485BPOS 1 a2191226z485bpos.txt 485BPOS As filed with the Securities and Exchange Commission on April 14, 2009 1933 Act Registration No. 333-40937 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. 31 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 176 /X/ Lincoln Life Variable Annuity Account N (Exact Name of Registrant) Lincoln ChoicePlus, Lincoln ChoicePlus II, and Lincoln ChoicePlus Assurance (B 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: Ronald R. Bessette, Esquire The Lincoln National Life Insurance Company One Granite Place Concord, NH 03301 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 May 1, 2009, 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 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.LincolnFinancial.com 1-888-868-2583 This prospectus describes an individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). This prospectus is primarily for use with 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 for a nonqualified plan or Section 403(b) transfer/rollovers; and $2,000 for any other qualified plan. 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. Purchase payments allocated to any subaccount or to the fixed side of the contract must be at least $100 or $2,000 respectively. 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 Thematic Growth Portfolio (formerly 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 BlackRock Variable Series Funds, Inc. (Class III): BlackRock Global Allocation V.I. Fund* 1 Delaware VIP Trust (Service Class): Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP Limited-Term Diversified Income Series (formerly Delaware VIP Capital Reserves Series) Delaware VIP U.S. Growth Series Delaware VIP Trust (Standard Class): Delaware VIP High Yield Series Delaware VIP International Value Equity Series* Delaware VIP REIT Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP Value Series DWS Investments VIT Funds (Class A): DWS Equity 500 Index VIP DWS Small Cap Index VIP DWS Variable Series II (Class B): DWS Alternative Asset Allocation Plus VIP* Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund Portfolio Fidelity (Reg. TM) VIP Mid Cap Portfolio Fidelity (Reg. TM) Variable Insurance Products (Initial Class): Fidelity (Reg. TM) VIP Equity-Income Portfolio Fidelity (Reg. TM) VIP Growth 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 Bond Securities Fund (formerly FTVIPT Templeton Global Income Securities Fund) FTVIPT Templeton Growth Securities Fund Janus Aspen Series (Service Share): Janus Aspen Balanced Portfolio Janus Aspen Enterprise Portfolio (formerly Janus Aspen Mid Cap Growth Portfolio) Janus Aspen Worldwide Portfolio (formerly 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 LVIP Delaware Foundation Aggressive Allocation Fund* LVIP Delaware Growth and Income Fund LVIP Delaware Special Opportunities Fund LVIP Global Income 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 LVIP SSgA Small-Cap Index Fund Lincoln Variable Insurance Products Trust (Service Class): LVIP T. Rowe Price Growth Stock Fund LVIP Templeton Growth Fund LVIP Turner 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 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** MFS (Reg. TM) Variable Insurance TrustSM (Service Class): MFS (Reg. TM) VIT Core Equity Series MFS (Reg. TM) Variable Insurance TrustSM (Initial Class): MFS (Reg. TM) VIT 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 PIMCO Variable Insurance Trust (Advisor Class): PIMCO VIT Commodity Real Return Strategy Portfolio* Putnam Variable Trust (Class IB): Putnam VT Growth & Income Fund Putnam VT Global Health Care Fund (formerly 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.) 2 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. May 1, 2009 3 Table of Contents
Item Page Special Terms 5 Expense Tables 7 Summary of Common Questions 10 The Lincoln National Life Insurance Company 12 Variable Annuity Account (VAA) 13 Investments of the Variable Annuity Account 14 Charges and Other Deductions 19 The Contracts 24 Purchase Payments 25 Transfers On or Before the Annuity Commencement Date 26 Surrenders and Withdrawals 29 Death Benefit 31 Investment Requirements 35 Living Benefit Riders 40 Lincoln Lifetime IncomeSM Advantage 40 Lincoln SmartSecurity (Reg. TM) Advantage 50 i4LIFE (Reg. TM) Advantage 55 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 60 4LATER (Reg. TM) Advantage 62 Annuity Payouts 66 Fixed Side of the Contract 68 Distribution of the Contracts 70 Federal Tax Matters 71 Additional Information 76 Voting Rights 76 Return Privilege 76 Other Information 77 Legal Proceedings 77 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 78 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. Account Value - Under i4LIFE (Reg. TM) Advantage, the initial Account Value is the contract value on the valuation date that i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value equals the initial Account Value plus investment gains minus losses, regular income payments, Guaranteed Income Benefit payments, and withdrawals. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date and to calculate the i4LIFE (Reg. TM) Advantage Account Value during the Access Period. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout - An amount paid at regular intervals after the annuity commencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person you choose to receive any death benefit paid if you die before the annuity commencement date. Contractowner (you, your, owner) - The person who can exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the contractowner is the annuitant. Contract value (may be referenced to as account value in marketing materials) - At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract, if any. Contract year - Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit - Before the annuity commencement date, the amount payable to your designated beneficiary if the contractowner dies or, if selected, to the contractowner if the annuitant dies. See The Contracts - Death Benefit for a description of the various death benefit options. Good Order - The actual receipt at our Home Office of the requested transaction in writing or by other means we accept, along with all information and supporting legal documentation necessary to effect the transaction. The forms we provide will identify the necessary documentation. We may, in our sole discretion, determine whether any particular transaction request is in good order, and we reserve the right to change or waive any good order requirements at any time. Guaranteed Income Benefit - An option that provides a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. The calculation of the Guaranteed Income Benefit or the features applicable to the Guaranteed Income Benefit may vary based on the rider provisions applicable to certain contractowners. i4LIFE (Reg. TM) Advantage - An income program which combines periodic variable lifetime income payments with the ability to make withdrawals during a defined period. Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company. Lincoln Lifetime IncomeSM Advantage - 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. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you may be subject to Investment Requirements. 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. Selling group individuals - A contractowner who meets one of the following criteria at the time of the contract purchase and who purchases the contract without the assistance of a sales representative under contract with us: 5 o Employees and registered representatives of any member of the selling group (broker-dealers who have selling agreements with us) and their spouses and minor children. o Officers, directors, trustees or bona-fide full-time employees and their spouses and minor children, of Lincoln Financial Group or any of the investment advisers of the funds currently being offered, or their affiliated or managed companies. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 6 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options and/or the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: o Surrender charge (as a percentage of purchase payments surrendered/withdrawn): 7.00%* o Transfer charge: $ 10**
* The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. See Charges and Other Deductions-Surrender Charge ** The transfer charge will not be imposed on the first 12 transfers during a contract year. We reserve the right to charge a $10 fee for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross reinvestment transfers. 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, cross-reinvestment, withdrawals up to the Maximum 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 Enhanced With Estate Enhancement Guaranteed Minimum Benefit Rider (EEB) Death Benefit (EGMDB) ------------------------- ---------------------- o Mortality and expense risk charge 1.45% 1.25% o Administrative charge 0.15% 0.15% ---- ---- o Total annual charge for each subaccount 1.60% 1.40%
*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 IncomeSM Advantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.90% 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. 7 Lincoln SmartSecurity (Reg. TM) Advantage:
Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-Up option+ ** --------------------------------- o Guaranteed maximum annual percentage charge* 0.95% o Current annual percentage charge* 0.65% Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Step-Up option Step-Up option - Single Life (and prior version) - Joint Life ----------------------------------- -------------------------------- o 1.50% 1.50% o 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount. +As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM)Advantage - 5 Year Elective Step-up option is no longer available for purchase. 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.65%
*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) Advantage charge is deducted from the subaccounts on a quarterly basis. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. 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* 1.85% 1.65%
*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%*
4LATER (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 0.65%* ***
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 1.85% with the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.35% (as a daily percentage of average account value). *The percentage charge will change to the current charge in effect upon election of a new step-up period, not to exceed the guaranteed maximum charge. **Purchasers of Lincoln Lifetime IncomeSM Advantage with the Guaranteed Income Benefit may purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase the Lincoln Lifetime IncomeSM Advantage. ***For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. The next table describes the separate account annual expenses (as a percentage of average daily net assets in the subaccounts) you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
8 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, 2008. 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): 4.15% 0.33% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.81% 0.33%
* 35 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, 2010. 9 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 are in effect. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ----------- --------- --------- --------- $1,427 $2,689 $3,967 $7,453
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 -------- --------- --------- --------- $727 $2,189 $3,667 $7,453
