,730,072 8,694,876 9,678,350 (297,200) ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,117,576 11,777,467 21,564,826 1,016,710 Changes From Unit Transactions: Accumulation Units: - Contract purchases 61,959 13,191,355 86,751,861 26,580 - Contract withdrawals and transfers to annuity reserves (3,508,661) (4,200,768) (8,650,245) (1,806,633) - Contract transfers (754,943) 11,014,854 32,588,085 (4,154) ----------- ----------- ------------ ----------- (4,201,645) 20,005,441 110,689,701 (1,784,207) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- (39,093) 2,461 - Annuity Payments (17,025) (55,851) (5,140) (37,694) - Receipt (reimbursement) of mortality guarantee adjustments 10,642 242 (254) 17,047 ----------- ----------- ------------ ----------- (6,383) (55,609) (44,487) (18,186) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (4,208,028) 19,949,832 110,645,214 (1,802,393) ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,090,452) 31,727,299 132,210,040 (785,683) ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 $13,793,116 $78,588,080 $266,663,938 $ 6,583,118 =========== =========== ============ ===========
See accompanying notes. N-16
FTVIPT FRANKLIN FTVIPT SMALL-MID FTVIPT FIDELITY VIP FRANKLIN CAP FTVIPT TEMPLETON OVERSEAS INCOME GROWTH MUTUAL SHARES GLOBAL INCOME SERVICE SECURITIES SECURITIES SECURITIES SECURITIES CLASS 2 CLASS 2 CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 93,652,564 $ -- $ 59,207,077 $ -- $ 9,296,781 Changes From Operations: - Net investment income (loss) (960,466) (263,977) (1,083,805) (181,594) 374,965 - Net realized gain (loss) on investments 4,170,830 55,331 1,164,584 40,153 99,470 - Net change in unrealized appreciation or depreciation on investments 11,898,635 3,358,133 4,367,619 2,797,616 2,839,453 ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 15,108,999 3,149,487 4,448,398 2,656,175 3,313,888 Changes From Unit Transactions: Accumulation Units: - Contract purchases 15,847,809 45,614,657 15,463,857 27,795,447 29,241,087 - Contract withdrawals and transfers to annuity reserves (6,356,294) (662,197) (4,833,700) (316,841) (1,576,726) - Contract transfers (5,063,083) 29,918,292 1,298,085 19,921,049 23,119,229 ------------ ------------ ------------ ------------ ------------ 4,428,432 74,870,752 11,928,242 47,399,655 50,783,590 Annuity Reserves: - Transfer from accumulation units and between subaccounts 11,795 -- 35 -- -- - Annuity Payments (9,332) -- (9,721) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 98 -- 78 -- -- ------------ ------------ ------------ ------------ ------------ 2,561 -- (9,608) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,430,993 74,870,752 11,918,634 47,399,655 50,783,590 ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 19,539,992 78,020,239 16,367,032 50,055,830 54,097,478 ------------ ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 113,192,556 78,020,239 75,574,109 50,055,830 63,394,259 Changes From Operations: - Net investment income (loss) 1,596,727 3,000,858 (1,472,770) (503,895) 866,224 - Net realized gain (loss) on investments 13,495,124 1,394,226 8,460,152 4,808,474 1,043,366 - Net change in unrealized appreciation or depreciation on investments 1,718,988 (6,212,996) 166,369 (7,792,676) 7,544,234 ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 16,810,839 (1,817,912) 7,153,751 (3,488,097) 9,453,824 Changes From Unit Transactions: Accumulation Units: - Contract purchases 14,187,438 189,733,447 25,632,209 121,184,754 62,361,826 - Contract withdrawals and transfers to annuity reserves (9,476,496) (10,663,636) (11,197,652) (5,971,073) (5,823,141) - Contract transfers (3,579,104) 94,730,438 2,433,449 61,221,987 43,905,504 ------------ ------------ ------------ ------------ ------------ 1,131,838 273,800,249 16,868,006 176,435,668 100,444,189 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 23,825 11,947 11,912 -- - Annuity Payments (852) (2,131) (6,407) (1,069) -- - Receipt (reimbursement) of mortality guarantee adjustments 462 5 (169) 2 -- ------------ ------------ ------------ ------------ ------------ (390) 21,699 5,371 10,845 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,131,448 273,821,948 16,873,377 176,446,513 100,444,189 ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 17,942,287 272,004,036 24,027,128 172,958,416 109,898,013 ------------ ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $131,134,843 $350,024,275 $ 99,601,237 $223,014,246 $173,292,272 ============ ============ ============ ============ ============ FTVIPT JANUS JANUS TEMPLETON JANUS ASPEN SERIES ASPEN SERIES GROWTH ASPEN SERIES MID CAP WORLDWIDE SECURITIES BALANCED GROWTH GROWTH CLASS 2 SERVICE SHARES SERVICE SHARES SERVICE SHARES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 89,831,343 $ 39,730,293 $15,318,067 $ 4,361,767 Changes From Operations: - Net investment income (loss) (400,475) 122,337 (240,652) 1,759 - Net realized gain (loss) on investments 5,600,909 1,278,415 606,638 102,359 - Net change in unrealized appreciation or depreciation on investments 16,743,943 1,780,075 1,242,129 551,610 ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,944,377 3,180,827 1,608,115 655,728 Changes From Unit Transactions: Accumulation Units: - Contract purchases 39,279,428 588,948 148,713 56,792 - Contract withdrawals and transfers to annuity reserves (7,394,393) (4,584,624) (831,891) (296,821) - Contract transfers 13,524,041 (1,396,358) (896,783) (111,441) ------------ ------------ ----------- ----------- 45,409,076 (5,392,034) (1,579,961) (351,470) Annuity Reserves: - Transfer from accumulation units and between subaccounts 29,731 -- -- -- - Annuity Payments (46,478) (73,775) -- (49,682) - Receipt (reimbursement) of mortality guarantee adjustments 509 542 -- 195 ------------ ------------ ----------- ----------- (16,238) (73,233) -- (49,487) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 45,392,838 (5,465,267) (1,579,961) (400,957) ------------ ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 67,337,215 (2,284,440) 28,154 254,771 ------------ ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 157,168,558 37,445,853 15,346,221 4,616,538 Changes From Operations: - Net investment income (loss) (520,922) 241,206 (258,794) (47,538) - Net realized gain (loss) on investments 12,498,284 1,841,890 1,444,199 552,948 - Net change in unrealized appreciation or depreciation on investments (11,221,346) 1,021,091 1,821,964 (163,348) ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 756,016 3,104,187 3,007,369 342,062 Changes From Unit Transactions: Accumulation Units: - Contract purchases 33,529,929 444,501 304,874 14,973 - Contract withdrawals and transfers to annuity reserves (10,347,575) (3,820,479) (1,518,327) (649,143) - Contract transfers 3,065,248 (1,586,163) 452,116 49,123 ------------ ------------ ----------- ----------- 26,247,602 (4,962,141) (761,337) (585,047) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (12,671) (65,249) -- (55,726) - Receipt (reimbursement) of mortality guarantee adjustments 254 (7) -- (11) ------------ ------------ ----------- ----------- (12,417) (65,256) -- (55,737) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 26,235,185 (5,027,397) (761,337) (640,784) ------------ ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 26,991,201 (1,923,210) 2,246,032 (298,722) ------------ ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $184,159,759 $ 35,522,643 $17,592,253 $ 4,317,816 ============ ============ =========== ===========
N-17
LINCOLN VIPT LINCOLN VIPT COHEN & STEERS BARON GROWTH LINCOLN VIPT GLOBAL OPPORTUNITIES CAPITAL GROWTH REAL ESTATE LINCOLN VIPT SERVICE CLASS SERVICE CLASS SERVICE CLASS CORE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ -- $ -- $ -- $ 131,724 Changes From Operations: - Net investment income (loss) (16,381) -- -- (852) - Net realized gain (loss) on investments 28,563 -- -- 2,755 - Net change in unrealized appreciation or depreciation on investments 247,647 -- -- 15,335 ----------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 259,829 -- -- 17,238 Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,546,713 -- -- 4,167 - Contract withdrawals and transfers to annuity reserves (73,202) -- -- (1,696) - Contract transfers 1,102,010 -- -- 400 ----------- ---------- ----------- --------- 4,575,521 -- -- 2,871 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 4,575,521 -- -- 2,871 ----------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 4,835,350 -- -- 20,109 ----------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2006 4,835,350 -- -- 151,833 Changes From Operations: - Net investment income (loss) (362,454) (5,874) (75,086) (1,325) - Net realized gain (loss) on investments 1,693,818 26,861 (94,548) 14,065 - Net change in unrealized appreciation or depreciation on investments (2,212,221) 44,905 (3,119,975) (15,944) ----------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (880,857) 65,892 (3,289,609) (3,204) Changes From Unit Transactions: Accumulation Units: - Contract purchases 19,049,911 1,341,504 21,372,854 840 - Contract withdrawals and transfers to annuity reserves (727,798) (7,684) (391,595) (1,026) - Contract transfers 14,255,165 (95,137) 14,277,886 (148,443) ----------- ---------- ----------- --------- 32,577,278 1,238,683 35,259,145 (148,629) Annuity Reserves: - Transfer from accumulation units and between subaccounts 13,806 -- -- -- - Annuity Payments (628) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 96 -- -- -- ----------- ---------- ----------- --------- 13,274 -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 32,590,552 1,238,683 35,259,145 (148,629) ----------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 31,709,695 1,304,575 31,969,536 (151,833) ----------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2007 $36,545,045 $1,304,575 $31,969,536 $ -- =========== ========== =========== =========
See accompanying notes. N-18
LINCOLN VIPT DELAWARE LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT GROWTH DELAWARE CORE LINCOLN VIPT DELAWARE BOND AND INCOME SOCIAL SERVICE CLASS DELAWARE BOND SERVICE CLASS SERVICE CLASS AWARENESS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 795,382 $353,491,303 $322,429,439 $ 3,043,012 $29,133,651 Changes From Operations: - Net investment income (loss) (19,034) 8,939,045 10,917,700 (18,971) (210,819) - Net realized gain (loss) on investments 23,604 (1,058,140) (882,266) 53,026 1,235,887 - Net change in unrealized appreciation or depreciation on investments 266,951 1,859,902 1,352,450 786,539 1,781,910 ----------- ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 271,521 9,740,807 11,387,884 820,594 2,806,978 Changes From Unit Transactions: Accumulation Units: - Contract purchases 2,002,209 11,248,481 99,980,090 4,862,883 621,042 - Contract withdrawals and transfers to annuity reserves (217,522) (46,788,453) (24,569,613) (262,821) (2,771,451) - Contract transfers 761,886 (2,333,471) 19,545,049 2,323,676 (1,881,034) ----------- ------------ ------------ ----------- ----------- 2,546,573 (37,873,443) 94,955,526 6,923,738 (4,031,443) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 148,296 178,532 -- 31,532 - Annuity Payments -- (126,020) (13,639) -- (6,399) - Receipt (reimbursement) of mortality guarantee adjustments -- 2,597 444 -- 2 ----------- ------------ ------------ ----------- ----------- -- 24,873 165,337 -- 25,135 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 2,546,573 (37,848,570) 95,120,863 6,923,738 (4,006,308) ----------- ------------ ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,818,094 (28,107,763) 106,508,747 7,744,332 (1,199,330) ----------- ------------ ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 3,613,476 325,383,540 428,938,186 10,787,344 27,934,321 Changes From Operations: - Net investment income (loss) (21,254) 9,601,521 15,779,347 (78,350) (208,636) - Net realized gain (loss) on investments 330,340 (415,139) (458,513) 198,893 1,469,068 - Net change in unrealized appreciation or depreciation on investments (277,420) 1,997,972 1,214,489 213,752 (845,273) ----------- ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 31,666 11,184,354 16,535,323 334,295 415,159 Changes From Unit Transactions: Accumulation Units: - Contract purchases 629,775 3,309,219 101,286,354 7,396,980 275,590 - Contract withdrawals and transfers to annuity reserves (23,406) (46,461,121) (33,755,563) (541,292) (2,739,674) - Contract transfers (4,251,511) (967,410) 12,319,624 4,472,513 (710,909) ----------- ------------ ------------ ----------- ----------- (3,645,142) (44,119,312) 79,850,415 11,328,201 (3,174,993) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 13,816 11,677 -- -- - Annuity Payments -- (139,648) (23,855) -- (7,532) - Receipt (reimbursement) of mortality guarantee adjustments -- 1,142 5,262 -- (5) ----------- ------------ ------------ ----------- ----------- -- (124,690) (6,916) -- (7,537) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,645,142) (44,244,002) 79,843,499 11,328,201 (3,182,530) ----------- ------------ ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (3,613,476) (33,059,648) 96,378,822 11,662,496 (2,767,371) ----------- ------------ ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $ -- $292,323,892 $525,317,008 $22,449,840 $25,166,950 =========== ============ ============ =========== =========== LINCOLN VIPT LINCOLN VIPT DELAWARE DELAWARE LINCOLN SOCIAL SPECIAL VIPT FI AWARENESS OPPORTUNITIES EQUITY-INCOME LINCOLN VIPT SERVICE CLASS SERVICE CLASS SERVICE CLASS GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $71,884,144 $ -- $ 4,781,806 $ 50,956 Changes From Operations: - Net investment income (loss) (672,859) -- (34,275) (1,568) - Net realized gain (loss) on investments 1,670,870 -- 714,522 339 - Net change in unrealized appreciation or depreciation on investments 6,231,153 -- 339,059 5,481 ----------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,229,164 -- 1,019,306 4,252 Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,796,341 -- 7,800,287 -- - Contract withdrawals and transfers to annuity reserves (4,352,431) -- (308,545) (7,108) - Contract transfers (4,715,013) -- 2,507,693 67,996 ----------- ---------- ----------- --------- (2,271,103) -- 9,999,435 60,888 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments 31,927 -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ----------- ---------- ----------- --------- 31,927 -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,239,176) -- 9,999,435 60,888 ----------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 4,989,988 -- 11,018,741 65,140 ----------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2006 76,874,132 -- 15,800,547 116,096 Changes From Operations: - Net investment income (loss) (768,767) 1,674 (112,964) (278) - Net realized gain (loss) on investments 2,698,443 68,498 2,033,455 14,677 - Net change in unrealized appreciation or depreciation on investments (1,100,388) (218,927) (1,674,791) (8,994) ----------- ---------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 829,288 (148,755) 245,700 5,405 Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,727,043 1,776,715 6,341,410 -- - Contract withdrawals and transfers to annuity reserves (5,418,555) (29,080) (973,038) (13,675) - Contract transfers (3,605,335) 1,727,715 1,875,530 (107,826) ----------- ---------- ----------- --------- (2,296,847) 3,475,350 7,243,902 (121,501) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (4,338) -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments 1,701 -- -- -- ----------- ---------- ----------- --------- (2,637) -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,299,484) 3,475,350 7,243,902 (121,501) ----------- ---------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,470,196) 3,326,595 7,489,602 (116,096) ----------- ---------- ----------- --------- NET ASSETS AT DECEMBER 31, 2007 $75,403,936 $3,326,595 $23,290,149 $ -- =========== ========== =========== =========