For more information, see Charges and Other Deductions in this prospectus, and the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income payments or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage 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 Asset Allocation Models? Asset allocation models are designed to assist you in deciding how to allocate your purchase payments among the various subaccounts. Each model provides a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. See The Contracts - Asset Allocation Models. 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 will 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? If you withdraw purchase payments, you pay a surrender charge from 0% to 7.00% of the surrendered or withdrawn purchase payment, depending upon how long those payments have been invested in the contract. We may waive surrender charges in certain situations. See Charges and Other Deductions-Surrender Charge. 10 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. 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 increase in your contract value of 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 different types of minimum guarantees if you meet certain conditions. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you will be subject to Investment Requirements. These riders are the Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage (both of which are withdrawal benefit riders) and 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit) (both of which are annuity payout riders). These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders that is provided with 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. 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 11 charge, imposed only during the i4LIFE (Reg. TM) Advantage payout phase, based on the i4LIFE (Reg. TM) Advantage death benefit you choose and whether or not the Guaranteed Income Benefit is in effect. What is the Guaranteed Income Benefit? The Guaranteed Income Benefit provides a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. The i4LIFE (Reg. TM) Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period subject to terms and conditions at that time. 4LATER (Reg. TM) Advantage, Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage have features that may be used to establish the amount of the Guaranteed Income Benefit. 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 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. You may use your Guaranteed Amount from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to establish the Guaranteed Income Benefit at the time you terminate Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, and Lincoln Lifetime IncomeSM Advantage - i4LIFE (Reg. TM) Advantage option. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See The Contracts - Surrenders and Withdrawals. If you surrender the contract or make a withdrawal, certain charges may apply. See Charges and Other Deductions. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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, with or without contingent deferred sales charges. Results calculated without contingent deferred sales charges will be higher. Total returns include the reinvestment of all distributions, which are reflected in changes in unit value. The money market subaccount's yield is based upon investment performance over a 7-day period, which is then annualized. Note that there can be no assurance that any money market fund will be able to maintain a stable net asset value per share. During extended periods of low interest rates, and due in part to the contract fees and expenses, the yields of any subaccount investing in a money market fund may also become extremely low and possibly negative. The money market yield figure and annual performance of the subaccounts are based on past performance and do not indicate or represent future performance. The Lincoln National Life Insurance Company The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905, is an Indiana-domiciled insurance company, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln Life is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, such as those associated with death benefit options and Living Benefit riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. 12 We issue other types of insurance policies and financial products as well, and we also pay our obligations under these products from our assets in the general account. Moreover, unlike assets held in the VAA, the assets of the general account are subject to the general liabilities of the Company and, therefore, to the Company's general creditors. In the event of an insolvency or receivership, payments we make from our general account to satisfy claims under the contract would generally receive the same priority as our other contractowner obligations. Our Financial Condition. Among the laws and regulations applicable to us as an insurance company are those which regulate the investments we can make with assets held in our general account. In general, those laws and regulations determine the amount and type of investments which we can make with general account assets. In addition, state insurance regulations require that insurance companies calculate and establish on their financial statements, a specified amount of reserves in order to meet the contractual obligations to pay the claims of our policyholders. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product. State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer's operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value. How to Obtain More Information. We encourage both existing and prospective policyholders to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would like a free copy of the SAI, please write to us at: PO Box 7866, Fort Wayne, IN 46801-7866 , or call 1-888-868-2583. In addition, the Statement of Additional Information is available on the SEC's website at http://www.sec.gov. You may obtain our audited statutory financial statements and any unaudited statutory financial statements that may be available by visiting our website at www.LincolnFinancial.com. You also will find on our website information on ratings assigned to us by one or more independent rating organizations. These ratings are opinions of an operating insurance company's financial capacity to meet the obligations of its insurance and annuity contracts based on its financial strength and/or claims-paying ability. Additional information about rating agencies is included in the Statement of Additional Information. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. 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. Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 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. 13 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 0.50%, 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, BlackRock, Delaware, DWS, Fidelity, Franklin, Janus, Lincoln, MFS, PIMCO 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. 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. 14 AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein, L.P. o AllianceBernstein Global Thematic Growth Portfolio (Class B): Maximum capital appreciation. (formerly AllianceBernstein Global Technology Portfolio) 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. 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. BlackRock Variable Series Funds, Inc.,advised by BlackRock Advisors, LLC and subadvised by BlackRock Investment Management, LLC o BlackRock Global Allocation V.I. Fund (Class III): High total return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Delaware VIP Trust, advised by Delaware Management Company o Diversified Income Series (Service Class): Total return. o Emerging Markets Series (Service Class): Capital appreciation. o High Yield Series (Standard Class): Capital appreciation. o International Value Equity Series (Standard Class): Long- term growth. This fund is not offered in contracts issued on or after February 22, 2000. o Limited-Term Diversified Income Series (Service Class): Current income. (formerly Capital Reserves Series) o REIT Series (Standard Class): Total return. o Small Cap Value Series (Standard Class): Capital appreciation. o Trend Series (Standard Class): Capital appreciation. o U.S. Growth Series (Service Class): Capital appreciation. o Value Series (Standard 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.) DWS Variable Series II, advised by Deutsche Asset Management Inc. and subadvised by RREEF America L.L.C. o DWS Alternative Asset Allocation Plus VIP (Class B): Capital appreciation. This fund will be available on or about June 30, 2009. Consult your financial advisor. Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company and subadvised by FMR Co., Inc. o Contrafund (Reg. TM) Portfolio (Service Class 2): Long-term capital appreciation. o Equity-Income Portfolio (Initial Class): Reasonable income. o Growth Portfolio (Initial Class): Capital appreciation. 15 o Mid Cap Portfolio (Service Class 2): Long-term growth. o VIP Overseas Portfolio (Initial Class): 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 Bond 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 Bond Securities Fund (Class 2): Total return. (formerly Templeton Global Income Securities Fund) 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 Enterprise Portfolio (Service Class): Long-term growth. (formerly Mid Cap Growth Portfolio) o Worldwide Portfolio (Service Class): Long-term growth. (formerly Worldwide Growth Portfolio) Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP Baron Growth Opportunities Fund (Service Class): Capital appreciation. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital growth. (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) o LVIP Delaware Bond Fund (Standard Class): Current income. (Subadvised by Delaware Management Company) o LVIP Delaware Foundation Aggressive Allocation Fund (Service Class): Long-term capital growth. (Subadvised by Delaware Management Company) This fund will not be available until the merger with the LVIP UBS Global Asset Allocation Fund is complete. 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 Global Income Fund (Service Class): Current income consistent with preservation of capital. This fund will be available on or about June 30, 2009. Consult your financial advisor. 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) 16 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): Replicate Barclays Aggregate Bond Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA International Index Fund (Service Class): Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA S&P 500 Index Fund (Standard Class): Replicate S&P 500 index. (Sub-advised by SSgA Funds Management, Inc o LVIP SSgA Small-Cap Index Fund (Service Class): Replicate Russell 2000 Index. (Sub-advised 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 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) o LVIP UBS Global Asset Allocation Fund (Service Class): Total return. (Subadvised by UBS Global Asset Management (Americas) Inc. (UBS Global AM) The Board of Trustees of the Lincoln Variable Insurance Products Trust has approved a reorganization pursuant to which the assets of the LVIP UBS Global Asset Allocation Fund would be acquired and the liabilities of such fund would be assumed by the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund in exchange for shares of the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund. This reorganization is subject to the approval of the LVIP UBS Global Asset Allocation Fund's shareholders. This reorganization is expected to occur in June 2009. 