N-19
LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT GROWTH LINCOLN VIPT JANUS CAPITAL GROWTH OPPORTUNITIES JANUS CAPITAL APPRECIATION SERVICE CLASS SERVICE CLASS APPRECIATION SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 2,448,531 $ 931,405 $ 3,928,463 $11,917,908 Changes From Operations: - Net investment income (loss) (97,645) (50,867) (59,260) (225,228) - Net realized gain (loss) on investments 39,447 (118,470) 53,765 147,552 - Net change in unrealized appreciation or depreciation on investments 272,181 87,524 315,216 1,190,710 ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 213,983 (81,813) 309,721 1,113,034 Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,917,314 2,198,782 107,229 2,409,099 - Contract withdrawals and transfers to annuity reserves (342,428) (175,224) (143,585) (774,914) - Contract transfers 418,541 921,417 70,193 1,500,946 ----------- ----------- ------------ ----------- 4,993,427 2,944,975 33,837 3,135,131 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- (4,436) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- 7 -- ----------- ----------- ------------ ----------- -- -- (4,429) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,993,427 2,944,975 29,408 3,135,131 ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,207,410 2,863,162 339,129 4,248,165 ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2006 7,655,941 3,794,567 4,267,592 16,166,073 Changes From Operations: - Net investment income (loss) (41,701) (30,536) (64,413) (398,160) - Net realized gain (loss) on investments 942,550 296,067 472,605 818,493 - Net change in unrealized appreciation or depreciation on investments (392,026) (100,716) 376,791 3,640,243 ----------- ----------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 508,823 164,815 784,983 4,060,576 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,497,365 1,078,002 64,950 5,121,889 - Contract withdrawals and transfers to annuity reserves (115,702) (112,380) (609,111) (1,460,952) - Contract transfers (9,546,427) (4,925,004) (14,650) 10,631,428 ----------- ----------- ------------ ----------- (8,164,764) (3,959,382) (558,811) 14,292,365 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- -- (386) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ----------- ----------- ------------ ----------- -- -- (386) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (8,164,764) (3,959,382) (559,197) 14,292,365 ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (7,655,941) (3,794,567) 225,786 18,352,941 ----------- ----------- ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 $ -- $ -- $ 4,493,378 $34,519,014 =========== =========== ============ ===========
See accompanying notes. N-20
LINCOLN VIPT MARSICO LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT INTERNATIONAL LINCOLN VIPT MID-CAP MID-CAP MONDRIAN GROWTH MFS VALUE GROWTH VALUE INTERNATIONAL SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS VALUE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ -- $ -- $ -- $ -- $51,322,467 Changes From Operations: - Net investment income (loss) -- -- -- -- 764,087 - Net realized gain (loss) on investments -- -- -- -- 2,480,122 - Net change in unrealized appreciation or depreciation on investments -- -- -- -- 10,937,162 ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- -- -- 14,181,371 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- -- -- 2,352,232 - Contract withdrawals and transfers to annuity reserves -- -- -- -- (4,182,575) - Contract transfers -- -- -- -- 607,599 ----------- ----------- ----------- ----------- ----------- -- -- -- -- (1,222,744) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- 44,779 - Annuity Payments -- -- -- -- (11,749) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- 258 ----------- ----------- ----------- ----------- ----------- -- -- -- -- 33,288 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS -- -- -- -- (1,189,456) ----------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- -- -- 12,991,915 ----------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 -- -- -- -- 64,314,382 Changes From Operations: - Net investment income (loss) (5,350) 12,604 (55,225) (55,829) 148,751 - Net realized gain (loss) on investments 210,688 (16,475) (124,145) (104,253) 7,094,743 - Net change in unrealized appreciation or depreciation on investments 439,786 (65,525) 270,519 (1,211,196) (1,298,205) ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 645,124 (69,396) 91,149 (1,371,278) 5,945,289 Changes From Unit Transactions: Accumulation Units: - Contract purchases 8,227,618 6,257,451 7,037,192 7,416,950 473,909 - Contract withdrawals and transfers to annuity reserves (227,019) (82,722) (143,471) (153,587) (5,063,291) - Contract transfers 12,034,923 5,217,963 5,048,351 7,908,757 (5,573,014) ----------- ----------- ----------- ----------- ----------- 20,035,522 11,392,692 11,942,072 15,172,120 (10,162,396) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- - Annuity Payments -- -- -- -- (14,461) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- 238 ----------- ----------- ----------- ----------- ----------- -- -- -- -- (14,223) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 20,035,522 11,392,692 11,942,072 15,172,120 (10,176,619) ----------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 20,680,646 11,323,296 12,033,221 13,800,842 (4,231,330) ----------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $20,680,646 $11,323,296 $12,033,221 $13,800,842 $60,083,052 =========== =========== =========== =========== =========== LINCOLN VIPT MONDRIAN INTERNATIONAL LINCOLN VIPT LINCOLN VIPT VALUE LINCOLN VIPT MONEY MARKET S&P 500 SERVICE CLASS MONEY MARKET SERVICE CLASS INDEX SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $110,575,192 $106,859,269 $ 79,247,808 $ -- Changes From Operations: - Net investment income (loss) 1,673,723 3,184,845 2,992,537 -- - Net realized gain (loss) on investments 3,847,342 -- -- -- - Net change in unrealized appreciation or depreciation on investments 27,225,119 -- -- -- ------------ ------------ ------------ -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 32,746,184 3,184,845 2,992,537 -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 31,417,099 9,893,971 142,360,131 -- - Contract withdrawals and transfers to annuity reserves (7,658,007) (42,711,083) (19,444,905) -- - Contract transfers (2,990,287) 29,181,242 (40,973,013) -- ------------ ------------ ------------ -------- 20,768,805 (3,635,870) 81,942,213 -- Annuity Reserves: - Transfer from accumulation units and between subaccounts 34,343 164,367 1,016,010 -- - Annuity Payments (1,773) (37,840) (111,118) -- - Receipt (reimbursement) of mortality guarantee adjustments 56 42 139 -- ------------ ------------ ------------ -------- 32,626 126,569 905,031 -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 20,801,431 (3,509,301) 82,847,244 -- ------------ ------------ ------------ -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 53,547,615 (324,456) 85,839,781 -- ------------ ------------ ------------ -------- NET ASSETS AT DECEMBER 31, 2006 164,122,807 106,534,813 165,087,589 -- Changes From Operations: - Net investment income (loss) 310,878 3,804,522 6,410,209 325 - Net realized gain (loss) on investments 11,627,857 -- -- 248 - Net change in unrealized appreciation or depreciation on investments 3,830,340 -- -- (5,372) ------------ ------------ ------------ -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 15,769,075 3,804,522 6,410,209 (4,799) Changes From Unit Transactions: Accumulation Units: - Contract purchases 26,024,940 6,245,700 166,093,451 420 - Contract withdrawals and transfers to annuity reserves (10,170,214) (66,590,478) (64,453,135) (4,076) - Contract transfers (9,874,779) 74,264,459 452,718 268,435 ------------ ------------ ------------ -------- 5,979,947 13,919,681 102,093,034 264,779 Annuity Reserves: - Transfer from accumulation units and between subaccounts 9,743 -- -- -- - Annuity Payments (8,252) (46,915) (236,157) -- - Receipt (reimbursement) of mortality guarantee adjustments 2,079 23 2,883 -- ------------ ------------ ------------ -------- 3,570 (46,892) (233,274) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 5,983,517 13,872,789 101,859,760 264,779 ------------ ------------ ------------ -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 21,752,592 17,677,311 108,269,969 259,980 ------------ ------------ ------------ -------- NET ASSETS AT DECEMBER 31, 2007 $185,875,399 $124,212,124 $273,357,558 $259,980 ============ ============ ============ ========
N-21
LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT T. ROWE PRICE S&P 500 SMALL-CAP T. ROWE PRICE STRUCTURED INDEX INDEX GROWTH STOCK MID-CAP SERVICE CLASS SERVICE CLASS SERVICE CLASS GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ -- $ -- $ -- $1,832,318 Changes From Operations: - Net investment income (loss) -- -- -- (35,738) - Net realized gain (loss) on investments -- -- -- 41,899 - Net change in unrealized appreciation or depreciation on investments -- -- -- 139,728 ----------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- -- -- 145,889 Changes From Unit Transactions: Accumulation Units: - Contract purchases -- -- -- 86,129 - Contract withdrawals and transfers to annuity reserves -- -- -- (66,251) - Contract transfers -- -- -- 285,924 ----------- ---------- ---------- ---------- -- -- -- 305,802 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 -- -- -- 305,802 ----------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- -- 451,691 ----------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2006 -- -- -- 2,284,009 Changes From Operations: - Net investment income (loss) 2,702 (4,857) (23,912) (41,580) - Net realized gain (loss) on investments (152,089) (3,497) 13,545 121,629 - Net change in unrealized appreciation or depreciation on investments (358,828) (291,716) (40,879) 181,714 ----------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (508,215) (300,070) (51,246) 261,763 Changes From Unit Transactions: Accumulation Units: - Contract purchases 13,908,189 4,962,567 4,594,700 12,795 - Contract withdrawals and transfers to annuity reserves (232,444) (104,044) (43,135) (59,184) - Contract transfers 6,287,517 2,149,893 2,225,750 246,539 ----------- ---------- ---------- ---------- 19,963,262 7,008,416 6,777,315 200,150 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 19,963,262 7,008,416 6,777,315 200,150 ----------- ---------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 19,455,047 6,708,346 6,726,069 461,913 ----------- ---------- ---------- ---------- NET ASSETS AT DECEMBER 31, 2007 $19,455,047 $6,708,346 $6,726,069 $2,745,922 =========== ========== ========== ==========
See accompanying notes. N-22
LINCOLN VIPT LINCOLN VIPT T. ROWE PRICE LINCOLN VIPT LINCOLN VIPT UBS LINCOLN VIPT STRUCTURED TEMPLETON UBS GLOBAL ASSET VALUE MID-CAP GROWTH GROWTH GLOBAL ASSET ALLOCATION OPPORTUNITIES SERVICE CLASS SERVICE CLASS ALLOCATION SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2006 $ 5,537,906 $ -- $26,758,516 $ 9,590,351 $ -- Changes From Operations: - Net investment income (loss) (138,762) -- (135,304) (15,206) -- - Net realized gain (loss) on investments 95,049 -- 2,140,279 854,797 -- - Net change in unrealized appreciation or depreciation on investments 645,829 -- 2,101,083 1,725,216 -- ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 602,116 -- 4,106,058 2,564,807 -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,872,605 -- 9,147,751 18,874,048 -- - Contract withdrawals and transfers to annuity reserves (274,424) -- (1,740,305) (1,161,661) -- - Contract transfers 1,497,421 -- 740,293 1,456,507 -- ----------- ----------- ----------- ----------- ----------- 5,095,602 -- 8,147,739 19,168,894 -- Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 10,433 32,629 -- - Annuity Payments -- -- (9,214) (32,629) -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- 131 -- -- ----------- ----------- ----------- ----------- ----------- -- -- 1,350 -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 5,095,602 -- 8,149,089 19,168,894 -- ----------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,697,718 -- 12,255,147 21,733,701 -- ----------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 11,235,624 -- 39,013,663 31,324,052 -- Changes From Operations: - Net investment income (loss) (237,252) 328,728 (39,319) (80,189) (1,500) - Net realized gain (loss) on investments 660,790 (38,228) 2,730,547 2,512,840 2,616 - Net change in unrealized appreciation or depreciation on investments 868,489 (809,786) (1,023,294) (927,488) (40,266) ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,292,027 (519,286) 1,667,934 1,505,163 (39,150) Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,498,894 36,632,607 434,692 23,794,071 659,019 - Contract withdrawals and transfers to annuity reserves (618,609) (433,735) (2,882,548) (2,320,050) (9,178) - Contract transfers 3,320 9,877,215 (2,037,038) 5,086,140 203,881 ----------- ----------- ----------- ----------- ----------- 4,883,605 46,076,087 (4,484,894) 26,560,161 853,722 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- - Annuity Payments -- -- (10,535) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- (11) -- -- ----------- ----------- ----------- ----------- ----------- -- -- (10,546) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,883,605 46,076,087 (4,495,440) 26,560,161 853,722 ----------- ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 6,175,632 45,556,801 (2,827,506) 28,065,324 814,572 ----------- ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $17,411,256 $45,556,801 $36,186,157 $59,389,376 $ 814,572 =========== =========== =========== =========== =========== LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT WILSHIRE 2010 WILSHIRE 2020 WILSHIRE 2030 WILSHIRE 2040 PROFILE PROFILE PROFILE PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ -- $ -- $ -- $ -- 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, 2006 -- -- -- -- Changes From Operations: - Net investment income (loss) (2,927) (4,284) (3,040) (30) - Net realized gain (loss) on investments 2,872 (2,146) 162 22 - Net change in unrealized appreciation or depreciation on investments 23,314 27,482 15,491 (5,328) ---------- ---------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 23,259 21,052 12,613 (5,336) Changes From Unit Transactions: Accumulation Units: - Contract purchases 836,711 1,288,525 811,235 393,881 - Contract withdrawals and transfers to annuity reserves (22,490) (21,304) (19,660) (16,876) - Contract transfers 443,268 879,681 129,934 25,510 ---------- ---------- -------- -------- 1,257,489 2,146,902 921,509 402,515 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 1,257,489 2,146,902 921,509 402,515 ---------- ---------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,280,748 2,167,954 934,122 397,179 ---------- ---------- -------- -------- NET ASSETS AT DECEMBER 31, 2007 $1,280,748 $2,167,954 $934,122 $397,179 ========== ========== ======== ========
N-23