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): Long-term growth of capital; 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): Growth and income; 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 (Initial Class): Capital appreciation. 17 o Total Return Series (Initial Class): Total return. o Utilities Series (Initial Class): Total return. Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management, Inc. and subadvised by Neuberger Berman, LLC. 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) PIMCO Variable Insurance Trust, advised by PIMCO o PIMCO VIT Commodity Real Return Strategy Portfolio (Advisor Class): Maximum real return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Putnam Variable Trust, advised by Putnam Investment Management, LLC o Global Health Care Fund (Class IB): Capital appreciation. (formerly Health Sciences Fund) o Growth & Income Fund (Class IB): Capital growth and current income. Fund Shares We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. Redeemed shares are retired, but they may be reissued later. Shares of the funds are not sold directly to the general public. They are sold to us, and may be sold to other insurance companies, for investment of the assets of the subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts. When a fund sells any of its shares both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When a fund sells any of its shares to separate accounts of unaffiliated life insurance companies, it is said to engage in shared funding. The funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various contractowners participating in a fund could conflict. Each of the fund's Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. The funds do not foresee any disadvantage to contractowners arising out of mixed or shared funding. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a fund. This might force a fund to sell portfolio securities at disadvantageous prices. See the prospectuses for the funds. Reinvestment of Dividends and Capital Gain Distributions All dividends and capital gain distributions of the funds are automatically reinvested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as additional units, but are reflected as changes in unit values. Addition, Deletion or Substitution of Investments We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; 18 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 more owners than expected will qualify for waivers of the surrender charge; 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. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts. Deductions from the VAA We apply to the average daily net asset value of the subaccounts a charge which is equal to an annual rate of:
With Enhanced With Estate Enhancement Guaranteed Minimum Benefit Rider (EEB) Death Benefit (EGMDB) ------------------------- ---------------------- o Mortality and expense risk charge 1.45% 1.25% o Administrative charge 0.15% 0.15% ---- ---- o Total annual charge for each subaccount 1.60% 1.40%
Surrender Charge A surrender charge applies (except as described below) to surrenders and withdrawals of purchase payments that have been invested for the periods indicated as follows: 19
Number of contract anniversaries since purchase payment was invested --------------------------------------- 0 1 2 3 4 5 6 7+ Surrender charge as a percentage of the surrendered or 7% 6% 5% 4% 3% 2% 1% 0 withdrawn purchase payments
An account fee will be deducted and any market value adjustment will be made before the deduction of the surrender charge. A surrender charge does not apply to: o A surrender or withdrawal of a purchase payment beyond the seventh anniversary since the purchase payment was invested; o Withdrawals of contract value during a contract year to the extent that the total contract value withdrawn during the current contract year does not exceed the free amount which is equal to 15% of the total purchase payments (this does not apply upon surrender of the contract); o When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (however the surrender charge schedule of the original contract will continue to apply to the spouse's contract); o A surrender or withdrawal equal to a maximum of 75% of the contract value as a result of admittance of the contractowner into an accredited nursing home or equivalent health care facility, where the admittance into such facility occurs after the effective date of the contract and the owner has been confined for at least 180 consecutive days; o A surrender of the contract as a result of the death of the contractowner, joint owner or annuitant; o Purchase payments when used in the calculation of the initial periodic income payment and the initial Account Value under the i4LIFE (Reg. TM) Advantage option or the contract value applied to calculate the benefit amount under any annuity payout option made available by us; o Regular income payments made under i4LIFE (Reg. TM) Advantage, including any payments to provide 4LATERSM or i4LIFE (Reg. TM) Guaranteed Income benefits, or periodic payments made under any annuity payout option made available by us; o A surrender of a contract or withdrawal of a contract value from contracts issued to selling group individuals; o Withdrawals up to the Maximum Annual Withdrawal amount under the Lincoln SmartSecurity (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage, subject to certain conditions. For purposes of calculating the surrender charge on withdrawals, we assume that: 1. The free amount will be withdrawn from purchase payments on a "first in-first out (FIFO)" basis. 2. Prior to the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) until exhausted; then o from earnings until exhausted. 3. On or after the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then o from earnings until exhausted; then o from purchase payments (on a FIFO basis) to which a surrender charge still applies until exhausted. We apply the surrender charge as a percentage of purchase payments, which means that you would pay the same surrender charge at the time of surrender regardless of whether your contract value has increased or decreased. The surrender charge is calculated separately for each purchase payment. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. Transfer Fee We reserve the right to charge a $10 fee for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross-reinvestment transfers. The transfer charge will not be imposed on the first 12 transfers during the contract year. 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 20 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. There is no account fee on contracts issued to selling group individuals. 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 0.90% of the Guaranteed Amount (0.225% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 1.05% of the Guaranteed Amount. See The Contracts - Lincoln Lifetime IncomeSM Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. 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. For riders purchased on or after March 2, 2009, the charge will also be deducted in proportion to the value in the fixed account used for dollar cost averaging purposes. 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% of the Guaranteed Amount. 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% of the Guaranteed Amount will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 1.05% 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) 0.65% of the Guaranteed Amount (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option (for riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount); or 2) 0.65% of the Guaranteed Amount (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 21 3) 0.80% of the Guaranteed Amount (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up Option is no longer available for 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. If you elect to step-up the Guaranteed Amount for another step-up period (including if we administer the step-up election for you or if you make a change from a Joint Life to a Single Life option after a death or divorce), a pro-rata deduction of the Rider charge based on the Guaranteed Amount immediately prior to the step-up will be made on the valuation date of the step-up. This deduction covers the cost of the Rider from the time of the previous deduction to the date of the step-up. After a contractowner's step-up, we will deduct the Rider charge for the stepped-up Guaranteed Amount on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the step-up. At the time of the elected step-up, the Rider percentage charge will change to the current charge in effect at that time (if the current charge has changed), but it will never exceed the guaranteed maximum annual percentage charge of 0.95% of the Guaranteed Amount for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% of the Guaranteed Amount 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 0.65% of the Income Base. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset 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 22 maximum charge of 1.50% of the Income Base. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. i4LIFE (Reg. TM) Advantage Charge . i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the Account Value. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.65% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 1.85% 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% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 2.35% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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 0.65% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.30% for the i4LIFE (Reg. TM) Account Value death benefit; and 2.50% for the EGMDB. (For riders purchased before January 20, 2009, the current annual percentage charge is 0.50%, but will increase to 0.65% upon the next election to reset the Income Base.) These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On and after the periodic income commencement date, the 4LATER (Reg. TM) Guaranteed Income Benefit charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of 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) Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) Guaranteed Income Benefit percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50% of Account Value. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Guaranteed Income Benefit annual charge will also terminate. Guaranteed Income Benefit Charge for Lincoln Lifetime IncomeSM Advantage purchasers. For purchasers of Lincoln Lifetime IncomeSM Advantage who terminate their rider and purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, the Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50% of the Account Value, which is added to the i4LIFE (Reg. TM)Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; and 2.35% for the i4LIFE (Reg. TM) Advantage EGMDB. Purchasers of Lincoln Lifetime IncomeSM Advantage are guaranteed that in the future the guaranteed maximum charge for 23 the Guaranteed Income Benefit will be the guaranteed maximum charge then in effect at the time that they purchase the Lincoln Lifetime IncomeSM Advantage. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30-day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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% of the contract value will be assessed on all variable annuity payouts (except for the i4LIFE (Reg. TM) Advantage, which has a different charge), including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the services will exceed our revenues from contract charges. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. 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 24 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. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract and/or a new surrender charge period may be imposed with the purchase of, or transfer into, this contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000 for a non-qualified plan or Section 403(b) transfer/rollovers; and $2,000 for any other qualified plan. The minimum annual amount for additional purchase payments is $100. 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 $50. 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 25 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. We reserve the right to charge a $10 fee for the 13th and each additional transfer during any contract year, excluding automatic dollar cost averaging, portfolio rebalancing and cross-reinvestment transfers. The transfer charge will not be imposed on the first 12 transfers during a contract year. The minimum amount which may be transferred between subaccounts is $50 (or the entire amount in the subaccount, if less than $50). If the transfer from a subaccount would leave you with less than $50 in the subaccount, we may transfer the total balance of the subaccount. Transfers will also be subject to any restrictions that may be imposed by the funds themselves. 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. 26 If your contract offers a fixed account, you may also transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $50 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) except that the sum of the percentages of a fixed account transferred is limited to 15% of the value of that fixed account in any contract year. 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 market value 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 (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. 27 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. 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 28 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 the surrender/withdrawal is the cash surrender value (contract value, plus or minus any market value adjustment, less any applicable surrender charges, account fees and premium tax charges) 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. 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 a market value adjustment. The maximum amount which can be withdrawn without incurring any surrender charges is explained under Charges and other deductions. 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. You may request that surrender proceeds be paid directly to you instead of deposited in a SecureLine (Reg. TM) account. There are charges associated with surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. If the charges are deducted from the remaining contract value, the amount of the total withdrawal will increase according to the impact of the applicable surrender charge percentage; consequently, the dollar amount of the surrender charge associated with the withdrawal will also increase. In other words, the dollar amount deducted to cover the surrender charge is also subject to a surrender charge. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS), 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 or in accordance with other terms we make available. We reserve the right to discontinue or modify this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. 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. 29 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 were designed and prepared by the Company, in consultation with SSgA Funds Management, Inc., 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 LVIP 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. The election of 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. At this time, the available models are as follows: o The Lincoln 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 Lincoln 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 Lincoln SSgA Moderately Aggressive Equity Index Model (formerly known as the Lincoln 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. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in three equity subaccounts and 30% 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. (Available on or after June 30, 2009) o The Lincoln 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. 30 o The Lincoln 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 Lincoln 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 Lincoln SSgA Structured Moderately Aggressive Equity Model (formerly known as the Lincoln SSgA Structured Moderately Aggressive Model) is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven 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 a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in seven equity subaccounts and 30% 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 a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Available on or after June 30, 2009) o The Lincoln 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. Your registered representative will have more information on the specific investments of each model. 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. If you choose to follow this strategy you will invest 100% of your contract value according to the strategy. You may invest in any of the three funds without adopting the strategy. 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 in accordance with the strategy. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. You may terminate the strategy at any time and reallocate your contract value to other investment options. 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% of contract value o FTVIPT Mutual Shares Securities 33% of contract value o LVIP Templeton Growth Fund 33% of contract value
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
31
UPON DEATH OF: AND... annuitant The contractowner is living annuitant The contractowner is living annuitant** The contractowner is a trust or other non-natural person UPON DEATH OF: AND... DEATH BENEFIT PROCEEDS PASS TO: annuitant There is no contingent annuitant The youngest contractowner becomes the contingent annuitant and the contract continues. The contractowner may waive* this continuation and receive the death benefit proceeds. annuitant The contingent annuitant is living contingent annuitant becomes the annuitant and the contract continues annuitant** No contingent annuitant allowed designated beneficiary with non-natural contractowner
* Notification from the contractowner to select the death benefit proceeds must be received within 75 days of the death of the annuitant. ** Death of annuitant is treated like death of the contractowner. If the contractowner (or a joint owner) or annuitant dies prior to the annuity commencement date, a death benefit may be payable. You can choose the death benefit. Only one death benefit may be in effect at any one time and this election terminates 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. 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 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) (determined before the allocation of any purchase payments on that contract anniversary) 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 32 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. All references to withdrawals include deductions for any applicable charges associated with that withdrawal (surrender charges for example) 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 any contractual basis that has previously been withdrawn, which is 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 previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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 any contractual basis that has previously been withdrawn, which is 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 previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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. 33 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: 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 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 34 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 death benefit payable will become the EGMDB and the total annual charge will be reduced to, 1.40%. 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. The recipient of death benefit proceeds may request to receive the proceeds in the form of a check rather than a deposit into the SecureLine (Reg. TM) account. Investment Requirements If you purchase a Living Benefit rider (Lincoln Lifetime IncomeSM Advantage, 4LATER (Reg. TM) Advantage, Lincoln SmartSecuritySM Advantage, or the Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage), you will be subject to Investment Requirements, and you will be limited in how much you can invest in certain subaccounts of your contract. The Living Benefit rider you purchase and the date of purchase will determine which Investment Requirements Option will apply to your contract. See Option 1, Option 2, and Option 3 below. Under each Option, we have divided the subaccounts of your contract into groups and have specified the minimum or maximum percentages of contract value that must be in each group at the time you purchase the rider (or when the rider Investment Requirements are enforced, if later). 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 subaccounts are not available to you if you purchase certain Riders. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. 35 The chart below is provided to help you determine which Option of Investment Requirements, if any, applies to the Living Benefit rider you purchase. If you do not elect a Living Benefit rider, the Investment Requirements will not apply to your contract. Different Investment Requirements may apply if you drop one rider and elect another rider.
YOU WILL BE SUBJECT TO IF YOU ELECT... AND THE DATE OF ELECTION IS... INVESTMENT REQUIREMENTS Lincoln Lifetime IncomeSM Advantage Between February 19, 2008 and January 20, 2009 Option 2 On or after January 20, 2009 Option 3 Lincoln SmartSecurity (Reg. TM) Advantage Prior to April 10, 2006 N/A Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 4LATER (Reg. TM) Advantage Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Prior to April 10, 2006 N/A Benefit (v.1) On or after April 10, 2006 Option 1 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between April 10, 2006 and January 20, 2009 Option 1 Benefit (v.2) On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between October 6, 2008 and January 20, 2009 Option 2 Benefit (v.3) On or after January 20, 2009 Option 3
Investment Requirements - Option 1 We intend to enforce these Investment Requirements on June 30, 2009 for contracts purchased with Investment Requirements Option 1. 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 VPS Global Thematic Growth Portfolio o AllianceBernstein VPS International Value Portfolio o AllianceBernstein VPS 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 High Yield Series o Delaware VIP International Value Equity 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 Mid-Cap Portfolio o Fidelity (Reg. TM) VIP Overseas Portfolio o FTVIPT Franklin Income Securities Fund o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Mutual Shares Securities Fund o FTVIPT Templeton Growth Securities Fund o Janus Aspen Enterprise Portfolio o Janus Aspen Worldwide Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Columbia Value Opportunities Fund o LVIP Delaware Foundation Aggressive Allocation Fund o LVIP Delaware Special Opportunities Fund o LVIP Marsico International Growth Fund o LVIP Mid-Cap Value Fund o LVIP Mondrian International Value Fund o LVIP SSgA Developed International 150 Fund 36 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 LVIP UBS Global Asset Allocation Fund o LVIP Wilshire 2040 Profile o LVIP Wilshire Aggressive Profile o MFS VIT Growth Series o MFS VIT Utilities Series o Neuberger Berman AMT Mid-Cap Growth Portfolio o Neuberger Berman AMT Regency Portfolio o Putnam VT Global Health Care Fund All other variable subaccounts will be referred to as "Non-Limited Subaccounts" except DWS Alternative Asset Allocation Plus VIP Portfolio and PIMCO VIT Commodity Real Return Strategy Portfolio, which are unavailable to any contract holder with a Living Benefit rider. The Founding Investment Strategy is also unavailable for investment. 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 reserve the right to designate a different investment option other than the LVIP Money Market subaccount as the default investment option should there be no contract value in the Non-Limited Subaccounts. We will provide you with notice of such change. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We may move subaccounts on or off the Limited Subaccount list, exclude Subaccounts and asset allocation models from being available for investment, change the number of Limited Subaccount groups, 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. 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 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion. 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. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any 37 subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group or change the investment options that are or are not available to you, at any time, in our sole discretion. 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 purchase payments 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 purchase payment or a contract transfer, in excess of the new percentage applicable to a subaccount or subaccount group. This does not apply to subaccounts added to Investment Requirements on or after June 30, 2009. 4. for subaccounts added to Investment Requirements on or after June 30, 2009, you may be subject to rebalancing as described above. If this results in a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% of contract value Investments cannot exceed 75% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. American Century VP Inflation Protection Fund All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Limited-Term Diversified Income Series 5. Delaware VIP Diversified Income Series 6. FTVIPT Templeton Global Bond Securities Fund 7. LVIP SSgA Bond Index Fund 8. LVIP Global Income Fund Group 3 Investments cannot exceed 10% of contract value or ----------------------------------------------------------------- Account Value ---------------------------------------------------- 1. Delaware VIP REIT Series 2. LVIP SSgA Emerging Markets 100 Fund
To satisfy the Investment Requirements, you may allocate 100% of your contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the available 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% of contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile 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 DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Structured Moderately Aggressive Equity Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index 38 Model, Lincoln SSgA Moderately Aggressive Index Model and Lincoln SSgA Moderately Aggressive Equity Index Model. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described above. 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. You may also allocate 100% of your contract value to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. Investment Requirements - Option 3 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts within the group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group, change the investment options that are or are not available to you, or change the rebalancing frequency at any time in our sole discretion. You will be notified at least 30 days prior to the date of any change. We may make such modifications at any time when we believe the modifications are necessary to protect our ability to provide the guarantees under these Riders. Our decision to make modifications will be based on several factors including the general market conditions and the style and investment objectives of the subaccount investments. At the time you receive notice of a change to the Investment Requirements, you may: 1. drop the applicable rider immediately, without waiting for a termination event if you do not wish to be subject to these Investment Requirements; or 2. submit your own reallocation instructions for the contract value, before the effective date specified in the notice, so that the Investment Requirements are satisfied; or 3. take no action and be subject to the quarterly rebalancing as described above. If this results is a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 30% of contract value Investments cannot exceed 70% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. American Century VP Inflation Protection Fund All other funds except as described below. 2. LVIP Delaware Bond Fund 3. Delaware VIP Limited-Term Diversified Income Series 4. Delaware VIP Diversified Income Series 5. FTVIPT Templeton Global Bond Securities Fund 6. LVIP SSgA Bond Index Fund 7. LVIP Global Income Fund
Group 3
39 Investments cannot exceed 10% of contract value or Account Value --------------------------------------------------- 1. Delware VIP Emerging Markets Series 2. LVIP SSgA Emerging Markets 100 Fund 3. Delaware VIP REIT Series 4. LVIP Cohen & Steers Global Real Estate Fund 5. MFS VIT Utilities Series 6. AllianceBernstein VPS Global Thematic Growth Portfolio
To satisfy these Investment Requirements, you may allocate 100% of your contract value among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 70% may be allocated to the LVIP Wilshire Aggressive Profile Fund, LVIP Wilshire 2030 Profile Fund and LVIP Wilshire 2040 Profile Fund. If you allocate less than 100% of contract value to or among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund or the available LVIP Wilshire Profile Funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. The DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index Model and Lincoln SSgA Moderately Aggressive Index Model. You may only choose one asset allocation at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described in your prospectus. If you purchase Lincoln Lifetime IncomeSM Advantage Plus rider on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. Living Benefit Riders The optional Living Benefit Riders offered under this variable annuity contract - Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage - are described in the following sections. The riders offer either a minimum withdrawal benefit (Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage) or a minimum annuity payout (i4LIFE (Reg. TM) Advantage and 4LATER (Reg. TM) Advantage). You may not elect more than one Living Benefit rider at a time. Upon election of a Living Benefit rider, you will be subject to Investment Requirements. The overview chart provided with this prospectus provides a brief description and comparison of each Living Benefit rider. Terms and conditions may change after the contract is purchased. 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 $25,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contractowner/annuitant (Single Life Option) or for the lives of you as contractowner/annuitant and your spouse as joint owner 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 40 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 3 if you purchased the Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009. See The Contracts - Investment Requirements - Option 2 if you purchased Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option before January 20, 2009, your only investment options until the seventh Benefit Year anniversary are: 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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. 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 (see Lincoln Lifetime IncomeSM Advantage - Compare to Lincoln SmartSecurity (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage option). 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. 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. 41 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 and the Rider is within the 10 year period described below. 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 10 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 10-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. For riders purchased prior to January 20, 2009, the 5% Enhancement will be in effect for 15 years from the effective date of the Rider, and a new 15-year period will begin following each Automatic Annual Step-up. 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 10-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2 or 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: 42 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 10-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 10 1st Benefit Year Anniversary......... $54,000 $54,000 Yes 10 2nd Benefit Year Anniversary......... $53,900 $56,700 No 9 3rd Benefit Year Anniversary......... $57,000 $59,535 No 8 4th Benefit Year Anniversary......... $64,000 $64,000 Yes 10
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. For contractowners who purchase Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009, on the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 65, 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). If you purchased the Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009, you will not be eligible to receive the 200% Step-up of the Guaranteed Amount until 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. 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 (RMDs) 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 Amount section below. 43 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 55 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 65, 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 Joint Life Option) 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 60 months or more after the effective date of the Rider (36 months or more for contractowners who purchased this Rider prior to January 20, 2009), 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. For riders purchased on or after January 20, 2009, the admittance to a nursing home must be pursuant to a plan of care provided by a licensed health care practitioner, and the nursing home must be located in the United States. The remaining references to the 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. 44 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 within the Maximum Annual Withdrawal amount are not subject to surrender charges. 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 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 and will not be subject to surrender charges. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the 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) 45 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 - $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. Excess Withdrawals will be subject to surrender charges unless one of the waiver of surrender charge provisions set forth in your prospectus is applicable. Continuing with the prior example of the $12,000 withdrawal: the $5,000 Maximum Annual Withdrawal amount is not subject to surrender charges; the $7,000 Excess Withdrawal may be subject to surrender charges. See Charges and Other Deductions - Surrender Charge. 