LINCOLN VIPT LINCOLN VIPT WILSHIRE LINCOLN VIPT LINCOLN VIPT WILSHIRE AGGRESSIVE WILSHIRE WILSHIRE MODERATELY PROFILE CONSERVATIVE MODERATE AGGRESSIVE SERVICE PROFILE PROFILE PROFILE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 17,873,575 $ 30,523,299 $ 99,075,704 $ 62,178,857 Changes From Operations: - Net investment income (loss) (400,941) (140,446) (1,891,901) (1,064,381) - Net realized gain (loss) on investments 473,760 821,194 1,782,299 668,767 - Net change in unrealized appreciation or depreciation on investments 5,514,152 4,295,185 25,616,206 19,658,986 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,586,971 4,975,933 25,506,604 19,263,372 Changes From Unit Transactions: Accumulation Units: - Contract purchases 26,941,949 32,567,870 179,071,161 125,393,276 - Contract withdrawals and transfers to annuity reserves (2,005,622) (5,799,622) (10,992,599) (4,073,835) - Contract transfers 10,140,881 13,833,662 75,111,123 44,150,963 ------------ ------------ ------------ ------------ 35,077,208 40,601,910 243,189,685 165,470,404 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 2,235,649 182,598 109,739 - Annuity Payments -- (161,635) (39,894) (44,632) - Receipt (reimbursement) of mortality guarantee adjustments -- 392 39 150 ------------ ------------ ------------ ------------ -- 2,074,406 142,743 65,257 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 35,077,208 42,676,316 243,332,428 165,535,661 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 40,664,179 47,652,249 268,839,032 184,799,033 ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 58,537,754 78,175,548 367,914,736 246,977,890 Changes From Operations: - Net investment income (loss) (844,135) 211,595 (2,454,920) (648,637) - Net realized gain (loss) on investments 3,530,945 2,545,698 8,039,253 7,179,953 - Net change in unrealized appreciation or depreciation on investments 3,392,713 2,903,120 25,707,114 16,061,556 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,079,523 5,660,413 31,291,447 22,592,872 Changes From Unit Transactions: Accumulation Units: - Contract purchases 50,186,340 56,570,256 213,170,146 175,593,651 - Contract withdrawals and transfers to annuity reserves (5,525,089) (9,589,045) (29,610,958) (14,021,762) - Contract transfers 3,947,931 23,138,701 59,345,033 37,928,739 ------------ ------------ ------------ ------------ 48,609,182 70,119,912 242,904,221 199,500,628 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 272,484 -- - Annuity Payments -- (561,293) (51,018) (48,672) - Receipt (reimbursement) of mortality guarantee adjustments -- (392) (338) (37) ------------ ------------ ------------ ------------ -- (561,685) 221,128 (48,709) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 48,609,182 69,558,227 243,125,349 199,451,919 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 54,688,705 75,218,640 274,416,796 222,044,791 ------------ ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $113,226,459 $153,394,188 $642,331,532 $469,022,681 ============ ============ ============ ============
See accompanying notes. N-24
MFS VIT MFS VIT MFS VIT EMERGING MFS VIT CORE EQUITY EMERGING GROWTH MFS VIT TOTAL RETURN MFS VIT SERVICE CLASS GROWTH SERVICE CLASS TOTAL RETURN SERVICE CLASS UTILITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $6,233,909 $ 9,143,587 $ 10,354,668 $ 46,128,539 $ 241,264,525 $33,244,903 Changes From Operations: - Net investment income (loss) (92,898) (117,539) (162,745) 414,362 1,107,472 214,082 - Net realized gain (loss) on investments 157,722 (1,031,211) 369,545 2,555,874 9,788,670 3,169,362 - Net change in unrealized appreciation or depreciation on investments 634,794 1,623,120 374,148 1,126,383 16,558,841 5,110,931 ---------- ----------- ------------ ------------ ------------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 699,618 474,370 580,948 4,096,619 27,454,983 8,494,375 Changes From Unit Transactions: Accumulation Units: - Contract purchases 143,121 50,330 244,138 117,796 62,107,288 239,184 - Contract withdrawals and transfers to annuity reserves (331,639) (1,420,586) (684,592) (7,574,500) (19,929,816) (7,205,531) - Contract transfers (280,962) (727,232) (407,511) (2,339,567) 11,845,787 (467,480) ---------- ----------- ------------ ------------ ------------- ----------- (469,480) (2,097,488) (847,965) (9,796,271) 54,023,259 (7,433,827) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- 49,246 -- - Annuity Payments -- (5,247) (4,106) (6,883) (28,419) (7,070) - Receipt (reimbursement) of mortality guarantee adjustments -- 2,281 26 816 170 2,302 ---------- ----------- ------------ ------------ ------------- ----------- -- (2,966) (4,080) (6,067) 20,997 (4,768) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (469,480) (2,100,454) (852,045) (9,802,338) 54,044,256 (7,438,595) ---------- ----------- ------------ ------------ ------------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 230,138 (1,626,084) (271,097) (5,705,719) 81,499,239 1,055,780 ---------- ----------- ------------ ------------ ------------- ----------- NET ASSETS AT DECEMBER 31, 2006 6,464,047 7,517,503 10,083,571 40,422,820 322,763,764 34,300,683 Changes From Operations: - Net investment income (loss) (99,789) (101,033) (173,687) 453,109 2,179,089 (141,284) - Net realized gain (loss) on investments 390,630 (470,617) 991,847 2,653,151 12,458,039 6,254,135 - Net change in unrealized appreciation or depreciation on investments 281,063 1,833,003 996,122 (1,948,416) (7,457,600) 1,895,815 ---------- ----------- ------------ ------------ ------------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 571,904 1,261,353 1,814,282 1,157,844 7,179,528 8,008,666 Changes From Unit Transactions: Accumulation Units: - Contract purchases 70,960 28,133 169,801 513,856 44,289,076 169,134 - Contract withdrawals and transfers to annuity reserves (610,399) (1,411,659) (1,195,660) (7,425,686) (26,742,541) (8,619,160) - Contract transfers (421,536) (619,503) (44,744) (3,413,223) (797,851) (1,123,251) ---------- ----------- ------------ ------------ ------------- ----------- (960,975) (2,003,029) (1,070,603) (10,325,053) 16,748,684 (9,573,277) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- 105,457 - Annuity Payments -- (3,806) (4,582) (23,603) (30,148) (38,027) - Receipt (reimbursement) of mortality guarantee adjustments -- 2,604 (3) (300) 455 2,071 ---------- ----------- ------------ ------------ ------------- ----------- -- (1,202) (4,585) (23,903) (29,693) 69,501 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (960,975) (2,004,231) (1,075,188) (10,348,956) 16,718,991 (9,503,776) ---------- ----------- ------------ ------------ ------------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (389,071) (742,878) 739,094 (9,191,112) 23,898,519 (1,495,110) ---------- ----------- ------------ ------------ ------------- ----------- NET ASSETS AT DECEMBER 31, 2007 $6,074,976 $ 6,774,625 $ 10,822,665 $ 31,231,708 $ 346,662,283 $32,805,573 ========== =========== ============ ============ ============= =========== MFS VIT NB AMT UTILITIES MID-CAP NB AMT SERVICE CLASS GROWTH REGENCY SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 77,763,713 $ 71,406,285 $114,789,057 Changes From Operations: - Net investment income (loss) 78,843 (1,326,833) (1,489,223) - Net realized gain (loss) on investments 6,739,800 2,588,070 9,359,182 - Net change in unrealized appreciation or depreciation on investments 20,314,073 8,308,368 3,357,792 ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 27,132,716 9,569,605 11,227,751 Changes From Unit Transactions: Accumulation Units: - Contract purchases 27,805,650 16,777,407 17,980,452 - Contract withdrawals and transfers to annuity reserves (7,764,367) (5,382,919) (7,787,595) - Contract transfers 12,625,324 (2,117,228) (3,584,053) ------------ ------------ ------------ 32,666,607 9,277,260 6,608,804 Annuity Reserves: - Transfer from accumulation units and between subaccounts 25,483 11,777 12,581 - Annuity Payments (9,887) (8,636) (8,889) - Receipt (reimbursement) of mortality guarantee adjustments 55 47 81 ------------ ------------ ------------ 15,651 3,188 3,773 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 32,682,258 9,280,448 6,612,577 ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 59,814,974 18,850,053 17,840,328 ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2006 137,578,687 90,256,338 132,629,385 Changes From Operations: - Net investment income (loss) (1,877,734) (1,800,592) (1,615,516) - Net realized gain (loss) on investments 19,199,561 6,430,815 7,520,286 - Net change in unrealized appreciation or depreciation on investments 25,228,694 14,951,317 (3,699,995) ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 42,550,521 19,581,540 2,204,775 Changes From Unit Transactions: Accumulation Units: - Contract purchases 60,599,558 10,178,399 7,846,684 - Contract withdrawals and transfers to annuity reserves (12,952,541) (8,151,499) (10,376,473) - Contract transfers 38,727,874 2,769,649 (10,129,046) ------------ ------------ ------------ 86,374,891 4,796,549 (12,658,835) Annuity Reserves: - Transfer from accumulation units and between subaccounts 9,743 -- -- - Annuity Payments (14,954) (11,442) (9,749) - Receipt (reimbursement) of mortality guarantee adjustments 246 708 22 ------------ ------------ ------------ (4,965) (10,734) (9,727) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 86,369,926 4,785,815 (12,668,562) ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 128,920,447 24,367,355 (10,463,787) ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 $266,499,134 $114,623,693 $122,165,598 ============ ============ ============
N-25
PUTNAM VT PUTNAM VT GROWTH & HEALTH INCOME SCIENCES CLASS IB CLASS IB SUBACCOUNT SUBACCOUNT ----------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2006 $ 7,329,537 $10,374,349 Changes From Operations: - Net investment income (loss) (3,921) (101,703) - Net realized gain (loss) on investments 455,958 489,239 - Net change in unrealized appreciation or depreciation on investments 511,375 (328,340) ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 963,412 59,196 Changes From Unit Transactions: Accumulation Units: - Contract purchases 77,413 125,720 - Contract withdrawals and transfers to annuity reserves (589,492) (714,754) - Contract transfers (422,114) (2,400,896) ----------- ----------- (934,193) (2,989,930) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (1,587) -- - Receipt (reimbursement) of mortality guarantee adjustments 5 -- ----------- ----------- (1,582) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (935,775) (2,989,930) ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 27,637 (2,930,734) ----------- ----------- NET ASSETS AT DECEMBER 31, 2006 7,357,174 7,443,615 Changes From Operations: - Net investment income (loss) (18,335) (48,697) - Net realized gain (loss) on investments 1,291,374 457,374 - Net change in unrealized appreciation or depreciation on investments (1,727,719) (477,929) ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (454,680) (69,252) Changes From Unit Transactions: Accumulation Units: - Contract purchases 51,136 97,431 - Contract withdrawals and transfers to annuity reserves (983,210) (1,163,329) - Contract transfers (295,126) (992,618) ----------- ----------- (1,227,200) (2,058,516) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- - Annuity Payments (1,795) -- - Receipt (reimbursement) of mortality guarantee adjustments (1) -- ----------- ----------- (1,796) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,228,996) (2,058,516) ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,683,676) (2,127,768) ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 $ 5,673,498 $ 5,315,847 =========== ===========
See accompanying notes. N-26 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 1. ACCOUNTING POLICIES AND ACCOUNT INFORMATION THE VARIABLE ACCOUNT: Lincoln Life Variable Annuity Account N (Variable Account) is a segregated investment account of The Lincoln National Life Insurance Company (the Company) and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a unit investment trust. 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 thirteen products. The available products are 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 Assurance A Share Lincoln ChoicePlus Assurance B Share Lincoln ChoicePlus Assurance Bonus Lincoln ChoicePlus Assurance C Share Lincoln ChoicePlus Assurance L Share Lincoln ChoicePlus Design The assets of the Variable Account are owned by the Company. The portion of the Variable Account's assets supporting the annuity contracts may not be used to satisfy liabilities arising from any other business of the Company. During 2007, Jefferson Pilot Life Insurance Company and Jefferson Pilot Financial Insurance Company merged into The Lincoln National Life Insurance Company. The merger did not affect the assets and liabilities of Lincoln Life Variable Annuity Account N. BASIS OF PRESENTATION: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for unit investment trusts. In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 "Fair Value Measurements" (Statement 157). Statement 157 establishes a framework for measuring fair value in U.S. generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have a material impact on the amounts reported in the financial statements. INVESTMENTS: The assets of the Variable Account are divided into variable subaccounts, each of which may be invested in shares of one hundred one available mutual funds (the Funds) of thirteen diversified open-end management investment companies, each Fund with its own investment objective. The Funds are: AIM Variable Insurance Funds (AIM V.I.): AIM V.I. Capital Appreciation Fund AIM V.I. Capital Appreciation Class II Fund AIM V.I. Core Equity Fund AIM V.I. Core Equity Class II Fund AIM V.I. International Growth Fund AIM V.I. International Growth Class II Fund AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF): ABVPSF Global Technology Class B Fund ABVPSF Growth and Income Class B Fund ABVPSF International Value Class B Fund ABVPSF Large Cap Growth Class B Fund ABVPSF Small/Mid Cap Value Class B Fund American Century Variable Portfolios, Inc. (American Century VP): American Century VP Inflation Protection (Class 2) American Funds Insurance Series (American Funds): American Funds Global Growth Class 2 Fund American Funds Global Small Capitalization Class 2 Fund American Funds Growth Class 2 Fund American Funds Growth-Income Class 2 Fund American Funds International Class 2 Fund Delaware VIP Trust (Delaware VIPT)*: Delaware VIPT Capital Reserves Service Class Series Delaware VIPT Diversified Income Service Class Series Delaware VIPT Emerging Markets Service Class Series Delaware VIPT High Yield Series Delaware VIPT High Yield Service Class Series Delaware VIPT International Value Equity Series Delaware VIPT REIT Series Delaware VIPT REIT Service Class Series Delaware VIPT Small Cap Value Series Delaware VIPT Small Cap Value Service Class Series Delaware VIPT Trend Series Delaware VIPT Trend Service Class Series Delaware VIPT U.S. Growth Service Class Series Delaware VIPT Value Series Delaware VIPT Value Service Class Series DWS Scudder VIP Funds (DWS VIP): DWS VIP Equity 500 Index Fund DWS VIP Equity 500 Index Service Class Fund DWS VIP Small Cap Index Fund DWS VIP Small Cap Index Service Class Fund Fidelity Variable Insurance Products Fund (Fidelity VIP): Fidelity VIP Contrafund Service Class 2 Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Equity-Income Service Class 2 Portfolio Fidelity VIP Growth Portfolio Fidelity VIP Growth Service Class 2 Portfolio Fidelity VIP Mid Cap Service Class 2 Portfolio Fidelity VIP Overseas Portfolio Fidelity VIP Overseas Service Class 2 Portfolio N-27 1. ACCOUNTING POLICIES AND ACCOUNT