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). Surrender charges will apply unless one of the waiver of surrender charge provisions is applicable. See Charges and Other Deductions - Surrender Charge. 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. If you choose to surrender your contract at this time, any applicable surrender charges will apply. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts or required minimum distributions, 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. 46 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 purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option prior to January 20, 2009, 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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 exercise of 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 47 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. 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 Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage. Owners of the Lincoln Lifetime IncomeSM Advantage rider are guaranteed the ability to purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit in the future even if it is no longer generally available for purchase. Owners of Lincoln Lifetime IncomeSM Advantage are also guaranteed that the annuity factors that are used to calculate the initial Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage will be the annuity factors in effect as of the day they purchased Lincoln Lifetime IncomeSM Advantage. In 48 addition, owners of Lincoln Lifetime IncomeSM Advantage may in the future purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase Lincoln Lifetime IncomeSM Advantage. i4LIFE (Reg. TM)Advantage with the Guaranteed Income Benefit for Lincoln Lifetime IncomeSM Advantage purchasers 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 charge for new purchasers in effect for the i4LIFE (Reg. TM) Advantage and the current Guaranteed Income Benefit charge in effect for prior purchasers of Lincoln Lifetime IncomeSM Advantage at the time of election of these benefits. If you use 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. 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 = $150,000 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 = $7,537.50 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime IncomeSMAdvantage 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 The Contracts - Death Benefits. 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. 49 Availability. The Lincoln Lifetime IncomeSM Advantage is available for purchase with nonqualified and qualified (IRAs and Roth IRAs) annuity contracts. The contractowner/annuitant as well as the spouse under the Joint Life option must be under age 86 at the time this Rider is elected. You cannot elect the Rider 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. 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 beneficiary. 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. There are two options that step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up): Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase after January 16, 2009. 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 will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. We offer other optional riders available for purchase with 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 50 by you (or on which you or your spouse if joint owner are the annuitant) under either the Lincoln SmartSecurity (Reg. TM) 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 surrender charges and 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 purchase payment $50,000 $50,000 $50,000 o 1st Benefit Year Anniversary $54,000 $54,000 o 2nd Benefit Year Anniversary $53,900 $54,000 o 3rd Benefit Year Anniversary $57,000 $57,000
Annual step-ups, if the conditions are met, will continue until (and including) the 10th Benefit Year Anniversary. If you had elected to have the next ten-year period of step-ups begin automatically after the prior ten-year period, annual step-ups, if conditions are met, will continue beginning on the 11th Benefit Year Anniversary. 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. 51 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 surrender charges or 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 52 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 surrender charges (to the extent that total withdrawals exceed the free amount of withdrawals allowed during a contract year) and a market value adjustment on the amount withdrawn from the fixed account. Refer to the Statement of Additional Information for an example of the market value 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. 53 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 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 - 54 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 terminate the Lincoln SmartSecurity (Reg. TM) Advantage rider and purchase i4LIFE (Reg. TM) Advantage can use any remaining Guaranteed Amount to establish the Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage terms and charge in effect at the time of the i4LIFE (Reg. TM) Advantage election. Contractowners may consider this if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. There are many factors to consider when making this decision, including the cost of the riders, the payout amounts and applicable guarantees. You should discuss this decision with your registered representative. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option 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 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. The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase. 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.SPAN> 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 55 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, are 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. 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. Additional restrictions may apply if you are under age 591/2 when you request a change to the Access Period. Currently, if you extend the Access Period, it must be extended at least 5 years. If you change the Access Period, subsequent regular income payments will be adjusted accordingly, and the Account Value remaining at the end of the new Access Period will be applied to continue regular income payments for your life. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. We may reduce or terminate the Access Period for IRA i4LIFE (Reg. TM) Advantage contracts in order to keep the regular income payments in compliance with IRC provisions for required minimum distributions. The minimum Access Period requirements for Guaranteed Income Benefits are longer than the requirements for i4LIFE (Reg. TM) Advantage without a Guaranteed Income Benefit. Shortening the Access Period will terminate the Guaranteed Income Benefit. See The Contracts - Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. 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 and Guaranteed Income Benefit 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. 56 This results in level regular income payments between recalculation dates. Qualified contracts are only recalculated once per year, at the beginning of each calendar year. You also choose the assumed investment return. Return rates of 3%, 4%, 5%, or 6% may be available. The higher the assumed investment return you choose, the higher your initial regular income payment will be and the higher the return must be to increase subsequent regular income payments. You also choose the length of the Access Period. At this time, changes can only be made on periodic income commencement date anniversaries. Regular income payments are not subject to any surrender charges or 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 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 Guaranteed Income Benefit (if any) will terminate and the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and 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 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 57 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. 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. If a death occurs during the Access Period, the value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of all the following: 58 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). 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. 59 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage A Guaranteed Income Benefit is available for purchase when you elect i4LIFE (Reg. TM) Advantage which ensures that your regular income payments will never be less than a minimum payout floor, regardless of the actual investment performance of your contract. See Charges and Other Deductions for a discussion of the Guaranteed Income Benefit charges. As discussed below, certain features of the Guaranteed Income Benefit may be impacted if you purchased Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage (withdrawal benefit riders) prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (annuity payout rider). Refer to the 4LATER (Reg. TM)Advantage section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider will limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements. The version of the Guaranteed Income Benefit, the date that you purchased it, and/or whether you previously owned Lincoln Lifetime IncomeSM Advantage will determine which Investment Requirement option applies to you. 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 Account Value as defined in the i4LIFE (Reg. TM) Advantage rider section) 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 (In other words, Guaranteed Income Benefit payments reduce the Account Value by the entire amount of the Guaranteed Income Benefit payment.) (Regular income payments also reduce the Account Value). This 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. Additional amounts withdrawn from the Account Value to provide the Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled, and will reduce your death benefit. If your Account Value equals zero, no death benefit will be paid. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living. 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: 60 o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
The contractowner receives an amount equal to the Guaranteed Income Benefit. The entire amount of the Guaranteed Income Benefit is deducted from the Account Value. If you purchased the Guaranteed Income Benefit (version 3) on or after January 20, 2009, the Guaranteed Income Benefit will automatically step-up every year to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. If you purchased the Guaranteed Income Benefit (version 2) prior to January 20, 2009, the Guaranteed Income Benefit will automatically step-up every three years on the periodic income commencement date anniversary to 75% of the current regular income payment, if the result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every periodic income commencement date anniversary during either a 5-year step-up period (version 3) or every third periodic income commencement date anniversary for a 15 year step-up period (version 2). At the end of a step-up period, you may elect a new 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. Step-ups for qualified contracts, including IRAs, will occur on a calendar year basis. At the time of a reset of the step-up period the i4LIFE (Reg. TM) Guaranteed Income Benefit percentage charge may increase subject to the maximum guaranteed charge of 1.50%. This means that your charge may change every five years for version 3 of the Guaranteed Income Benefit or every 15 years for version 2 of the Guaranteed Income Benefit. If we automatically administer a new step-up period for you and if your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the periodic income commencement anniversary. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period. i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit Charges. 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 below in 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. We may change this Access Period requirement prior to election of the Guaranteed Income Benefit. 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 regular income payment frequency; or o upon written notice to us; or o assignment of the contract. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and not the i4LIFE (Reg. TM)Advantage election, unless otherwise specified. 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 61 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. 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. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. 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 $ 900 o Account Value at time of Additional Withdrawal $150,000 o Additional Withdrawal $ 15,000 (a 10% withdrawal)
Reduction in i4LIFE (Reg. TM) Regular Income payment for Withdrawal = $1,200 X 10 % = $120 i4LIFE (Reg. TM) Regular Income payment after Withdrawal = $1,200 - $120 = $1,080 Reduction in Guaranteed Income Benefit for Withdrawal = $900 X 10% = $90 Guaranteed Income Benefit after Withdrawal = $900 - $90 = $810 Surrender. At any time prior to or during the Access Period, you may surrender the contract by withdrawing the surrender value. If the contract is surrendered, the contract terminates and no further regular income payments will be made. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The 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, 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 62 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. 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. 63 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 64 Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the 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). If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit currently is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. We reserve the right to increase this minimum prior to election of 4LATER (Reg. TM) Advantage, subject to the terms in your rider. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. 65 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 - $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. 66 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 67 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. We assume an investment return of 4% per year, as applied to the applicable mortality table. The amount of each payout after the initial payout will depend upon how the underlying fund(s) perform, relative to the 4% assumed rate. If the actual net investment rate (annualized) exceeds 4%, the annuity payout will increase at a rate proportional to the amount of such excess. Conversely, if the actual rate is less than 4% annuity payouts will decrease. 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 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. 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 68 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 Maximum 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, 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 interpolation 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 three (3) full, consecutive contract years; and o the paid up annuity benefit at maturity would be less than $20.00 per month (these requirements may differ in some states). 69 At least 60 days before we surrender your contract, we will send you a letter at your last address we have on file, to inform you that your contract will be surrendered. You will have the opportunity to make additional purchase payments to bring your contract value above the minimum level to avoid surrender. If we surrender your contract, we will not assess any surrender charge. 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, and we will recredit that portion of the surrender/withdrawal charges attributable to the amount returned. This election must be made by your written authorization to us on an approved Lincoln reinvestment form and received in our Home office within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this prospectus. In the case of a qualified retirement plan, a representation must be made that the proceeds being used to make the purchase have retained their tax-favored status under an arrangement for which the contracts offered by this prospectus are designed. The number of accumulation units which will be credited when the proceeds are reinvested will be based on the value of the accumulation unit(s) on the next valuation date. This computation will occur following receipt of the proceeds and request for reinvestment at the Home office. You may utilize the reinvestment privilege only once. For tax reporting purposes, we will treat a surrender/withdrawal and a subsequent reinvestment purchase as separate transactions (and a Form 1099 may be issued, if applicable). You should consult a tax adviser before you request a surrender/withdrawal or subsequent reinvestment purchase. Amendment of Contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Any changes are subject to prior approval of your state's insurance department (if required). Distribution of the Contracts Lincoln Financial Distributors, Inc. ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln Life and is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a member of FINRA. The Principal Underwriter has entered into selling agreements with Lincoln Financial Advisors Corporation ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us ("Selling Firms"). While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. 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 6.50% of purchase payments. 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 70 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 6.50% 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 2008 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. 71 Tax Deferral On Earnings The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied: o An individual must own the contract (or the tax law must treat the contract as owned by an individual). o The investments of the VAA must be "adequately diversified" in accordance with IRS regulations. o Your right to choose particular investments for a contract must be limited. o The annuity commencement date must not occur near the end of the annuitant's life expectancy. Contracts Not Owned By An Individual If a contract is owned by an entity (rather than an individual) the tax code generally does not treat it as an annuity contract for Federal income tax purposes. This means that the entity owning the contract pays tax currently on the excess of the contract value over the purchase payments for the contract. Examples of contracts where the owner pays current tax on the contract's earnings, bonus credits and persistency credits, if applicable, are contracts issued to a corporation or a trust. Some exceptions to the rule are: o Contracts in which the named owner is a trust or other entity that holds the contract as an agent for an individual; however, this exception does not apply in the case of any employer that owns a contract to provide deferred compensation for its employees; o Immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase and substantially equal periodic payments are made, not less frequently than annually, during the annuity payout period; o Contracts acquired by an estate of a decedent; o Certain qualified contracts; o Contracts purchased by employers upon the termination of certain qualified plans; and o Certain contracts used in connection with structured settlement agreements. Investments In The VAA Must Be Diversified For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be "adequately diversified." IRS regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the contract purchase payments. Although we do not control the investments of the underlying investment options, we expect that the underlying investment options will comply with the IRS regulations so that the VAA will be considered "adequately diversified." Restrictions Federal income tax law limits your right to choose particular investments for the contract. Because the IRS has 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 72 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 subject to an exclusion ratio that is determined based on the amount of the payment. Taxation Of Death Benefits We may distribute amounts from your contract because of the death of a contractowner or an annuitant. The tax treatment of these amounts depends on whether you or the annuitant dies before or after the annuity commencement date. Death prior to the annuity commencement date: o If the beneficiary receives death benefits under an annuity payout option, they are taxed in the same manner as annuity payouts. o If the beneficiary does not receive death benefits under an annuity payout option, they are taxed in the same manner as a withdrawal. Death after the annuity commencement date: o If death benefits are received in accordance with the existing annuity payout option, they are excludible from income if they do not exceed the purchase payments not yet distributed from the contract. All annuity payouts in excess of the purchase payments not previously received are includible in income. o If death benefits are received in a lump sum, the tax law imposes tax on the amount of death benefits which exceeds the amount of purchase payments not previously received. Penalty Taxes Payable On Withdrawals, Surrenders, Or Annuity Payouts The tax code may impose a 10% penalty tax on any distribution from your contract which you must include in your gross income. The 10% penalty tax does not apply if one of several exceptions exists. These exceptions include withdrawals, surrenders, or annuity payouts that: o you receive on or after you reach 591/2, o you receive because you became disabled (as defined in the tax law), o you receive from an immediate annuity, o a beneficiary receives on or after your death, or o you receive as a series of substantially equal periodic payments based on your life or life expectancy (non-natural owners holding as agent for an individual do not qualify). 