INFORMATION (CONTINUED) Franklin Templeton Variable Insurance Products Trust (FTVIPT): FTVIPT Franklin Income Securities Class 2 Fund FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 Fund FTVIPT Mutual Shares Securities Class 2 Fund FTVIPT Templeton Global Income Securities Class 2 Fund FTVIPT Templeton Growth Securities Class 2 Fund Janus Aspen Series: Janus Aspen Series Balanced Service Shares Portfolio Janus Aspen Series Mid Cap Growth Service Shares Portfolio Janus Aspen Series Worldwide Growth Service Shares Portfolio Lincoln Variable Insurance Products Trust (Lincoln VIPT)*: Lincoln VIPT Baron Growth Opportunities Service Class Fund Lincoln VIPT Capital Growth Service Class Fund Lincoln VIPT Cohen & Steers Global Real Estate Service Class Fund Lincoln VIPT Delaware Bond Fund Lincoln VIPT Delaware Bond Service Class Fund Lincoln VIPT Delaware Growth and Income Service Class Fund Lincoln VIPT Delaware Social Awareness Fund Lincoln VIPT Delaware Social Awareness Service Class Fund Lincoln VIPT Delaware Special Opportunities Service Class Fund Lincoln VIPT FI Equity-Income Service Class Fund Lincoln VIPT Janus Capital Appreciation Fund Lincoln VIPT Janus Capital Appreciation Service Class Fund Lincoln VIPT Marsico International Growth Service Class Fund Lincoln VIPT MFS Value Service Class Fund Lincoln VIPT Mid-Cap Growth Service Class Fund Lincoln VIPT Mid-Cap Value Service Class Fund Lincoln VIPT Mondrian International Value Fund Lincoln VIPT Mondrian International Value Service Class Fund Lincoln VIPT Money Market Fund Lincoln VIPT Money Market Service Class Fund Lincoln VIPT S&P 500 Index Fund Lincoln VIPT S&P 500 Index Service Class Fund Lincoln VIPT Small-Cap Index Service Class Fund Lincoln VIPT T. Rowe Price Growth Stock Service Class Fund Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Fund Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class Fund Lincoln VIPT Templeton Growth Service Class Fund Lincoln VIPT UBS Global Asset Allocation Fund Lincoln VIPT UBS Global Asset Allocation Service Class Fund Lincoln VIPT Value Opportunities Service Class Fund Lincoln VIPT Wilshire 2010 Profile Service Class Fund Lincoln VIPT Wilshire 2020 Profile Service Class Fund Lincoln VIPT Wilshire 2030 Profile Service Class Fund Lincoln VIPT Wilshire 2040 Profile Service Class Fund Lincoln VIPT Wilshire Aggressive Profile Service Class Fund Lincoln VIPT Wilshire Conservative Profile Service Class Fund Lincoln VIPT Wilshire Moderate Profile Service Class Fund Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class Fund MFS Variable Insurance Trust (MFS VIT): MFS VIT Core Equity Service Class Series MFS VIT Emerging Growth Series MFS VIT Emerging Growth Service Class Series MFS VIT Total Return Series MFS VIT Total Return Service Class Series MFS VIT Utilities Series MFS VIT Utilities Service Class Series Neuberger Berman Advisers Management Trust (NB AMT): NB AMT Mid-Cap Growth Portfolio NB AMT Regency Portfolio Putnam Variable Trust (Putnam VT): Putnam VT Growth & Income Class IB Fund Putnam VT Health Sciences Class IB Fund * Denotes an affiliate of The Lincoln National Life Insurance Company Investments in the Funds are stated at the closing net asset value per share on December 31, 2007, which approximates fair value. The difference between cost and fair value is reflected as unrealized appreciation or depreciation of investments. 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 N-28 1. ACCOUNTING POLICIES AND ACCOUNT INFORMATION (CONTINUED) federal income taxes are payable with respect to the Variable Account's net investment income and the net realized gain on investments. ANNUITY RESERVES: Reserves on contracts not involving life contingencies are calculated using an assumed investment rate of 4%. Reserves on contracts involving life contingencies are calculated using a modification of the 1971 Individual Annuitant Mortality Table and an assumed investment rate of 4%. INVESTMENT FUND CHANGES: During 2006, the AIM V.I Core Equity Fund, the AIM V.I Core Equity Class II Fund, the AIM V.I Capital Appreciation Fund, the AIM V.I Capital Appreciation Class II Fund, the ABVPSF International Value Class B Fund, the Baron Capital Asset Fund, the FTVIPT Income Securities Class 2 Fund and the FTVIPT Mutual Shares Securities Class 2 Fund became available as investment options for Account Contract owners. Accordingly, the 2006 statement 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, 2006. Also during 2006, the Scudder Investments VIT Funds (Scudder VIT) family of funds changed its name to DWS Scudder VIP Funds (DWS VIP). During 2006, the AIM V.I. Premier Equity Fund, the AIM V.I. Premier Equity Class II Fund, the AIM V.I. Growth Fund, and the AIM V.I. Growth Class II Fund ceased to be available as investment options to Variable Account Contract owners. During 2006, the AIM V.I. Premier Equity Fund merged into the AIM V.I Core Equity Fund, the AIM V.I. Premier Equity Class II Fund merged into the AIM V.I Core Equity Class II Fund, AIM V.I. Growth Fund merged into the AIM V.I Capital Appreciation Fund, and the AIM V.I. Growth Class II Fund merged into the AIM V.I Capital Appreciation Class II Fund. During 2007, the Lincoln VIPT Capital Growth Service Class Fund, the Lincoln VIPT Cohen & Steers Global Real Estate Service Class Fund, the Lincoln VIPT Delaware Special Opportunities Service Class Fund, the Lincoln VIPT Marsico International Growth Service Class Fund, the Lincoln VIPT MFS Value Service Class Fund, the Lincoln VIPT Mid-Cap Growth Service Class Fund, the Lincoln VIPT Mid-Cap Value Service Class Fund, the Lincoln VIPT S&P 500 Index Fund, the Lincoln VIPT S&P 500 Index Service Class Fund, the Lincoln VIPT Small-Cap Index Service Class Fund, the Lincoln VIPT T. Rowe Price Growth Stock Service Class Fund, the Lincoln VIPT Templeton Growth Service Class Fund, the Lincoln VIPT Value Opportunities Service Class Fund, the Lincoln VIPT Wilshire 2010 Profile Service Class Fund, the Lincoln VIPT Wilshire 2020 Profile Service Class Fund, the Lincoln VIPT Wilshire 2030 Profile Service Class Fund and the Lincoln VIPT Wilshire 2040 Profile Service Class Fund became available as investment options for Account Contract owners. Accordingly, the 2007 statement of operations and 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, 2007. Also during 2007 the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME ---------------------------------------------------------------------------------------------------------------------------------- Baron Capital Asset Fund Lincoln VIPT Baron Growth Opportunities Service Class Fund Lincoln VIPT Bond Fund Lincoln VIPT Delaware Bond Fund Lincoln VIPT Bond Service Class Fund Lincoln VIPT Delaware Bond Service Class Fund Lincoln VIPT Growth and Income Service Class Fund Lincoln VIPT Delaware Growth and Income Service Class Fund Lincoln VIPT Social Awareness Fund Lincoln VIPT Delaware Social Awareness Fund Lincoln VIPT Social Awareness Service Class Fund Lincoln VIPT Delaware Social Awareness Service Class Fund Lincoln VIPT Special Opportunities Service Class Fund Lincoln VIPT Delaware Special Opportunities Service Class Fund Lincoln VIPT Equity-Income Service Class Fund Lincoln VIPT FI Equity-Income Service Class Fund Lincoln VIPT Capital Appreciation Fund Lincoln VIPT Janus Capital Appreciation Fund Lincoln VIPT Capital Appreciation Service Class Fund Lincoln VIPT Janus Capital Appreciation Service Class Fund Lincoln VIPT International Fund Lincoln VIPT Mondrian International Value Fund Lincoln VIPT International Service Class Fund Lincoln VIPT Mondrian International Value Service Class Fund Lincoln VIPT Aggressive Growth Fund Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Fund Lincoln VIPT Aggressive Growth Service Class Fund Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class Fund Lincoln VIPT Global Asset Allocation Fund Lincoln VIPT UBS Global Asset Allocation Fund Lincoln VIPT Global Asset Allocation Service Class Fund Lincoln VIPT UBS Global Asset Allocation Service Class Fund Lincoln VIPT Aggressive Profile Service Class Fund Lincoln VIPT Wilshire Aggressive Profile Service Class Fund Lincoln VIPT Conservative Profile Service Class Fund Lincoln VIPT Wilshire Conservative Profile Service Class Fund Lincoln VIPT Moderate Profile Service Class Fund Lincoln VIPT Wilshire Moderate Profile Service Class Fund Lincoln VIPT Moderately Aggressive Profile Service Class Fund Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class Fund MFS VIT Capital Opportunities Service Class Fund MFS VIT Core Equity Service Class Fund
N-29 1. ACCOUNTING POLICIES AND ACCOUNT INFORMATION (CONTINUED) Also during 2007, the Lincoln VIPT Core Fund, the Lincoln VIPT Core Service Class Fund, the Lincoln VIPT Growth Fund, the Lincoln VIPT Growth Service Class Fund and the Lincoln VIPT Growth Opportunities Fund ceased to be available as investment options to Variable Account Contract owners. During 2007, the Lincoln Variable Insurance Products Trust (Lincoln VIPT) acquired the Baron Capital Asset Fund and renamed the fund Lincoln VIPT Baron Growth Opportunities Fund. This fund acquisition had no impact on the units outstanding or the unit prices to the Variable Account Contract owner. 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 thirteen products: - Lincoln ChoicePlus at a daily rate of .0038356% to .0064384% (1.40% to 2.35% on an annual basis) - Lincoln ChoicePlus Access at a daily rate of .0038356% to .0071233% (1.40% to 2.60% on an annual basis) - Lincoln ChoicePlus Bonus at a daily rate of .0038356% to .0069863% (1.40% to 2.55% on an annual basis) - Lincoln ChoicePlus II at a daily rate of .0035616% to .0064384% (1.30% to 2.35% on an annual basis) - Lincoln ChoicePlus II Access at a daily rate of .0038356% to .0071233% (1.40% to 2.60% on an annual basis) - Lincoln ChoicePlus II Advance at a daily rate of .0038356% to .0072603% (1.40% to 2.65% on an annual basis) - Lincoln ChoicePlus II Bonus at a daily rate of .0038356% to .0069863% (1.40% to 2.55% on an annual basis) - Lincoln ChoicePlus Assurance A Share at a daily rate of .0016438% to .0049315% (60% to 1.80% on an annual basis) - Lincoln ChoicePlus Assurance B Share at a daily rate of .0034247% to .0067123% (1.25% to 2.45% on an annual basis) - Lincoln ChoicePlus Assurance Bonus at a daily rate of .0038356% to .0073973% (1.40% to 2.70% on an annual basis) - Lincoln ChoicePlus Assurance C Share at a daily rate of .0038356% to .0078082% (1.40% to 2.85% on an annual basis) - Lincoln ChoicePlus Assurance L Share at a daily rate of .0038356% to .0076712% (1.40% to 2.80% on an annual basis) - Lincoln ChoicePlus Design at a daily rate of .0030137% to .0075342% (1.10% to 2.75% on an annual basis) In addition, $9,724,817 and $8,076,249 was retained by the Company for contract charges and surrender charges during 2007 and 2006, respectively. The Company is responsible for all sales, general and administrative expenses applicable to the Variable Account. 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, 2007 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) ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. CAPITAL APPRECIATION 2007 1.40% 2.35% $ 5.41 $16.98 996,399 $ 7,865,602 9.63% 10.46% 0.00% 2006 4/28/06 1.40% 2.55% 4.92 15.49 1,300,177 9,411,659 -1.98% -1.22% 0.06% AIM V.I. CAPITAL APPRECIATION CLASS II 2007 1.30% 2.35% 12.29 16.57 348,396 4,499,119 9.14% 10.29% 0.00% 2006 4/28/06 1.30% 2.35% 11.22 15.51 417,948 4,908,825 -2.02% -1.33% 0.00% AIM V.I. CORE EQUITY 2007 1.40% 2.35% 7.94 16.21 2,005,117 20,947,610 5.61% 6.61% 1.01% 2006 4/28/06 1.40% 2.35% 7.48 15.39 2,593,323 25,607,172 7.45% 8.14% 0.53% AIM V.I. CORE EQUITY CLASS II 2007 1.30% 2.55% 12.04 15.84 519,086 6,677,207 5.37% 6.49% 0.84% 2006 4/28/06 1.30% 2.35% 11.38 15.04 688,914 8,237,493 7.28% 8.04% 0.53% AIM V.I. INTERNATIONAL GROWTH 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% 2005 1.40% 2.15% 8.94 18.69 932,673 11,255,535 15.42% 16.29% 0.61% 2004 1.40% 2.15% 7.72 16.17 1,099,843 11,434,378 21.49% 22.28% 0.62% 2003 1.40% 2.05% 6.34 11.12 1,314,993 11,187,573 26.63% 27.27% 0.49%
N-30
3. FINANCIAL HIGHLIGHTS (CONTINUED) 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) ----------------------------------------------------------------------------------------------------------------------------------- AIM V.I. INTERNATIONAL GROWTH CLASS II 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% 2005 1.30% 2.45% 15.44 18.50 402,262 6,449,458 14.91% 16.18% 0.58% 2004 1.30% 2.40% 13.38 16.05 425,659 5,860,514 21.13% 22.11% 0.59% 2003 1.30% 2.10% 11.03 11.75 311,193 3,506,721 26.12% 26.81% 0.25% ABVPSF GLOBAL TECHNOLOGY CLASS B 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% 2005 1.25% 2.65% 4.11 16.19 2,865,931 15,883,898 1.03% 2.31% 0.00% 2004 1.30% 2.55% 4.03 15.94 3,240,821 16,596,090 2.95% 3.73% 0.00% 2003 1.30% 2.05% 3.90 10.45 3,521,618 16,241,721 41.02% 41.79% 0.00% ABVPSF GROWTH AND INCOME CLASS B 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% 2005 1.25% 2.80% 11.45 15.58 16,191,191 206,322,630 1.86% 3.25% 1.28% 2004 1.30% 2.65% 11.15 15.17 13,908,523 172,477,094 8.31% 9.79% 0.72% 2003 1.30% 2.65% 10.21 12.32 9,896,069 111,968,167 29.63% 30.35% 0.79% ABVPSF INTERNATIONAL VALUE CLASS B 2007 1.10% 2.85% 11.78 12.38 13,859,734 170,225,318 2.63% 4.38% 0.99% 2006 6/6/06 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 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% 2005 1.30% 2.65% 6.19 14.26 4,848,291 38,794,594 11.96% 13.36% 0.00% 2004 1.30% 2.55% 5.49 12.68 4,906,004 34,130,631 6.04% 6.95% 0.00% 2003 1.30% 2.15% 5.16 9.89 4,506,741 28,289,885 20.99% 21.65% 0.00% ABVPSF SMALL/MID CAP VALUE CLASS B 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% 2005 1.25% 2.80% 15.89 19.45 3,060,293 53,499,928 3.84% 5.25% 0.56% 2004 1.30% 2.65% 15.40 18.62 2,055,473 35,366,991 16.31% 17.54% 0.07% 2003 1.30% 2.35% 15.06 15.24 967,864 14,514,469 38.17% 38.94% 0.42% AMERICAN CENTURY VP INFLATION PROTECTION CLASS 2 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% 2005 1.25% 2.85% 10.23 10.45 9,646,622 100,042,811 -1.10% 0.25% 4.69% 2004 5/24/04 1.30% 2.65% 10.34 10.43 3,079,182 32,042,442 0.81% 5.20% 2.06% AMERICAN FUNDS GLOBAL GROWTH CLASS 2 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% 2005 1.25% 2.80% 12.44 12.71 4,729,847 59,479,022 11.09% 12.60% 0.64% 2004 5/24/04 1.30% 2.65% 11.20 11.29 1,552,710 17,496,155 9.02% 12.95% 0.09% AMERICAN FUNDS GLOBAL SMALL CAPITALIZATION CLASS 2 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% 2005 1.25% 2.80% 10.59 23.26 9,624,135 146,086,924 22.08% 23.73% 0.97% 2004 1.30% 2.65% 8.57 18.90 7,448,131 86,948,362 17.84% 19.32% 0.00% 2003 1.30% 2.55% 7.19 15.07 3,883,351 35,447,235 50.57% 51.40% 0.55% AMERICAN FUNDS GROWTH CLASS 2 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% 2005 1.25% 2.85% 9.06 17.97 85,725,228 1,027,944,645 13.15% 14.69% 0.76% 2004 1.30% 2.65% 7.93 15.76 68,042,386 685,173,120 9.56% 11.04% 0.21% 2003 1.30% 2.65% 7.17 12.34 41,130,557 348,311,333 34.17% 34.91% 0.15% AMERICAN FUNDS GROWTH-INCOME CLASS 2 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% 2005 1.25% 2.85% 12.35 15.91 87,562,380 1,158,679,589 3.06% 4.47% 1.46% 2004 1.30% 2.65% 11.88 15.31 68,627,474 873,734,564 7.49% 8.95% 1.08% 2003 1.30% 2.65% 10.96 11.99 37,515,991 436,956,266 29.87% 30.59% 1.40%
N-31 3. FINANCIAL HIGHLIGHTS (CONTINUED)
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 INTERNATIONAL CLASS 2 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% 2005 1.25% 2.85% 8.51 20.13 33,907,194 413,015,292 18.33% 19.93% 1.71% 2004 1.30% 2.65% 7.10 16.88 26,363,351 254,014,200 16.20% 17.78% 1.64% 2003 1.30% 2.65% 6.04 12.07 16,087,085 117,109,450 32.25% 32.98% 1.75% DELAWARE VIPT CAPITAL RESERVES SERVICE CLASS 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% 2005 6/6/05 1.25% 2.50% 9.87 9.97 417,378 4,142,143 -0.75% 0.75% 2.23% DELAWARE VIPT DIVERSIFIED INCOME SERVICE CLASS 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% 2005 1.25% 2.85% 10.46 10.69 11,110,785 117,668,130 -3.19% -1.87% 0.59% 2004 5/24/04 1.30% 2.65% 10.81 10.89 3,955,275 43,006,321 0.10% 8.88% 0.00% DELAWARE VIPT EMERGING MARKETS SERVICE CLASS 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% 2005 1.25% 2.80% 16.74 32.08 3,755,710 63,653,626 24.04% 25.47% 0.07% 2004 5/26/04 1.30% 2.45% 13.50 25.71 690,972 10,347,465 16.16% 34.46% 0.00% DELAWARE VIPT HIGH YIELD 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% 2005 1.40% 2.15% 10.96 15.84 1,361,372 15,016,454 1.38% 2.15% 7.55% 2004 1.40% 2.15% 10.73 14.75 1,781,940 19,188,007 12.38% 12.66% 6.68% 2003 1.40% 1.65% 9.53 13.12 2,496,030 23,797,308 26.64% 26.96% 6.27% DELAWARE VIPT HIGH YIELD SERVICE CLASS 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% 2005 1.25% 2.85% 12.05 15.91 11,482,026 151,343,314 0.64% 2.01% 6.00% 2004 1.30% 2.65% 11.87 15.68 9,299,746 121,685,217 11.04% 12.55% 4.87% 2003 1.30% 2.65% 10.60 13.11 5,206,710 60,480,694 26.13% 26.82% 4.82% DELAWARE VIPT INTERNATIONAL VALUE EQUITY 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% 2005 1.40% 1.65% 16.48 18.13 170,735 2,813,892 11.03% 11.31% 1.40% 2004 1.40% 1.65% 14.80 16.33 149,061 2,207,313 19.80% 20.10% 2.70% 2003 1.40% 1.65% 12.32 13.63 175,704 2,166,408 41.09% 41.45% 2.39% DELAWARE VIPT REIT 2007 1.40% 2.35% 20.51 27.95 497,495 13,641,050 -15.94% -15.14% 1.51% 2006 1.40% 2.35% 24.60 32.93 745,569 24,391,247 29.81% 30.79% 1.93% 2005 1.40% 2.15% 19.78 25.18 917,113 22,971,856 5.42% 5.68% 2.04% 2004 1.40% 1.65% 18.77 23.83 1,227,905 29,150,435 29.23% 29.55% 2.11% 2003 1.40% 1.65% 14.52 18.39 1,279,047 23,460,839 31.83% 32.16% 2.55% DELAWARE VIPT REIT SERVICE CLASS 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% 2005 1.25% 2.80% 16.28 21.23 8,802,972 161,758,580 4.06% 5.48% 1.55% 2004 1.30% 2.65% 15.57 20.15 6,905,964 126,052,112 27.79% 29.39% 1.53% 2003 1.30% 2.55% 13.96 15.45 3,514,224 51,191,530 31.15% 31.87% 2.01% DELAWARE VIPT SMALL CAP VALUE 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% 2005 1.40% 2.35% 18.37 21.30 1,518,277 32,285,750 7.63% 7.90% 0.38% 2004 1.40% 1.65% 17.06 19.75 1,744,483 34,401,846 19.49% 19.79% 0.20% 2003 1.40% 1.65% 14.27 16.48 1,911,460 31,463,013 39.66% 40.01% 0.38% DELAWARE VIPT SMALL CAP VALUE SERVICE CLASS 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% 2005 1.25% 2.80% 16.59 21.80 10,633,977 196,817,038 6.29% 7.74% 0.14% 2004 1.30% 2.65% 15.54 20.25 7,036,912 128,023,938 18.35% 19.60% 0.02% 2003 1.30% 2.35% 14.13 16.81 4,064,442 63,655,137 38.93% 39.70% 0.20%
N-32 3. FINANCIAL HIGHLIGHTS (CONTINUED)
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 VIPT TREND 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% 2005 1.40% 2.15% 13.73 17.05 1,802,451 30,707,868 4.13% 4.39% 0.00% 2004 1.40% 1.65% 13.18 16.33 2,361,636 38,545,101 10.76% 11.04% 0.00% 2003 1.40% 1.65% 11.89 14.71 2,681,212 39,417,437 32.89% 33.22% 0.00% DELAWARE VIPT TREND SERVICE CLASS 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% 2005 1.25% 2.80% 7.66 16.67 9,417,497 107,820,967 2.85% 4.25% 0.00% 2004 1.30% 2.65% 7.38 16.07 9,480,716 101,229,754 9.38% 10.87% 0.00% 2003 1.30% 2.65% 6.69 13.41 5,631,974 50,750,853 32.19% 32.92% 0.00% DELAWARE VIPT U.S. GROWTH SERVICE CLASS 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% 2005 1.30% 2.65% 11.07 13.99 3,262,415 38,980,114 11.42% 12.93% 0.37% 2004 1.30% 2.65% 9.87 12.46 3,281,070 34,757,989 0.33% 1.70% 0.00% 2003 1.30% 2.65% 9.77 9.89 843,958 8,688,397 21.05% 21.65% 0.01% DELAWARE VIPT VALUE 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% 2005 1.40% 2.35% 11.98 13.22 1,470,232 17,634,039 4.29% 4.55% 1.68% 2004 1.40% 1.65% 11.46 11.80 1,499,570 17,193,059 13.11% 13.33% 1.57% 2003 1.40% 1.60% 10.11 10.43 1,637,137 16,557,842 26.26% 26.51% 1.66% DELAWARE VIPT VALUE SERVICE CLASS 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% 2005 1.25% 2.80% 12.08 15.69 5,229,714 68,306,425 3.03% 4.43% 1.08% 2004 1.30% 2.65% 11.63 15.10 2,352,748 30,019,065 12.21% 13.11% 1.08% 2003 1.30% 2.10% 10.34 11.23 1,125,234 12,558,833 25.63% 26.33% 1.50% DWS VIP EAFE EQUITY INDEX 2005 0.00% 0.00% -- -- -- -- 0.00% 0.00% 2.26% 2004 1.30% 2.05% 12.42 15.87 246,903 3,152,537 16.65% 17.53% 1.98% 2003 1.30% 2.05% 10.64 10.78 173,615 1,884,156 30.78% 31.50% 3.73% DWS VIP EAFE EQUITY INDEX SERVICE CLASS 2005 0.00% 0.00% -- -- -- -- 0.00% 0.00% 2.63% 2004 1.35% 2.65% 15.02 15.13 331,822 4,997,803 16.67% 17.19% 1.48% 2003 5/19/03 1.35% 1.80% 12.87 12.91 57,081 736,266 2.21% 29.04% 0.00% DWS VIP EQUITY 500 INDEX 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% 2005 1.30% 2.65% 8.31 14.53 6,723,314 68,258,386 1.94% 3.32% 1.59% 2004 1.30% 2.65% 8.08 14.21 8,211,104 80,888,455 8.35% 9.16% 1.13% 2003 1.30% 2.15% 7.44 10.89 9,046,305 81,353,452 25.68% 26.38% 1.05% DWS VIP EQUITY 500 INDEX SERVICE CLASS 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% 2005 1.25% 2.80% 13.06 13.51 2,267,108 29,602,529 1.69% 3.02% 1.20% 2004 1.35% 2.65% 13.01 13.12 1,345,572 17,589,539 8.29% 8.84% 0.66% 2003 6/10/03 1.35% 1.85% 12.01 12.05 299,786 3,609,750 7.46% 13.78% 0.00% DWS VIP SMALL CAP INDEX 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% 2005 1.30% 2.65% 15.99 18.82 1,000,507 16,288,832 1.53% 2.91% 0.61% 2004 1.30% 2.65% 15.64 18.39 1,037,248 16,459,324 15.25% 16.24% 0.41% 2003 1.30% 2.15% 13.54 13.71 854,106 11,685,822 43.60% 44.39% 0.29%
N-33 3. FINANCIAL HIGHLIGHTS (CONTINUED)
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ----------------------------------------------------------------------------------------------------------------------------------- DWS VIP SMALL CAP INDEX SERVICE CLASS 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% 2005 1.25% 2.80% 15.58 16.11 1,286,490 19,247,425 1.27% 2.60% 0.36% 2004 1.35% 2.65% 15.58 15.71 720,811 11,280,931 15.33% 15.90% 0.14% 2003 6/17/03 1.35% 1.85% 13.51 13.55 201,394 2,724,738 6.41% 25.08% 0.00% FIDELITY VIP CONTRAFUND SERVICE CLASS 2 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% 2005 1.25% 2.85% 15.70 16.14 15,529,612 242,707,287 13.61% 15.16% 0.09% 2004 1.30% 2.65% 13.75 14.09 7,227,480 100,567,575 12.15% 13.67% 0.13% 2003 1.30% 2.65% 12.18 12.33 2,337,942 28,698,100 25.72% 26.42% 0.15% FIDELITY VIP EQUITY-INCOME 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% 2005 1.40% 2.15% 12.35 15.54 2,187,704 28,049,062 3.62% 4.39% 1.71% 2004 1.40% 2.15% 11.86 12.76 2,706,796 33,239,120 9.70% 9.98% 1.56% 2003 1.40% 1.65% 10.80 11.63 2,927,303 32,683,551 28.20% 28.52% 1.84% FIDELITY VIP EQUITY-INCOME SERVICE CLASS 2 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% 2005 1.30% 2.65% 11.89 15.56 8,341,856 108,463,653 2.81% 4.21% 1.25% 2004 1.30% 2.65% 11.47 15.01 6,568,159 81,874,928 8.87% 9.80% 1.04% 2003 1.30% 2.15% 10.50 11.63 3,106,889 34,700,736 27.52% 28.22% 1.21% FIDELITY VIP GROWTH 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% 2005 1.40% 2.15% 9.83 14.01 1,972,496 19,401,348 3.55% 4.33% 0.54% 2004 1.40% 2.15% 9.42 10.76 2,565,999 24,186,820 1.69% 1.94% 0.28% 2003 1.40% 1.65% 9.24 10.58 3,068,551 28,369,256 30.68% 31.00% 0.28% FIDELITY VIP GROWTH SERVICE CLASS 2 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% 2005 1.25% 2.80% 6.30 13.94 4,476,186 40,555,043 2.74% 4.14% 0.21% 2004 1.30% 2.65% 6.08 13.47 2,742,063 22,976,078 0.73% 1.79% 0.11% 2003 1.30% 2.35% 6.01 10.59 1,693,187 12,346,857 29.98% 30.70% 0.10% FIDELITY VIP MID CAP SERVICE CLASS 2 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% 2005 6/6/05 1.25% 2.85% 11.49 11.59 2,530,388 29,265,696 3.06% 16.25% 0.00% FIDELITY VIP OVERSEAS 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% 2005 1.40% 2.15% 12.88 18.86 605,539 7,809,350 16.51% 17.39% 0.67% 2004 1.40% 2.15% 10.97 13.46 695,470 7,639,894 11.83% 12.06% 1.13% 2003 1.40% 1.60% 9.79 12.03 730,313 7,151,986 41.10% 41.38% 0.85% FIDELITY VIP OVERSEAS SERVICE CLASS 2 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% 2005 1.25% 2.80% 9.48 18.78 6,857,887 93,652,564 15.68% 17.25% 0.39% 2004 1.30% 2.65% 8.13 16.12 4,295,700 49,857,492 10.35% 11.85% 0.60% 2003 1.30% 2.65% 7.30 12.07 1,514,804 13,712,180 40.28% 41.05% 0.23% FTVIPT FRANKLIN INCOME SECURITIES CLASS 2 2007 1.10% 2.85% 11.00 11.53 30,630,668 350,024,275 0.84% 2.57% 3.16% 2006 6/2/06 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 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% 2005 1.25% 2.80% 6.81 17.49 6,525,815 59,207,077 2.05% 3.43% 0.00% 2004 1.30% 2.65% 6.59 17.00 5,959,921 49,278,519 9.16% 10.04% 0.00% 2003 1.30% 2.10% 6.00 11.67 4,577,044 31,394,991 34.60% 35.34% 0.00%
N-34 3. FINANCIAL HIGHLIGHTS (CONTINUED)
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ FTVIPT MUTUAL SHARES SECURITIES CLASS 2 2007 1.10% 2.85% $11.18 $11.54 19,477,930 $223,014,246 0.62% 2.30% 1.36% 2006 6/2/06 1.15% 2.80% 10.92 11.29 4,444,345 50,055,830 2.61% 15.87% 0.03% FTVIPT TEMPLETON GLOBAL INCOME SECURITIES CLASS 2 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% 2005 6/6/05 1.25% 2.80% 9.81 9.90 941,896 9,296,781 -1.70% 2.14% 0.11% FTVIPT TEMPLETON GROWTH SECURITIES CLASS 2 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% 2005 1.25% 2.80% 12.51 16.72 6,482,117 89,831,343 6.02% 7.46% 1.09% 2004 1.30% 2.65% 11.70 15.64 3,921,711 51,068,185 13.28% 14.53% 1.14% 2003 1.30% 2.40% 10.27 11.67 2,086,334 23,332,586 29.59% 30.30% 1.46% JANUS ASPEN SERIES BALANCED SERVICE SHARES 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% 2005 1.30% 2.65% 12.05 12.70 3,213,240 39,730,293 4.85% 6.27% 2.10% 2004 1.30% 2.65% 11.55 11.94 3,249,338 37,916,501 5.78% 6.89% 2.48% 2003 1.30% 2.35% 10.87 11.01 2,319,319 25,413,234 11.53% 12.14% 2.22% JANUS ASPEN SERIES MID CAP GROWTH SERVICE SHARES 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% 2005 1.30% 2.55% 13.76 17.48 1,051,727 15,318,067 9.32% 10.58% 0.00% 2004 1.30% 2.45% 12.52 15.82 766,944 10,085,016 17.68% 18.92% 0.00% 2003 1.30% 2.35% 10.60 10.73 280,391 3,054,564 32.16% 32.90% 0.00% JANUS ASPEN SERIES WORLDWIDE GROWTH SERVICE SHARES 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% 2005 1.30% 2.45% 10.78 13.15 388,509 4,361,767 3.01% 4.20% 1.18% 2004 1.30% 2.45% 10.42 12.62 471,875 5,086,972 2.51% 3.18% 0.94% 2003 1.30% 1.95% 10.16 10.29 431,027 4,472,346 21.29% 21.96% 0.93% LINCOLN VIPT BARON GROWTH OPPORTUNITIES SERVICE CLASS 2007 1.10% 2.85% 10.60 11.49 3,386,775 36,545,045 0.56% 2.24% 0.00% 2006 6/2/06 1.15% 2.80% 10.54 11.24 455,476 4,835,350 -1.18% 16.51% 0.00% LINCOLN VIPT CAPITAL GROWTH SERVICE CLASS 2007 6/5/07 1.10% 2.70% 10.63 10.74 121,888 1,304,575 -2.84% 9.70% 0.00% LINCOLN VIPT COHEN & STEERS GLOBAL REAL ESTATE SERVICE CLASS 2007 6/1/07 1.10% 2.85% 8.16 8.25 3,891,548 31,969,536 -18.94% -7.02% 0.59% LINCOLN VIPT CORE 2006 1.40% 1.60% 11.54 11.54 13,155 151,833 12.36% 12.36% 0.79% 2005 6/22/05 1.40% 1.40% 10.27 10.27 12,820 131,724 1.78% 1.78% 0.48% LINCOLN VIPT CORE SERVICE CLASS 2006 1.25% 2.80% 11.28 11.53 315,822 3,613,476 10.69% 12.25% 0.80% 2005 6/15/05 1.25% 2.65% 10.19 10.27 77,707 795,382 -1.39% 2.87% 0.37% LINCOLN VIPT DELAWARE BOND 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% 2005 1.30% 2.65% 10.53 13.69 27,381,711 353,491,303 -0.04% 1.31% 4.17% 2004 1.30% 2.65% 10.41 13.52 27,775,838 357,120,174 2.55% 3.94% 4.20% 2003 1.30% 2.65% 11.49 13.04 24,088,150 302,767,592 5.21% 5.79% 4.48% LINCOLN VIPT DELAWARE BOND SERVICE CLASS 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% 2005 1.25% 2.85% 10.15 10.50 31,108,567 322,429,439 -0.29% 1.01% 4.55% 2004 1.35% 2.65% 10.20 10.40 18,125,175 187,702,118 2.40% 3.64% 5.30% 2003 6/10/03 1.35% 2.55% 9.96 10.03 4,003,602 40,119,444 -2.05% 3.94% 5.95% LINCOLN VIPT DELAWARE GROWTH AND INCOME SERVICE CLASS 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% 2005 6/27/05 1.25% 2.50% 10.31 10.39 293,771 3,043,012 -1.56% 4.48% 1.65%
N-35 3. FINANCIAL HIGHLIGHTS (CONTINUED)
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) ------------------------------------------------------------------------------------------------------------------------------------ LINCOLN VIPT DELAWARE SOCIAL AWARENESS 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% 2005 1.30% 2.65% 13.79 16.43 2,050,578 29,133,651 9.10% 10.58% 0.88% 2004 1.30% 2.65% 12.55 14.84 1,843,970 23,648,064 9.76% 11.25% 1.18% 2003 1.30% 2.65% 11.35 12.03 928,999 10,713,994 29.33% 30.03% 1.43% LINCOLN VIPT DELAWARE SOCIAL AWARENESS SERVICE CLASS 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% 2005 1.25% 2.70% 14.52 15.02 4,949,634 71,884,144 8.83% 10.25% 0.73% 2004 1.35% 2.65% 13.36 13.62 2,972,005 40,329,641 9.59% 10.91% 1.06% 2003 6/11/03 1.35% 2.55% 12.19 12.28 566,516 6,949,285 1.19% 15.03% 1.09% LINCOLN VIPT DELAWARE SPECIAL OPPORTUNITIES SERVICE CLASS 2007 6/12/07 1.25% 2.65% 9.08 9.16 364,016 3,326,595 -9.80% 2.13% 0.99% LINCOLN VIPT FI EQUITY-INCOME SERVICE CLASS 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% 2005 6/8/05 1.25% 2.80% 10.40 10.50 456,634 4,781,806 -0.71% 4.99% 1.46% LINCOLN VIPT GROWTH 2006 1.40% 1.65% 11.31 11.36 10,237 116,096 4.44% 4.70% 0.00% 2005 6/15/05 1.40% 1.65% 10.83 10.85 4,701 50,956 5.10% 7.49% 0.00% LINCOLN VIPT GROWTH SERVICE CLASS 2006 1.15% 2.80% 11.07 11.34 679,394 7,655,941 2.99% 4.60% 0.00% 2005 6/7/05 1.25% 2.80% 10.75 10.84 226,285 2,448,531 -0.83% 8.92% 0.00% LINCOLN VIPT GROWTH OPPORTUNITIES SERVICE CLASS 2006 1.25% 2.80% 12.14 12.44 306,765 3,794,567 6.86% 8.53% 0.00% 2005 6/22/05 1.25% 2.80% 11.36 11.47 81,392 931,405 -2.62% 11.91% 0.00% LINCOLN VIPT JANUS CAPITAL APPRECIATION 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% 2005 1.30% 2.55% 11.40 13.69 327,886 3,928,463 1.68% 2.86% 0.28% 2004 1.30% 2.45% 11.17 12.71 285,703 3,309,738 3.30% 3.92% 0.00% 2003 1.30% 1.90% 10.82 10.94 159,833 1,745,889 29.97% 30.62% 0.00% LINCOLN VIPT JANUS CAPITAL APPRECIATION SERVICE CLASS 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% 2005 1.25% 2.65% 12.54 12.97 938,655 11,917,908 1.23% 2.55% 0.06% 2004 1.35% 2.65% 12.58 12.65 286,650 3,610,787 3.25% 3.61% 0.00% 2003 5/27/03 1.35% 1.70% 12.18 12.21 27,204 332,036 3.14% 18.14% 0.00% LINCOLN VIPT MARSICO INTERNATIONAL GROWTH SERVICE CLASS 2007 6/1/07 1.15% 2.85% 11.06 11.18 1,856,720 20,680,646 -4.83% 14.91% 0.98% LINCOLN VIPT MFS VALUE SERVICE CLASS 2007 6/5/07 1.15% 2.80% 9.64 9.74 1,167,639 11,323,296 -4.50% 5.67% 1.27% LINCOLN VIPT MID-CAP GROWTH SERVICE CLASS 2007 6/4/07 1.10% 2.80% 10.78 10.98 1,108,808 12,033,221 1.67% 9.71% 0.00% LINCOLN VIPT MID-CAP VALUE SERVICE CLASS 2007 6/5/07 1.10% 2.85% 8.57 8.66 1,598,830 13,800,842 -15.89% -7.65% 0.28% LINCOLN VIPT MONDRIAN INTERNATIONAL VALUE 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% 2005 1.30% 2.65% 17.38 19.05 2,893,309 51,322,467 9.60% 11.09% 2.34% 2004 1.30% 2.65% 15.68 17.26 2,002,599 32,129,421 17.77% 19.37% 1.43% 2003 1.30% 2.65% 13.39 13.55 764,656 10,309,269 38.89% 39.65% 2.63% LINCOLN VIPT MONDRIAN INTERNATIONAL VALUE SERVICE CLASS 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% 2005 1.25% 2.80% 16.76 17.34 6,748,458 110,575,192 9.32% 10.75% 2.14% 2004 1.35% 2.65% 15.35 15.66 3,752,542 58,521,613 17.61% 19.02% 1.25% 2003 6/9/03 1.35% 2.55% 13.06 13.15 783,969 10,298,202 5.07% 22.78% 2.75%
N-36 3. FINANCIAL HIGHLIGHTS (CONTINUED)
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) ------------------------------------------------------------------------------------------------------------------------------------ LINCOLN VIPT MONEY MARKET 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% 2005 1.30% 2.65% 9.61 11.13 10,227,809 106,859,269 0.10% 1.46% 2.75% 2004 1.30% 2.65% 9.60 10.98 9,664,617 100,481,381 -1.76% -0.42% 0.86% 2003 1.30% 2.65% 9.83 11.04 10,954,801 115,293,445 -1.26% -0.72% 0.70% LINCOLN VIPT MONEY MARKET SERVICE CLASS 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% 2005 1.25% 2.80% 9.65 9.98 7,980,149 79,247,808 -0.15% 1.16% 2.59% 2004 1.35% 2.65% 9.68 9.87 5,260,840 51,684,873 -1.91% -0.72% 0.74% 2003 6/11/03 1.35% 2.55% 9.86 9.94 1,070,114 10,621,014 -0.81% -0.04% 0.17% LINCOLN VIPT S&P 500 INDEX 2007 4/27/07 1.40% 1.60% 11.41 11.47 22,682 259,980 -1.64% -1.51% 1.11% LINCOLN VIPT S&P 500 INDEX SERVICE CLASS 2007 4/27/07 1.15% 2.80% 10.79 11.44 1,724,252 19,455,047 -3.29% 1.87% 1.23% LINCOLN VIPT SMALL-CAP INDEX SERVICE CLASS 2007 6/5/07 1.10% 2.80% 9.08 9.18 733,570 6,708,346 -10.14% -0.28% 0.79% LINCOLN VIPT T. ROWE PRICE GROWTH STOCK SERVICE CLASS 2007 6/1/07 1.25% 2.80% 9.85 9.94 678,322 6,726,069 -4.45% 2.43% 0.20% LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP GROWTH 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% 2005 1.30% 2.65% 13.24 16.08 133,778 1,832,318 6.94% 8.39% 0.00% 2004 1.30% 2.65% 12.31 13.87 97,110 1,220,901 11.53% 12.20% 0.00% 2003 1.30% 1.90% 11.04 11.16 91,201 1,017,546 30.14% 30.78% 0.00% LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP GROWTH SERVICE CLASS 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% 2005 1.25% 2.85% 14.59 14.92 398,136 5,537,906 7.16% 8.08% 0.00% 2004 1.35% 2.45% 13.73 13.81 122,805 1,688,413 11.46% 11.85% 0.00% 2003 6/17/03 1.35% 1.70% 12.32 12.34 33,165 408,896 2.44% 12.32% 0.00% LINCOLN VIPT TEMPLETON GROWTH SERVICE CLASS 2007 6/1/07 1.10% 2.80% 9.72 9.82 4,655,053 45,556,801 -4.11% 3.03% 2.40% LINCOLN VIPT UBS GLOBAL ASSET ALLOCATION 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% 2005 1.30% 2.55% 13.01 14.18 2,005,959 26,758,516 4.11% 5.42% 1.53% 2004 1.30% 2.55% 12.43 13.03 884,987 11,179,606 11.35% 12.08% 1.94% 2003 1.30% 1.95% 11.16 11.66 276,370 3,130,361 18.08% 18.73% 3.24% LINCOLN VIPT UBS GLOBAL ASSET ALLOCATION SERVICE CLASS 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% 2005 1.30% 2.80% 12.97 13.35 749,347 9,590,351 3.95% 5.10% 1.23% 2004 1.35% 2.45% 12.62 12.70 281,278 3,560,394 11.30% 11.75% 1.73% 2003 6/12/03 1.35% 1.75% 11.34 11.36 50,890 577,576 3.67% 9.91% 1.51% LINCOLN VIPT VALUE OPPORTUNITIES SERVICE CLASS 2007 6/1/07 1.15% 2.80% 9.29 9.38 87,108 814,572 -8.28% 2.76% 0.67% LINCOLN VIPT WILSHIRE 2010 PROFILE SERVICE CLASS 2007 7/11/07 1.15% 2.70% 10.37 10.47 122,994 1,280,748 0.02% 6.47% 0.41% LINCOLN VIPT WILSHIRE 2020 PROFILE SERVICE CLASS 2007 6/14/07 1.15% 2.70% 10.21 10.31 210,936 2,167,954 -1.81% 7.80% 0.36% LINCOLN VIPT WILSHIRE 2030 PROFILE SERVICE CLASS 2007 6/5/07 1.30% 2.70% 10.32 10.41 90,098 934,122 -2.40% 8.65% 0.40% LINCOLN VIPT WILSHIRE 2040 PROFILE SERVICE CLASS 2007 7/16/07 1.30% 2.70% 10.15 10.23 39,057 397,179 -2.92% 4.57% 1.08%
N-37 3. FINANCIAL HIGHLIGHTS (CONTINUED)
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) ------------------------------------------------------------------------------------------------------------------------------------ LINCOLN VIPT WILSHIRE AGGRESSIVE PROFILE SERVICE CLASS 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% 2005 6/6/05 1.25% 2.80% 10.81 10.91 1,642,617 17,873,575 -0.53% 8.81% 0.00% LINCOLN VIPT WILSHIRE CONSERVATIVE PROFILE SERVICE CLASS 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% 2005 6/6/05 1.25% 2.85% 10.18 10.27 2,979,092 30,523,299 -0.58% 2.86% 0.00% LINCOLN VIPT WILSHIRE MODERATE PROFILE SERVICE CLASS 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% 2005 6/6/05 1.25% 2.80% 10.40 10.49 9,467,285 99,075,704 1.01% 5.00% 0.00% LINCOLN VIPT WILSHIRE MODERATELY AGGRESSIVE PROFILE SERVICE CLASS 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% 2005 6/6/05 1.25% 2.80% 10.58 10.67 5,843,065 62,178,857 0.30% 6.79% 0.00% MFS VIT CORE EQUITY SERVICE CLASS 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% 2005 1.30% 2.65% 11.15 14.56 530,004 6,233,909 -1.19% 0.15% 0.54% 2004 1.30% 2.65% 11.20 14.62 450,863 5,312,294 9.92% 10.64% 0.17% 2003 1.30% 1.95% 10.19 10.32 315,701 3,303,141 24.66% 25.35% 0.00% MFS VIT EMERGING GROWTH 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% 2005 1.40% 2.15% 10.23 12.11 891,376 9,143,587 7.40% 7.67% 0.00% 2004 1.40% 1.65% 9.50 11.27 1,097,291 10,435,949 11.11% 11.39% 0.00% 2003 1.40% 1.65% 8.53 10.14 1,329,911 11,350,490 28.16% 28.42% 0.00% MFS VIT EMERGING GROWTH SERVICE CLASS 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% 2005 1.30% 2.45% 5.23 15.14 1,298,284 10,354,668 6.29% 7.52% 0.00% 2004 1.30% 2.45% 4.89 14.23 1,250,577 8,924,947 10.11% 11.26% 0.00% 2003 1.30% 2.35% 4.41 10.15 1,032,525 5,967,597 27.43% 28.13% 0.00% MFS VIT TOTAL RETURN 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% 2005 1.40% 2.35% 12.18 13.91 3,328,787 46,128,539 0.63% 1.39% 2.05% 2004 1.40% 2.15% 12.04 13.72 3,709,086 50,715,329 9.50% 9.77% 1.68% 2003 1.40% 1.65% 10.99 12.50 4,023,962 50,213,967 14.42% 14.71% 1.75% MFS VIT TOTAL RETURN SERVICE CLASS 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% 2005 1.25% 2.85% 11.96 13.00 19,428,172 241,264,525 -0.09% 1.27% 1.72% 2004 1.30% 2.65% 11.87 12.90 13,898,886 173,052,340 8.34% 9.59% 1.37% 2003 1.30% 2.45% 10.89 11.65 8,005,593 91,456,755 13.77% 14.39% 1.41% MFS VIT UTILITIES 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% 2005 1.40% 2.35% 14.04 15.74 2,112,594 33,244,903 14.93% 15.21% 0.61% 2004 1.40% 1.65% 12.21 13.66 2,231,354 30,455,785 28.07% 28.39% 1.49% 2003 1.40% 1.65% 9.53 10.64 2,525,979 26,851,342 33.67% 34.01% 2.31% MFS VIT UTILITIES SERVICE CLASS 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% 2005 1.25% 2.80% 10.81 21.94 5,828,235 77,763,713 13.52% 15.07% 0.47% 2004 1.30% 2.65% 9.44 19.21 3,708,140 41,924,765 27.21% 28.17% 1.24% 2003 1.30% 2.05% 7.40 10.02 2,745,333 23,119,140 32.96% 33.69% 1.65%
N-38 3. FINANCIAL HIGHLIGHTS (CONTINUED)
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ------------------------------------------------------------------------------------------------------------------------------------ NB AMT MID-CAP GROWTH 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% 2005 1.25% 2.70% 13.28 15.94 5,153,591 71,406,285 10.77% 12.27% 0.00% 2004 1.30% 2.65% 11.91 14.28 3,603,225 44,841,964 13.61% 14.81% 0.00% 2003 1.30% 2.35% 10.44 10.57 1,795,704 19,108,352 25.60% 26.29% 0.00% NB AMT REGENCY 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% 2005 1.25% 2.85% 16.73 18.28 6,722,953 114,789,057 9.07% 10.55% 0.09% 2004 1.30% 2.65% 15.27 16.65 3,996,020 62,810,341 19.16% 20.78% 0.03% 2003 1.30% 2.65% 13.02 13.18 1,149,687 15,018,457 33.22% 33.96% 0.00% PUTNAM VT GROWTH & INCOME CLASS IB 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% 2005 1.30% 2.65% 12.11 15.21 589,211 7,329,537 2.94% 3.87% 1.57% 2004 1.30% 2.20% 11.73 14.73 645,292 7,734,644 8.97% 9.68% 1.54% 2003 1.30% 1.95% 10.77 10.91 580,669 6,347,230 24.92% 25.61% 1.21% PUTNAM VT HEALTH SCIENCES CLASS IB 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% 2005 1.30% 2.40% 11.17 13.20 898,624 10,374,349 10.79% 11.74% 0.04% 2004 1.30% 2.15% 10.06 11.88 733,632 7,624,955 5.06% 5.74% 0.18% 2003 1.30% 1.95% 9.57 9.70 528,371 5,171,919 16.10% 16.74% 0.44%
(1) Reflects less than a full year of activity. Funds were first received in this option on the commencement date noted or the option was inactive at the date funds were received. (2) These amounts represent the annualized minimum and maximum contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying funds have been excluded. (3) As the unit value is presented as a range of minimum to maximum values for only those subaccounts which existed for the entire year, some individual contract unit values may not be within the ranges presented as a result of partial year activity. (4) These amounts represent the total return, including changes in value of mutual funds, and reflect deductions for all items included in the fee rate. The total return does not include contract charges deducted directly from policy account values. The total return is not annualized. As the total return is presented as a range of minimum to maximum values for only those subaccounts which existed for the entire year, some individual contract total returns may not be within the ranges presented as a result of partial year activity. (5) These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense guarantee charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. Investment income ratios are not annualized. Note: Fee rate, unit value and total return minimum and maximum are the same where there is only one active contract level charge for the subaccount. N-39 4. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2007.
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ---------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation $ 176,584 $ 2,797,192 AIM V.I. Capital Appreciation Class II 368,999 1,316,612 AIM V.I. Core Equity 423,062 6,682,986 AIM V.I. Core Equity Class II 330,636 2,444,763 AIM V.I. International Growth 1,115,092 4,237,590 AIM V.I. International Growth Class II 1,884,158 3,114,707 ABVPSF Global Technology Class B 25,355,579 15,440,637 ABVPSF Growth and Income Class B 53,528,268 49,017,925 ABVPSF International Value Class B 171,516,134 33,360,361 ABVPSF Large Cap Growth Class B 1,903,612 8,132,701 ABVPSF Small/Mid Cap Value Class B 73,078,174 35,682,775 American Century VP Inflation Protection Class 2 64,163,256 48,188,719 American Funds Global Growth Class 2 137,024,529 24,935,902 American Funds Global Small Capitalization Class 2 165,253,411 65,442,010 American Funds Growth Class 2 538,219,193 214,131,665 American Funds Growth-Income Class 2 498,457,542 234,994,390 American Funds International Class 2 299,167,920 113,130,571 Delaware VIPT Capital Reserves Service Class 15,261,556 7,777,206 Delaware VIPT Diversified Income Service Class 139,351,104 34,985,223 Delaware VIPT Emerging Markets Service Class 138,129,609 56,118,959 Delaware VIPT High Yield 10,515,448 8,614,901 Delaware VIPT High Yield Service Class 81,261,542 57,431,065 Delaware VIPT International Value Equity 1,202,496 1,285,657 Delaware VIPT REIT 6,208,488 9,696,261 Delaware VIPT REIT Service Class 112,627,216 82,660,396 Delaware VIPT Small Cap Value 2,873,947 9,456,413 Delaware VIPT Small Cap Value Service Class 147,843,589 73,795,095 Delaware VIPT Trend 393,994 8,496,355 Delaware VIPT Trend Service Class 18,449,430 27,870,491 Delaware VIPT U.S. Growth Service Class 6,109,723 7,329,382 Delaware VIPT Value 2,211,659 4,738,763 Delaware VIPT Value Service Class 78,643,778 37,303,374 DWS VIP Equity 500 Index 2,595,442 14,976,855 DWS VIP Equity 500 Index Service Class 14,350,644 11,452,593 DWS VIP Small Cap Index 2,243,079 4,193,223 DWS VIP Small Cap Index Service Class 18,064,939 9,787,330 Fidelity VIP Contrafund Service Class 2 411,825,582 76,885,474 Fidelity VIP Equity-Income 2,968,241 7,844,352 Fidelity VIP Equity-Income Service Class 2 16,957,371 21,363,974 Fidelity VIP Growth 1,001,579 5,266,731 Fidelity VIP Growth Service Class 2 43,361,186 24,069,861 Fidelity VIP Mid Cap Service Class 2 152,821,638 31,271,709 Fidelity VIP Overseas 1,357,715 2,461,563 Fidelity VIP Overseas Service Class 2 37,028,676 26,661,294 FTVIPT Franklin Income Securities Class 2 310,243,117 32,502,410 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 43,416,711 21,490,634 FTVIPT Mutual Shares Securities Class 2 208,164,615 27,527,654 FTVIPT Templeton Global Income Securities Class 2 130,894,831 29,791,943 FTVIPT Templeton Growth Securities Class 2 76,721,583 42,447,774 Janus Aspen Series Balanced Service Shares 4,852,337 9,669,124 Janus Aspen Series Mid Cap Growth Service Shares 3,613,484 4,536,550 Janus Aspen Series Worldwide Growth Service Shares 1,364,123 2,061,904 Lincoln VIPT Baron Growth Opportunities Service Class 38,439,921 4,599,015 Lincoln VIPT Capital Growth Service Class 2,174,388 959,084 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 37,970,003 2,944,888 Lincoln VIPT Core 375,301 525,273 Lincoln VIPT Core Service Class 991,905 4,658,825 Lincoln VIPT Delaware Bond 35,336,683 69,748,160 Lincoln VIPT Delaware Bond Service Class 178,080,149 82,922,224
N-40 4. PURCHASES AND SALES OF INVESTMENTS (CONTINUED)
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ----------------------------------------------------------------------------------------------- Lincoln VIPT Delaware Growth and Income Service Class $ 14,683,876 $ 3,724,710 Lincoln VIPT Delaware Social Awareness 1,940,278 5,280,985 Lincoln VIPT Delaware Social Awareness Service Class 11,261,908 14,448,068 Lincoln VIPT Delaware Special Opportunities Service Class 3,877,548 305,867 Lincoln VIPT FI Equity-Income Service Class 13,975,525 4,920,214 Lincoln VIPT Growth 33,624 155,417 Lincoln VIPT Growth Service Class 1,941,548 10,155,874 Lincoln VIPT Growth Opportunities Service Class 1,601,563 5,585,840 Lincoln VIPT Janus Capital Appreciation 1,399,737 1,942,443 Lincoln VIPT Janus Capital Appreciation Service Class 22,169,462 8,355,524 Lincoln VIPT Marsico International Growth Service Class 22,981,604 3,095,465 Lincoln VIPT MFS Value Service Class 13,067,287 1,761,395 Lincoln VIPT Mid-Cap Growth Service Class 19,412,691 7,595,886 Lincoln VIPT Mid-Cap Value Service Class 17,139,254 2,023,399 Lincoln VIPT Mondrian International Value 9,549,940 17,971,119 Lincoln VIPT Mondrian International Value Service Class 50,552,749 40,030,936 Lincoln VIPT Money Market 140,952,885 122,244,462 Lincoln VIPT Money Market Service Class 447,601,080 339,610,810 Lincoln VIPT S&P 500 Index 273,731 27,725 Lincoln VIPT S&P 500 Index Service Class 27,615,737 7,928,843 Lincoln VIPT Small-Cap Index Service Class 7,423,443 470,348 Lincoln VIPT T. Rowe Price Growth Stock Service Class 7,755,947 1,030,518 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 707,756 550,494 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 10,778,938 6,048,081 Lincoln VIPT Templeton Growth Service Class 50,139,513 4,053,917 Lincoln VIPT UBS Global Asset Allocation 6,849,708 9,625,300 Lincoln VIPT UBS Global Asset Allocation Service Class 38,583,686 10,082,781 Lincoln VIPT Value Opportunities Service Class 1,112,797 265,537 Lincoln VIPT Wilshire 2010 Profile Service Class 1,427,335 172,565 Lincoln VIPT Wilshire 2020 Profile Service Class 2,584,813 502,702 Lincoln VIPT Wilshire 2030 Profile Service Class 978,340 59,721 Lincoln VIPT Wilshire 2040 Profile Service Class 421,509 18,947 Lincoln VIPT Wilshire Aggressive Profile Service Class 73,416,836 24,724,891 Lincoln VIPT Wilshire Conservative Profile Service Class 109,541,820 38,823,070 Lincoln VIPT Wilshire Moderate Profile Service Class 337,732,406 96,940,982 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 251,913,015 50,671,721 MFS VIT Core Equity Service Class 372,338 1,443,933 MFS VIT Emerging Growth 190,176 2,301,023 MFS VIT Emerging Growth Service Class 2,654,735 3,903,163 MFS VIT Total Return 2,784,794 11,830,818 MFS VIT Total Return Service Class 88,042,235 60,912,465 MFS VIT Utilities 4,611,844 11,712,983 MFS VIT Utilities Service Class 140,752,989 45,547,195 NB AMT Mid-Cap Growth 30,021,371 26,816,056 NB AMT Regency 22,342,816 33,285,805 Putnam VT Growth & Income Class IB 1,530,790 1,728,119 Putnam VT Health Sciences Class IB 777,714 2,907,359
5. INVESTMENTS The following is a summary of investments owned at December 31, 2007.
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ---------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation 268,239 $29.37 $ 7,878,192 $ 7,038,615 AIM V.I. Capital Appreciation Class II 155,422 28.95 4,499,470 4,062,328 AIM V.I. Core Equity 722,356 29.11 21,027,797 18,164,484 AIM V.I. Core Equity Class II 231,238 28.88 6,678,152 5,798,804 AIM V.I. International Growth 306,862 33.63 10,319,777 5,570,924 AIM V.I. International Growth Class II 254,849 33.24 8,471,166 5,298,051 ABVPSF Global Technology Class B 1,662,180 20.31 33,758,869 30,922,607
N-41 5. INVESTMENTS (CONTINUED)
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ------------------------------------------------------------------------------------------------------------------------- ABVPSF Growth and Income Class B 8,987,311 $26.55 $ 238,613,108 $ 205,483,760 ABVPSF International Value Class B 6,827,773 24.88 169,874,991 170,764,017 ABVPSF Large Cap Growth Class B 978,915 29.96 29,328,284 23,885,961 ABVPSF Small/Mid Cap Value Class B 6,455,001 17.03 109,928,662 110,838,884 American Century VP Inflation Protection Class 2 13,712,261 10.55 144,664,346 141,022,997 American Funds Global Growth Class 2 11,125,733 25.00 278,143,329 242,422,261 American Funds Global Small Capitalization Class 2 13,298,741 26.95 358,401,071 282,641,488 American Funds Growth Class 2 26,555,727 66.72 1,771,798,093 1,444,502,012 American Funds Growth-Income Class 2 43,474,510 42.26 1,837,232,780 1,584,544,386 American Funds International Class 2 36,570,666 24.72 904,026,860 652,482,609 Delaware VIPT Capital Reserves Service Class 1,899,305 9.61 18,252,313 18,260,401 Delaware VIPT Diversified Income Service Class 29,620,318 10.18 301,534,841 282,468,520 Delaware VIPT Emerging Markets Service Class 9,241,799 27.75 256,459,929 193,326,420 Delaware VIPT High Yield 2,669,418 5.95 15,883,038 15,378,162 Delaware VIPT High Yield Service Class 34,110,049 5.94 202,613,694 197,663,618 Delaware VIPT International Value Equity 121,945 14.70 1,792,597 1,979,878 Delaware VIPT REIT 862,651 15.83 13,655,772 13,317,456 Delaware VIPT REIT Service Class 12,150,384 15.79 191,854,557 217,821,845 Delaware VIPT Small Cap Value 713,518 28.65 20,442,282 16,406,967 Delaware VIPT Small Cap Value Service Class 11,477,287 28.57 327,906,080 334,537,287 Delaware VIPT Trend 496,573 38.50 19,118,056 15,012,285 Delaware VIPT Trend Service Class 3,061,768 37.88 115,979,763 88,671,403 Delaware VIPT U.S. Growth Service Class 4,347,830 8.90 38,695,689 29,436,370 Delaware VIPT Value 698,671 21.44 14,979,503 12,023,699 Delaware VIPT Value Service Class 7,419,661 21.39 158,706,539 151,311,387 DWS VIP Equity 500 Index 3,341,580 15.53 51,894,736 40,255,858 DWS VIP Equity 500 Index Service Class 3,043,459 15.52 47,234,485 40,347,130 DWS VIP Small Cap Index 912,108 14.71 13,417,109 11,679,357 DWS VIP Small Cap Index Service Class 2,549,098 14.70 37,471,746 37,422,978 Fidelity VIP Contrafund Service Class 2 26,341,247 27.46 723,330,643 773,728,076 Fidelity VIP Equity-Income 828,104 23.91 19,799,959 19,555,580 Fidelity VIP Equity-Income Service Class 2 4,449,027 23.57 104,863,578 103,370,380 Fidelity VIP Growth 306,135 45.12 13,812,813 13,449,828 Fidelity VIP Growth Service Class 2 1,755,466 44.65 78,381,564 64,548,485 Fidelity VIP Mid Cap Service Class 2 7,468,745 35.63 266,111,382 251,800,916 Fidelity VIP Overseas 262,609 25.32 6,649,271 4,706,061 Fidelity VIP Overseas Service Class 2 5,214,869 25.12 130,997,497 98,496,096 FTVIPT Franklin Income Securities Class 2 20,166,064 17.31 349,074,572 351,929,435 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 4,346,115 22.91 99,569,494 88,257,315 FTVIPT Mutual Shares Securities Class 2 11,026,518 20.19 222,625,391 227,620,451 FTVIPT Templeton Global Income Securities Class 2 10,342,634 16.72 172,928,844 162,489,167 FTVIPT Templeton Growth Securities Class 2 11,933,728 15.44 184,256,757 164,818,233 Janus Aspen Series Balanced Service Shares 1,143,101 31.08 35,527,593 28,001,465 Janus Aspen Series Mid Cap Growth Service Shares 451,738 38.95 17,595,201 11,581,732 Janus Aspen Series Worldwide Growth Service Shares 123,277 35.03 4,318,401 3,334,548 Lincoln VIPT Baron Growth Opportunities Service Class 1,215,888 29.94 36,408,548 38,373,122 Lincoln VIPT Capital Growth Service Class 46,813 27.49 1,287,070 1,242,165 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 3,952,117 8.05 31,810,592 34,930,567 Lincoln VIPT Delaware Bond 23,088,908 12.68 292,721,178 297,537,473 Lincoln VIPT Delaware Bond Service Class 41,420,977 12.68 525,052,299 533,150,142 Lincoln VIPT Delaware Growth and Income Service Class 602,060 36.80 22,158,220 21,131,059 Lincoln VIPT Delaware Social Awareness 688,055 36.65 25,219,967 18,407,572 Lincoln VIPT Delaware Social Awareness Service Class 2,059,649 36.59 75,368,754 60,159,729 Lincoln VIPT Delaware Special Opportunities Service Class 79,225 42.00 3,327,057 3,545,984 Lincoln VIPT FI Equity-Income Service Class 1,371,151 16.95 23,238,266 24,495,539 Lincoln VIPT Janus Capital Appreciation 189,289 24.17 4,575,105 3,432,866 Lincoln VIPT Janus Capital Appreciation Service Class 1,432,842 24.04 34,441,219 28,871,784 Lincoln VIPT Marsico International Growth Service Class 1,136,755 18.07 20,536,613 20,096,827 Lincoln VIPT MFS Value Service Class 424,890 26.42 11,223,892 11,289,417 Lincoln VIPT Mid-Cap Growth Service Class 848,332 14.10 11,963,179 11,692,660 Lincoln VIPT Mid-Cap Value Service Class 941,622 14.66 13,800,406 15,011,602
N-42 5. INVESTMENTS (CONTINUED)
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ------------------------------------------------------------------------------------------------------------------------ Lincoln VIPT Mondrian International Value 2,487,673 $24.16 $ 60,109,653 $ 41,284,193 Lincoln VIPT Mondrian International Value Service Class 7,690,670 24.13 185,606,633 137,628,722 Lincoln VIPT Money Market 12,469,478 10.00 124,694,780 124,694,780 Lincoln VIPT Money Market Service Class 27,303,170 10.00 273,031,697 273,031,697 Lincoln VIPT S&P 500 Index 23,346 10.32 240,882 246,254 Lincoln VIPT S&P 500 Index Service Class 1,859,218 10.31 19,175,977 19,534,805 Lincoln VIPT Small-Cap Index Service Class 348,763 19.09 6,657,882 6,949,598 Lincoln VIPT T. Rowe Price Growth Stock Service Class 365,776 18.31 6,698,095 6,738,974 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 204,312 13.44 2,744,934 2,140,574 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 1,316,824 13.28 17,488,737 15,444,120 Lincoln VIPT Templeton Growth Service Class 1,361,593 33.22 45,237,582 46,047,368 Lincoln VIPT UBS Global Asset Allocation 2,321,749 15.59 36,193,743 33,233,226 Lincoln VIPT UBS Global Asset Allocation Service Class 3,803,747 15.57 59,235,757 57,928,482 Lincoln VIPT Value Opportunities Service Class 55,237 14.66 809,610 849,876 Lincoln VIPT Wilshire 2010 Profile Service Class 120,754 10.61 1,280,956 1,257,642 Lincoln VIPT Wilshire 2020 Profile Service Class 200,901 10.49 2,107,447 2,079,965 Lincoln VIPT Wilshire 2030 Profile Service Class 87,667 10.66 934,272 918,781 Lincoln VIPT Wilshire 2040 Profile Service Class 37,852 10.50 397,256 402,584 Lincoln VIPT Wilshire Aggressive Profile Service Class 7,915,611 14.27 112,963,679 103,437,351 Lincoln VIPT Wilshire Conservative Profile Service Class 12,819,612 12.00 153,835,348 146,240,463 Lincoln VIPT Wilshire Moderate Profile Service Class 49,519,685 12.92 639,744,807 586,106,902 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 34,930,160 13.38 467,260,752 429,677,199 MFS VIT Core Equity Service Class 355,937 17.07 6,075,850 4,387,851 MFS VIT Emerging Growth 271,183 25.01 6,782,299 7,365,040 MFS VIT Emerging Growth Service Class 439,834 24.61 10,824,308 7,514,014 MFS VIT Total Return 1,441,236 21.68 31,246,004 27,008,977 MFS VIT Total Return Service Class 16,168,498 21.44 346,652,602 324,166,908 MFS VIT Utilities 952,093 34.48 32,828,161 20,881,528 MFS VIT Utilities Service Class 7,767,634 34.11 264,953,998 203,527,642 NB AMT Mid-Cap Growth 4,026,153 28.50 114,745,371 76,678,022 NB AMT Regency 7,526,718 16.23 122,158,632 108,022,300 Putnam VT Growth & Income Class IB 245,422 23.12 5,674,146 5,476,800 Putnam VT Health Sciences Class IB 396,463 13.41 5,316,572 4,679,534
6. CHANGES IN UNITS OUTSTANDING The change in units outstanding for the year ended December 31, 2007 is as follows:
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation 30,380 (334,158) (303,778) AIM V.I. Capital Appreciation Class II 30,355 (99,907) (69,552) AIM V.I. Core Equity 48,230 (636,436) (588,206) AIM V.I. Core Equity Class II 21,481 (191,309) (169,828) AIM V.I. International Growth 71,649 (251,989) (180,340) AIM V.I. International Growth Class II 87,789 (139,794) (52,005) ABVPSF Global Technology Class B 2,579,307 (1,891,039) 688,268 ABVPSF Growth and Income Class B 3,171,163 (3,529,339) (358,176) ABVPSF International Value Class B 14,867,242 (3,914,589) 10,952,653 ABVPSF Large Cap Growth Class B 244,454 (944,981) (700,527) ABVPSF Small/Mid Cap Value Class B 3,824,437 (2,108,261) 1,716,176 American Century VP Inflation Protection Class 2 6,338,233 (5,157,238) 1,180,995 American Funds Global Growth Class 2 8,965,777 (2,555,598) 6,410,179 American Funds Global Small Capitalization Class 2 6,562,884 (3,962,503) 2,600,381 American Funds Growth Class 2 33,331,993 (21,795,425) 11,536,568 American Funds Growth-Income Class 2 35,474,159 (21,700,468) 13,773,691 American Funds International Class 2 16,498,204 (10,074,980) 6,423,224 Delaware VIPT Capital Reserves Service Class 1,469,860 (792,767) 677,093 Delaware VIPT Diversified Income Service Class 13,596,273 (4,604,143) 8,992,130 Delaware VIPT Emerging Markets Service Class 6,763,267 (3,139,454) 3,623,813 Delaware VIPT High Yield 818,409 (716,276) 102,133
N-43 6. CHANGES IN UNITS OUTSTANDING (CONTINUED)
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------ Delaware VIPT High Yield Service Class 5,914,676 (4,683,561) 1,231,115 Delaware VIPT International Value Equity 8,268 (62,834) (54,566) Delaware VIPT REIT 74,449 (322,523) (248,074) Delaware VIPT REIT Service Class 3,969,731 (4,827,426) (857,695) Delaware VIPT Small Cap Value 46,639 (394,147) (347,508) Delaware VIPT Small Cap Value Service Class 9,206,812 (5,472,532) 3,734,280 Delaware VIPT Trend 45,769 (454,749) (408,980) Delaware VIPT Trend Service Class 1,527,350 (2,266,143) (738,793) Delaware VIPT U.S. Growth Service Class 557,421 (593,081) (35,660) Delaware VIPT Value 141,708 (348,747) (207,039) Delaware VIPT Value Service Class 5,684,077 (3,051,979) 2,632,098 DWS VIP Equity 500 Index 229,221 (1,244,684) (1,015,463) DWS VIP Equity 500 Index Service Class 1,064,563 (813,052) 251,511 DWS VIP Small Cap Index 67,869 (218,586) (150,717) DWS VIP Small Cap Index Service Class 1,102,425 (651,153) 451,272 Fidelity VIP Contrafund Service Class 2 16,712,465 (6,910,869) 9,801,596 Fidelity VIP Equity-Income 102,723 (520,601) (417,878) Fidelity VIP Equity-Income Service Class 2 548,364 (1,386,001) (837,637) Fidelity VIP Growth 106,386 (480,474) (374,088) Fidelity VIP Growth Service Class 2 3,560,101 (2,238,650) 1,321,451 Fidelity VIP Mid Cap Service Class 2 11,356,799 (3,456,105) 7,900,694 Fidelity VIP Overseas 46,025 (157,794) (111,769) Fidelity VIP Overseas Service Class 2 1,743,228 (1,669,866) 73,362 FTVIPT Franklin Income Securities Class 2 28,677,909 (5,005,135) 23,672,774 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 2,922,370 (2,064,137) 858,233 FTVIPT Mutual Shares Securities Class 2 18,703,610 (3,670,025) 15,033,585 FTVIPT Templeton Global Income Securities Class 2 12,104,567 (3,361,441) 8,743,126 FTVIPT Templeton Growth Securities Class 2 4,440,367 (2,831,745) 1,608,622 Janus Aspen Series Balanced Service Shares 314,792 (665,541) (350,749) Janus Aspen Series Mid Cap Growth Service Shares 208,303 (250,152) (41,849) Janus Aspen Series Worldwide Growth Service Shares 95,338 (143,571) (48,233) Lincoln VIPT Baron Growth Opportunities Service Class 3,463,848 (532,549) 2,931,299 Lincoln VIPT Capital Growth Service Class 216,120 (94,232) 121,888 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 4,429,098 (537,550) 3,891,548 Lincoln VIPT Core 32,331 (45,486) (13,155) Lincoln VIPT Core Service Class 87,693 (403,515) (315,822) Lincoln VIPT Delaware Bond 2,570,468 (5,809,108) (3,238,640) Lincoln VIPT Delaware Bond Service Class 18,103,723 (10,336,801) 7,766,922 Lincoln VIPT Delaware Growth and Income Service Class 1,270,857 (325,895) 944,962 Lincoln VIPT Delaware Social Awareness 125,894 (319,092) (193,198) Lincoln VIPT Delaware Social Awareness Service Class 880,776 (929,575) (48,799) Lincoln VIPT Delaware Special Opportunities Service Class 401,732 (37,716) 364,016 Lincoln VIPT FI Equity-Income Service Class 1,071,663 (463,033) 608,630 Lincoln VIPT Growth 2,892 (13,129) (10,237) Lincoln VIPT Growth Service Class 179,449 (858,843) (679,394) Lincoln VIPT Growth Opportunities Service Class 129,697 (436,462) (306,765) Lincoln VIPT Janus Capital Appreciation 100,451 (132,912) (32,461) Lincoln VIPT Janus Capital Appreciation Service Class 1,613,599 (586,051) 1,027,548 Lincoln VIPT Marsico International Growth Service Class 2,166,203 (309,483) 1,856,720 Lincoln VIPT MFS Value Service Class 1,369,284 (201,645) 1,167,639 Lincoln VIPT Mid-Cap Growth Service Class 1,884,172 (775,364) 1,108,808 Lincoln VIPT Mid-Cap Value Service Class 1,861,577 (262,747) 1,598,830 Lincoln VIPT Mondrian International Value 373,242 (774,271) (401,029) Lincoln VIPT Mondrian International Value Service Class 2,961,578 (2,377,490) 584,088 Lincoln VIPT Money Market 14,511,556 (13,252,858) 1,258,698 Lincoln VIPT Money Market Service Class 49,025,144 (39,192,354) 9,832,790 Lincoln VIPT S&P 500 Index 24,882 (2,200) 22,682 Lincoln VIPT S&P 500 Index Service Class 2,440,264 (716,012) 1,724,252 Lincoln VIPT Small-Cap Index Service Class 796,934 (63,364) 733,570 Lincoln VIPT T. Rowe Price Growth Stock Service Class 792,335 (114,013) 678,322 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 45,174 (32,993) 12,181 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 739,365 (407,364) 332,001
N-44 6. CHANGES IN UNITS OUTSTANDING (CONTINUED)
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ----------------------------------------------------------------------------------------------------------- Lincoln VIPT Templeton Growth Service Class 5,231,695 (576,642) 4,655,053 Lincoln VIPT UBS Global Asset Allocation 318,727 (599,391) (280,664) Lincoln VIPT UBS Global Asset Allocation Service Class 2,623,708 (750,798) 1,872,910 Lincoln VIPT Value Opportunities Service Class 117,596 (30,488) 87,108 Lincoln VIPT Wilshire 2010 Profile Service Class 139,156 (16,162) 122,994 Lincoln VIPT Wilshire 2020 Profile Service Class 278,766 (67,830) 210,936 Lincoln VIPT Wilshire 2030 Profile Service Class 95,562 (5,464) 90,098 Lincoln VIPT Wilshire 2040 Profile Service Class 40,683 (1,626) 39,057 Lincoln VIPT Wilshire Aggressive Profile Service Class 5,605,612 (1,933,868) 3,671,744 Lincoln VIPT Wilshire Conservative Profile Service Class 9,871,873 (3,771,940) 6,099,933 Lincoln VIPT Wilshire Moderate Profile Service Class 30,499,839 (10,287,333) 20,212,506 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 21,104,437 (5,235,213) 15,869,224 MFS VIT Core Equity Service Class 28,001 (95,629) (67,628) MFS VIT Emerging Growth 27,636 (197,720) (170,084) MFS VIT Emerging Growth Service Class 309,594 (447,412) (137,818) MFS VIT Total Return 140,437 (800,010) (659,573) MFS VIT Total Return Service Class 6,949,123 (5,331,703) 1,617,420 MFS VIT Utilities 145,088 (556,824) (411,736) MFS VIT Utilities Service Class 7,479,568 (3,130,503) 4,349,065 NB AMT Mid-Cap Growth 1,996,758 (1,641,017) 355,741 NB AMT Regency 1,286,016 (1,896,686) (610,670) Putnam VT Growth & Income Class IB 28,059 (113,915) (85,856) Putnam VT Health Sciences Class IB 66,394 (236,437) (170,043)
The change in units outstanding for the year ended December 31, 2006 is as follows:
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ----------------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation 1,620,564 (320,387) 1,300,177 AIM V.I. Capital Appreciation Class II 445,448 (27,500) 417,948 AIM V.I. Core Equity 3,177,977 (584,654) 2,593,323 AIM V.I. Core Equity Class II 809,908 (120,994) 688,914 AIM V.I. International Growth 125,941 (272,365) (146,424) AIM V.I. International Growth Class II 97,015 (75,905) 21,110 ABVPSF Global Technology Class B 1,267,575 (979,355) 288,220 ABVPSF Growth and Income Class B 3,532,927 (3,425,696) 107,231 ABVPSF International Value Class B 3,093,523 (186,442) 2,907,081 ABVPSF Large Cap Growth Class B 504,819 (1,371,118) (866,299) ABVPSF Small/Mid Cap Value Class B 2,150,416 (944,595) 1,205,821 American Century VP Inflation Protection Class 2 5,548,245 (3,331,364) 2,216,881 American Funds Global Growth Class 2 7,098,673 (1,472,895) 5,625,778 American Funds Global Small Capitalization Class 2 5,666,268 (3,076,868) 2,589,400 American Funds Growth Class 2 34,022,282 (17,221,407) 16,800,875 American Funds Growth-Income Class 2 36,390,669 (17,774,609) 18,616,060 American Funds International Class 2 15,323,365 (7,336,707) 7,986,658 Lincoln VIPT Baron Growth Opportunities Service Class 562,654 (107,178) 455,476 Delaware VIPT Capital Reserves Service Class 2,139,854 (1,488,881) 650,973 Delaware VIPT Diversified Income Service Class 8,956,639 (3,290,311) 5,666,328 Delaware VIPT Emerging Markets Service Class 5,499,195 (2,296,150) 3,203,045 Delaware VIPT High Yield 221,806 (408,079) (186,273) Delaware VIPT High Yield Service Class 5,523,167 (3,947,522) 1,575,645 Delaware VIPT International Value Equity 37,323 (71,763) (34,440) Delaware VIPT REIT 88,381 (259,925) (171,544) Delaware VIPT REIT Service Class 5,012,523 (2,437,283) 2,575,240 Delaware VIPT Small Cap Value 141,304 (400,386) (259,082) Delaware VIPT Small Cap Value Service Class 8,470,007 (3,122,957) 5,347,050 Delaware VIPT Trend 49,602 (475,281) (425,679) Delaware VIPT Trend Service Class 2,365,226 (2,419,245) (54,019) Delaware VIPT U.S. Growth Service Class 374,173 (682,111) (307,938) Delaware VIPT Value 274,023 (479,547) (205,524) Delaware VIPT Value Service Class 4,878,007 (1,733,391) 3,144,616 DWS VIP Equity 500 Index 464,748 (1,833,693) (1,368,945)
N-45 6. CHANGES IN UNITS OUTSTANDING (CONTINUED)
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ------------------------------------------------------------------------------------------------------------ DWS VIP Equity 500 Index Service Class 1,363,570 (660,873) 702,697 DWS VIP Small Cap Index 271,229 (385,809) (114,580) DWS VIP Small Cap Index Service Class 1,301,679 (499,645) 802,034 Fidelity VIP Contrafund Service Class 2 17,364,278 (4,582,894) 12,781,384 Fidelity VIP Equity-Income 81,464 (552,148) (470,684) Fidelity VIP Equity-Income Service Class 2 637,416 (1,296,625) (659,209) Fidelity VIP Growth 44,800 (582,993) (538,193) Fidelity VIP Growth Service Class 2 1,235,252 (921,630) 313,622 Fidelity VIP Mid Cap Service Class 2 10,224,130 (2,232,455) 7,991,675 Fidelity VIP Overseas 47,068 (163,801) (116,733) Fidelity VIP Overseas Service Class 2 2,098,279 (1,836,891) 261,388 FTVIPT Franklin Income Securities Class 2 7,618,348 (660,454) 6,957,894 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 2,406,684 (1,673,933) 732,751 FTVIPT Mutual Shares Securities Class 2 4,785,686 (341,341) 4,444,345 FTVIPT Templeton Global Income Securities Class 2 5,976,026 (1,123,578) 4,852,448 FTVIPT Templeton Growth Securities Class 2 4,524,253 (1,449,258) 3,074,995 Janus Aspen Series Balanced Service Shares 290,653 (717,094) (426,441) Janus Aspen Series Mid Cap Growth Service Shares 88,871 (194,133) (105,262) Janus Aspen Series Worldwide Growth Service Shares 16,823 (51,413) (34,590) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 39,117 (18,493) 20,624 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 533,926 (160,362) 373,564 Lincoln VIPT Wilshire Aggressive Profile Service Class 3,974,735 (912,572) 3,062,163 Lincoln VIPT Delaware Bond 3,103,245 (5,889,786) (2,786,541) Lincoln VIPT Delaware Bond Service Class 18,122,148 (8,587,673) 9,534,475 Lincoln VIPT Janus Capital Appreciation 38,345 (35,646) 2,699 Lincoln VIPT Janus Capital Appreciation Service Class 595,202 (337,731) 257,471 Lincoln VIPT Wilshire Conservative Profile Service Class 6,987,540 (2,846,641) 4,140,899 Lincoln VIPT Core 23,538 (23,203) 335 Lincoln VIPT Core Service Class 338,980 (100,865) 238,115 Lincoln VIPT FI Equity-Income Service Class 1,216,195 (290,163) 926,032 Lincoln VIPT UBS Global Asset Allocation 1,067,746 (475,804) 591,942 Lincoln VIPT UBS Global Asset Allocation Service Class 2,202,088 (724,442) 1,477,646 Lincoln VIPT Growth 6,584 (1,048) 5,536 Lincoln VIPT Growth Service Class 889,446 (436,337) 453,109 Lincoln VIPT Delaware Growth and Income Service Class 876,912 (226,234) 650,678 Lincoln VIPT Growth Opportunities Service Class 493,798 (268,425) 225,373 Lincoln VIPT Mondrian International Value 580,518 (638,664) (58,146) Lincoln VIPT Mondrian International Value Service Class 3,817,713 (2,135,779) 1,681,934 Lincoln VIPT Wilshire Moderate Profile Service Class 30,304,426 (7,752,132) 22,552,294 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 18,186,975 (3,288,716) 14,898,259 Lincoln VIPT Money Market 10,682,005 (10,965,016) (283,011) Lincoln VIPT Money Market Service Class 22,805,337 (14,607,448) 8,197,889 Lincoln VIPT Delaware Social Awareness 115,346 (388,264) (272,918) Lincoln VIPT Delaware Social Awareness Service Class 961,306 (1,013,483) (52,177) MFS VIT Core Equity Service Class 40,589 (78,652) (38,063) MFS VIT Emerging Growth 45,612 (249,478) (203,866) MFS VIT Emerging Growth Service Class 118,968 (234,796) (115,828) MFS VIT Total Return 94,940 (776,086) (681,146) MFS VIT Total Return Service Class 9,652,153 (4,815,314) 4,836,839 MFS VIT Utilities 176,250 (604,294) (428,044) MFS VIT Utilities Service Class 4,168,733 (1,876,570) 2,292,163 NB AMT Mid-Cap Growth 2,070,287 (1,392,234) 678,053 NB AMT Regency 2,359,869 (1,884,088) 475,781 Putnam VT Growth & Income Class IB 24,805 (95,572) (70,767) Putnam VT Health Sciences Class IB 90,036 (353,449) (263,413)
N-46 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 statement 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, 2007, the related statement of operations for the year then ended, and the statements of changes in net assets for each of the two years in the period then ended. These financial statements are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, 2007, by correspondence with the custodian. 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, 2007, the results of their operations for the year then ended, and the changes in their net assets for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP ------------------------------------- Fort Wayne, Indiana March 7, 2008 N-47 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. 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, 2007 Statement of Operations - Year ended December 31, 2007 Statements of Changes in Net Assets - Years ended December 31, 2007 and 2006 Notes to Financial Statements - December 31, 2007 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 - Years ended December 31, 2007 and 2006 Consolidated Statements of Income - Years ended December 31, 2007, 2006, and 2005 Consolidated Statements of Shareholder's Equity - Years ended December 31, 2007, 2006, and 2005 Consolidated Statements of Cash Flows - Years ended December 31, 2007, 2006, and 2005 Notes to Consolidated Financial Statements - December 31, 2007 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 are incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-40937) filed on November 25, 1997. (2) None. (3) (a) Selling Group Agreement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (b) Amendment to Selling Group Agreement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (c) Amendment to Schedule A of Selling Group Agreement dated February 14, 2000 incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 19, 2000. (d) Selling Group Agreement for ChoicePlus Assurance incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (e) ChoicePlus Selling Agreement with Affiliates incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (f) 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) ChoicePlus Access Variable Annuity Contract incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-36316) filed on July 19, 2000. (b) ChoicePlus Access Estate Enhancement Benefit Rider incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-40937) filed on April 12, 2001. (c) ChoicePlus Access and ChoicePlus II Access Income4Life Solution (IRA) Rider incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-36316) filed on April 10, 2002. (d) ChoicePlus Access and ChoicePlus II Access Income4Life Solution (NQ) Rider incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-36316) filed on April 10, 2002. (e) ChoicePlus II Access Annuity Contract (30070-B) incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (f) ChoicePlus II Access Annuity Payment Option Rider incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (g) ChoicePlus II Access Interest Adjusted Fixed Account Rider incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (h) ChoicePlus II Access 1% Step-up Death Benefit Rider incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (i) ChoicePlus II Access Estate Enhancement Benefit Rider incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (j) ChoicePlus II Access 1% Estate Enhancement Benefit Rider incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (k) Variable Annuity Income Rider (I4LA-NQ) incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-36316) filed on October 11, 2002. (l) Accumulation Benefit Enhancement Rider (ABE) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-36316) filed on April 10, 2002. (m) Estate Enhancement Benefit Rider with 5% Step-up Death Benefit incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-36316) filed on April 10, 2002. (n) Variable Annuity Income Rider (I4LA-Q) incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-36316) filed on October 11, 2002. (o) 28877-E IRA Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (p) 28877 IRA Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (q) 5305 IRA Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (r) Contract Benefit Data (I4LA-CB 8/02) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (s) Contract Benefit Data (I4LA-CB-PR) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (t) Variable Annuity Income Rider (I4LA-Q) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (u) Variable Annuity Income Rider (I4LA-NQ) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (v) Variable Annuity Income Rider (I4LA-NQ 10/02) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (w) Variable Annuity Income Rider (I4LA-Q-PR) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (x) Variable Annuity Income Rider (I4LA-NQ-PR) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (y) Variable Annuity Rider (32793) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (z) ABE prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. B-2 (aa) 1% stepup and EEB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (bb) EEB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (cc) 1% stepup and DB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (dd) EGMDB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (ee) GOP prorate Rider incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (ff) Variable Annuity Income Rider (I4L-NQ-PR 8/03) incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (gg) Variable Annuity Income Rider (I4L-NQ 8/03) incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (hh) Variable Annuity Income Rider (I4L-Q-PR 8/03) incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (ii) Variable Annuity Income Rider (I4L-Q- 8/03) incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-36316) filed on April 20, 2004. (jj) Variable Annuity Rider (32793 HWM 4/04) incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-35784) filed on June 9, 2004. (kk) Persistency Credit Rider incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-36304) filed on August 8, 2001. (ll) Variable Annuity Income Rider (i4LA-NQ 9/05) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-35784) filed on June 20, 2005. (mm) Variable Annuity Income Rider (i4LA-Q 9/05) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-35784) filed on June 20, 2005. (nn) Variable Annuity Income Rider (i4LA-NQ-PR 9/05) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-35784) filed on June 20, 2005. (oo) Variable Annuity Income Rider (i4LA-Q-PR 9/05) incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-35784) filed on June 20, 2005. (pp) Guaranteed Income Later Rider (4LATER 2/06) incorporated herein by reference to Post-Effective Amendment No. 23 (File No. 333-36316) filed on April 4, 2006. (qq) Guaranteed Income Benefit Rider (GIB 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (rr) Guaranteed Income Benefit Rider (IGIB 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (ss) Contract Benefit Data (CBD 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (tt) Allocation Amendment (AR503 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (uu) Variable Annuity Payment Option Rider (I4LA-Q 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (vv) Variable Annuity Payment Option Rider (I4LA-NQ 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 18, 2006. (ww) Variable Annuity Rider (32793 7/06) incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36316) filed on December 21, 2006. (xx) Variable Annuity Payment Option Rider (I4LA-Q 1/07) incorporated herein by reference to Post-Effective Amendment No. 31 (File No. 333-36316) filed on April 17, 2007. B-3 (yy) Variable Annuity Death Benefit Rider (DB-3 1/06) incorporated herein by reference to Post-Effective Amendment No. 31 (File No. 333-36316) filed on April 17, 2007. (zz) Variable Annuity Living Benefits Rider (AR-512 2/08) incorporated herein by reference to Post-Effective Amendment No. 24 (File No. 333-61554) filed on December 18, 2007. (5)(a) ChoicePlus Access Application incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-36316) filed July 19, 2000. (b) ChoicePlus II Access Application incorporated by reference to Post-Effective Amendment No. 4 (File No. 333-36316) filed on August 8, 2001. (c) ChoicePlus Assurance (C Share) Application (CPAC1/08) (6) (a) Articles of Incorporation of The Lincoln National Life Insurance Company incorporated herein by reference to Post-Effective Amendment No. 1 (File No. 333-40937) filed on November 9, 1998. (b) By-laws of The Lincoln National Life Insurance Company incorporated herein by reference to Post-Effective Amendment No. 1 (File No. 333-40937) filed on November 9, 1998. (7) (a) Automatic Indemnity Reinsurance Agreement Amended and Restated as of January 31, 2008 between The Lincoln National Life Insurance Company and Lincoln National Reinsurance Company (Barbados) Limited incorporated herein by reference to Post-Effective Amendment No. 18 (File No. 333-68842) filed on April 4, 2008. (b) Automatic Reinsurance Agreement effective 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. (8) (a) Fund Participation Agreements and Amendments between The Lincoln National Life Insurance Company and: (i) AIM Variable Insurance Funds, Inc. incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (ii) DWS Investments VIT Funds incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (iii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (iv) American Century Variable Products incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (v) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (vi) Fidelity Variable Insurance Products Fund incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (vii) 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. (viii) American Funds Insurance Series incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (ix) AllianceBernstein Variable Product Series Fund incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (x) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (xi) Neuberger Berman Advisers Management Trust incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. (xii) Putnam 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. (xiii) Janus Aspen Series incorporated herein by reference to Post-Effective Amendment No. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. B-4 (b) 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 incorporated herein by reference to the Registration Statement on Form N-4 (File No. 333-147673) filed on November 28, 2007. (9) (a) Opinion and Consent of Mary Jo Ardington, Counsel of The Lincoln National Life Insurance Company as to legality of securities being issued incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-36316) filed on July 19, 2000. (b) Opinion and Consent of Mary Jo Ardington, Counsel of The Lincoln National Life Insurance Company as to legality of securities being issued incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-36316) filed on June 15, 2001. (c) Opinion and Consent of Mary Jo Ardington, Counsel of The Lincoln National Life Insurance Company as to legality of securities being issued incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-36316) filed on April 22, 2003. (10) (a) Consent of 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 Post-Effective Amendment No. 18 (File No. 333-04999) filed on April 4, 2008. (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. 1 on Form N-6 (File No. 333-139960) filed on April 1, 2008. 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.
Name Positions and Offices with Depositor --------------------------- ------------------------------------------------------------- Michael J. Burns**** Senior Vice President Kelly D. Clevenger* Vice President Frederick J. Crawford** Chief Financial Officer and Director Christine S. Frederick*** Vice President and Chief Compliance Officer Dennis R. Glass** President and Director Mark E. Konen**** Senior Vice President and Director See Yeng Quek***** Senior Vice President, Chief Investment Officer and Director Keith J. Ryan* Vice President and Director Dennis L. Schoff** Senior Vice President and General Counsel Rise' C.M. Taylor* Treasurer and Vice President Westley V. Thompson*** Senior Vice President and Director C. Suzanne Womack** Secretary and Second Vice President
* 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 350 Church Street, Hartford, CT 06103 **** Principal business address is 100 North Greene Street, Greensboro, NC 27401 ***** Principal business address is One Commerce Square, 2005 Market Street, 39th Floor, Philadelphia, PA 19103-3682 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 29, 2008 there were 102,366 contract owners under Account N. B-5 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 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 Flexible Premium Variable Life Account J; Lincoln Life Flexible Premium Variable Life Account K; Lincoln National Variable Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M; Lincoln Life Variable Annuity Account N; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible Premium Variable Life Account R; Lincoln Life Flexible Premium Variable Life Account S; Lincoln Life Variable Annuity Account T; Lincoln Life Variable Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account Y.
Name Positions and Offices with Underwriter ------------------------ ------------------------------------------------ Terrence Mullen* Chief Executive Officer, President and Director David M. Kittredge* Senior Vice President Randal J. Freitag* Vice President and Treasurer Patrick J. Caulfield** Vice President and Chief Compliance Officer Frederick J. Crawford* Director Dennis R. Glass* Director Keith J. Ryan*** Vice President and Chief Financial Officer Marilyn K. Ondecker*** 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 B-6 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 Mellon Bank, N.A., 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 a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Registration Statement and has caused this Post-Effective Amendment No. 37 to the Registration Statement to be signed on its behalf, in the City of Fort Wayne, and State of Indiana on this 10th day of April, 2008. Lincoln Life Variable Annuity Account N (Registrant) Lincoln ChoicePlus Access, Lincoln ChoicePlus II Access, and Lincoln ChoicePlus Assurance (C Share) By: /s/ Robert L. Grubka ------------------------------------ Robert L. Grubka 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-7 (b) As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in their capacities indicated on April 10, 2008. Signature Title * President and Director (Principal Executive Officer) ------------------------------ Dennis R. Glass * Senior Vice President, Chief Financial Officer and Director (Prin- ------------------------------ cipal Financial Officer) Frederick J. Crawford * Senior Vice President ------------------------------ Michael J. Burns * Senior Vice President and Director ------------------------------ Mark E. Konen * Senior Vice President, Chief Investment Officer and Director ------------------------------ See Yeng Quek * Vice President and Director ------------------------------ Keith J. Ryan * Senior Vice President and Director ------------------------------ Westley V. Thompson *By:/s/ Robert L. Grubka Pursuant to a Power of Attorney --------------------------- Robert L. Grubka
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