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 73 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. Pursuant to new tax regulations, starting September 24, 2007, the contract is not available for purchase under a 403(b) plan and since July 31, 2008, we do not accept additional premiums or transfers to existing 403(b) contracts. Also, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that surrenders, loans or transfers you request comply with applicable tax requirements and to decline requests that are not in compliance. We will defer processing payments you request until all information required under the tax law has been received. By requesting a surrender, loan or transfer, you consent to the sharing of confidential information about you, your contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, as described below. o Loans are allowed under certain types of qualified plans, but Federal income tax rules prohibit loans under other types of qualified plans. For example, Federal income tax rules permit loans under some section 403(b) plans, but prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject to a variety of limitations, including restrictions as to the loan amount, the loan's duration, the rate of interest, and the manner of repayment. Your contract or plan may not permit loans. Tax Treatment of Payments 74 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. Congress enacted The Worker, Retiree, and Employer recovery Act of 2008 (the Act) in December, 2008. The Act includes a number of relief provisions, including the suspension of the RMD requirement for IRAs and certain qualified plans in 2009. You should consult your tax advisor to determine whether the RMD relief applies to your annuity contract. If your RMD is currently paid automatically each year, Lincoln will not make any changes to your payments for 2009 unless you specifically request that a change be made. 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. 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. 75 Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans. Our Tax Status Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes. Changes in the Law The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by applying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a "quorum"), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the same proportion as the voting instruction which we receive, it is important that each contractowner provide their voting instructions to us. Even though contractowners may choose not to provide voting instruction, the shares of a fund to which such contractowners would have been entitled to provide voting instruction will, subject to fair representation requirements, be voted by us in the same proportion as the voting instruction which we actually receive. As a result, the instruction of a small number of contractowners could determine the outcome of matters subject to shareholder vote. All shares voted by us will be counted when the underlying fund determines whether any requirement for a minimum number of shares be present at such a meeting to satisfy a quorum requirement has been met. Voting instructions to abstain on any item to be voted on will be applied on a pro-rata basis to reduce the number of votes eligible to be cast. 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 surrender charges or 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 the greater of the purchase payment(s) or contract value as of the valuation date we receive the cancellation request, plus any premium taxes that had been deducted. IRA purchasers will also receive the greater of purchase payments or contract value as of the valuation date. 76 State Regulation As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Department of Insurance at all times. A full examination of our operations is conducted by that Department at least every five years. Records and Reports As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Home office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Other Information 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.LincolnFinancial.com, select service centers and continue on through the Internet Service Center. Legal Proceedings In the ordinary course of its business, Lincoln Life, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of Lincoln Life, the financial position of the VAA, or the principal underwriter. 77 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Interest Adjustment Example Annuity Payouts Examples of Regular Income Payment Calculations Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below. Statement of Additional Information Request Card Lincoln ChoicePlusSM Lincoln Life Variable Annuity Account N . Please send me a free copy of the current Statement of Additional Information for Lincoln Life Variable Annuity Account N Lincoln ChoicePlusSM. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 78 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 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) AIM V.I. Capital Appreciation 2006 . 11.266 11.113 5 8.055 7.957 959 2007 . 11.113 12.251 5 7.957 8.789 711 2008 . 12.251 6.933 3 8.789 4.984 539 --------- ------ ------ - ----- ----- --- AIM V.I. Core Equity 2006 . 10.151 10.962 11 9.843 10.644 1,906 2007 . 10.962 11.664 11 10.644 11.348 1,405 2008 . 11.664 8.019 11 11.348 7.817 1,041 --------- ------ ------ -- ------ ------ ----- AIM V.I. International Growth Fund 1998 . 10.000 10.278* 7 1999 . 10.278 15.710 686 2000 . 15.710 11.401 1,579 2001 . 10.000 10.620(1) 1*** 11.401 8.597 1,503 2002 . N/A N/A N/A 8.597 7.148 1,161 2003 . N/A N/A N/A 7.148 9.098 1,014 2004 . N/A N/A N/A 9.098 11.125 830 2005 . N/A N/A N/A 11.125 12.937 693 2006 . N/A N/A N/A 12.937 16.359 558 2007 . 19.697 22.584 1 16.359 18.506 422 2008 . 22.584 13.251 1 18.506 10.880 274 --------- ------ -------- ---- ------ ------ ----- AllianceBernstein VPS Global Technology 1998 . N/A 1999 . N/A 2000 . 10.000 6.961** 1,898 2001 . 10.000 12.876(1) 1*** 6.961 5.117 2,652 2002 . 12.876 7.374 5 5.117 2.936 2,062 2003 . 7.374 10.435 5 2.936 4.163 1,949 2004 . 10.435 10.791 5 4.163 4.314 1,548 2005 . 10.791 11.007 4 4.314 4.410 1,123 2006 . 11.007 11.740 4 4.410 4.713 1,321 2007 . 11.740 13.854 5 4.713 5.572 1,071 2008 . 13.854 7.162 2 5.572 2.887 454 --------- ------ -------- ---- ------ ------ ----- AllianceBernstein VPS Growth and Income 2000 . 10.000 12.485** 763 2001 . 10.000 10.350(2) 12 12.485 12.330 2,870 2002 . 10.350 7.918 53 12.330 9.451 3,415 2003 . 7.918 10.300 32 9.451 12.320 2,871 2004 . 10.300 11.274 28 12.320 13.512 2,455 2005 . 11.274 11.605 27 13.512 13.936 2,083 2006 . 11.605 13.361 25 13.936 16.076 1,718 2007 . 13.361 13.788 23 16.076 16.624 1,330 2008 . 13.788 8.047 16 16.624 9.722 891 --------- ------ -------- ---- ------ ------ ----- AllianceBernstein VPS International Value 2006 . 10.661 11.846 4 9.596 11.861 68 2007 . 11.846 12.309 6 11.861 12.348 143 2008 . 12.309 5.659 7 12.348 5.688 112 --------- ------ -------- ---- ------ ------ -----
A-1
with EEB 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) AllianceBernstein VPS Large Cap Growth 1998 . N/A 1999 . N/A 2000 . 10.000 8.941** 898 2001 . 10.000 11.007(2) 3 8.941 7.282 1,902 2002 . 11.007 7.492 9 7.282 4.966 2,049 2003 . 7.492 9.096 6 4.966 6.042 1,692 2004 . 9.096 9.698 3 6.042 6.455 1,415 2005 . 9.698 10.961 3 6.455 7.310 1,160 2006 . 10.961 10.718 3 7.310 7.162 953 2007 . 10.718 11.984 3 7.162 8.024 728 2008 . 11.984 7.097 2 8.024 4.762 562 --------- ------ -------- - ------ ----- ----- AllianceBernstein VPS Small/Mid Cap Value 2003 . 10.943 15.174 1 10.971 15.243 81 2004 . N/A N/A N/A 15.243 17.898 75 2005 . 17.781 18.659 1*** 17.898 18.820 77 2006 . 18.659 20.971 1 18.820 21.194 103 2007 . 20.971 20.954 3 21.194 21.219 113 2008 . 20.954 13.250 3 21.219 13.444 43 --------- ------ -------- ---- ------ ------ ----- American Century Investments VP Inflation Protection Fund 2004 . N/A N/A N/A 10.000 10.420 299 2005 . N/A N/A N/A 10.420 10.435 504 2006 . N/A N/A N/A 10.435 10.452 398 2007 . N/A N/A N/A 10.452 11.287 313 2008 . 11.352 10.851 9 11.287 10.952 554 --------- ------ -------- ---- ------ ------ ----- American Funds Global Growth Fund 2004 . N/A N/A N/A 10.221 11.283 32 2005 . 11.269 12.652 1 11.283 12.692 88 2006 . 12.652 14.994 1 12.692 15.072 179 2007 . 14.994 16.947 2 15.072 17.070 217 2008 . 16.947 10.275 3 17.070 10.370 208 --------- ------ -------- ---- ------ ------ ----- American Funds Global Small Capitalization Fund 2000 . 10.000 6.92** 687 2001 . 10.000 11.134(2) 2 6.920 5.946 1,070 2002 . 11.134 8.870 11 5.946 4.746 1,260 2003 . 8.870 13.402 6 4.746 7.186 1,260 2004 . 13.402 15.943 7 7.186 8.566 1,485 2005 . 15.943 19.668 9 8.566 10.588 1,397 2006 . 19.668 24.011 12 10.588 12.952 1,178 2007 . 24.011 28.694 12 12.952 15.509 893 2008 . 28.694 13.124 10 15.509 7.108 615 --------- ------ -------- ---- ------ ------ ----- American Funds Growth Fund 2000 . 10.000 9.691** 2,845 2001 . 10.000 10.820(2) 20 9.691 7.821 7,187 2002 . 10.820 8.044 140 7.821 5.826 10,157 2003 . 8.044 10.830 72 5.826 7.860 12,954 2004 . 10.830 11.990 77 7.860 8.720 12,415 2005 . 11.990 13.711 76 8.720 9.991 11,142 2006 . 13.711 14.872 71 9.991 10.858 9,262 2007 . 14.872 16.443 69 10.858 12.029 6,907 2008 . 16.443 9.066 56 12.029 6.646 4,966 --------- ------ -------- ---- ------ ------ ------ American Funds Growth-Income Fund 2000 . 10.000 11.279** 1,269 2001 . 10.000 10.535(2) 48 11.279 11.407 4,314 2002 . 10.535 8.466 279 11.407 9.185 7,545 2003 . 8.466 11.033 209 9.185 11.994 8,781 2004 . 11.033 11.984 221 11.994 13.055 8,425 2005 . 11.984 12.482 216 13.055 13.624 7,340 2006 . 12.482 14.151 194 13.624 15.477 6,098 2007 . 14.151 14.629 180 15.477 16.031 4,757 2008 . 14.629 8.948 141 16.031 9.825 3,590 --------- ------ -------- ---- ------ ------ ------
A-2
with EEB 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 Funds International Fund 2000 . 10.000 6.845** 1,907 2001 . 10.000 10.224(2) 3 6.845 5.407 3,660 2002 . 10.224 8.568 26 5.407 4.541 4,553 2003 . 8.568 11.371 12 4.541 6.038 6,117 2004 . 11.371 13.353 17 6.038 7.104 6,101 2005 . 13.353 15.966 19 7.104 8.512 6,102 2006 . 15.966 18.695 20 8.512 9.987 5,394 2007 . 18.695 22.082 20 9.987 11.820 4,184 2008 . 22.082 12.577 15 11.820 6.746 2,988 --------- ------ -------- -- ------ ------ ----- Delaware VIP Capital Reserves 2005 . N/A N/A N/A 9.922 9.936 21 2006 . N/A N/A N/A 9.936 10.222 8 2007 . 10.493 10.504 2 10.222 10.506 34 2008 . 10.504 10.270 2 10.506 10.293 75 --------- ------ -------- ---- ------ ------ ----- Delaware VIP Diversified Income Series 2004 . N/A N/A N/A 10.000 10.888 306 2005 . 10.875 10.639 5 10.888 10.673 546 2006 . 10.639 11.263 2 10.673 11.321 581 2007 . 11.263 11.906 10 11.321 11.992 621 2008 . 11.906 11.143 13 11.992 11.246 517 --------- ------ -------- ---- ------ ------ ----- Delaware VIP Emerging Markets Series(4) 2004 . N/A N/A N/A 10.103 13.584 206 2005 . 19.378 24.241 2 13.584 17.027 300 2006 . 24.241 30.253 2 17.027 21.293 198 2007 . 30.253 41.238 3 21.293 29.082 188 2008 . 41.238 19.608 2 29.082 13.856 122 --------- ------ -------- ---- ------ ------ ----- Delaware VIP High Yield Series 1998 . 10.000 9.970* 41 1999 . 9.970 9.575 637 2000 . 9.575 7.902 960 2001 . 10.000 10.331(1) 1*** 7.902 7.472 1,213 2002 . 10.331 10.354 1 7.472 7.504 1,719 2003 . 10.354 13.119 3 7.504 9.527 2,489 2004 . 13.119 14.750 9 9.527 10.733 1,765 2005 . 14.750 15.036 8 10.733 10.963 1,340 2006 . 15.036 16.639 6 10.963 12.156 1,150 2007 . 16.639 16.833 4 12.156 12.322 1,248 2008 . 16.833 12.561 5 12.322 9.213 838 --------- ------ -------- ---- ------ ------ ----- Delaware VIP International Value Equity Series 1998 . 10.000 10.152* 2 1999 . 10.152 11.574 314 2000 . 11.574 11.474 208 2001 . 10.000 10.964(1) 1*** 11.474 9.862 172 2002 . N/A N/A N/A 9.862 8.713 157 2003 . N/A N/A N/A 8.713 12.325 175 2004 . N/A N/A N/A 12.325 14.802 148 2005 . N/A N/A N/A 14.802 16.475 170 2006 . N/A N/A N/A 16.475 20.078 136 2007 . N/A N/A N/A 20.078 20.836 77 2008 . N/A N/A N/A 20.836 11.830 34 --------- ------ -------- ---- ------ ------ -----
A-3
with EEB 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) Delaware VIP REIT Series 1998 . 10.000 10.119* 9 1999 . 10.119 9.718 73 2000 . 9.718 12.585 286 2001 . 10.000 10.734(3) 2 12.585 13.501 610 2002 . 10.734 11.041 9 13.501 13.915 1,281 2003 . 11.041 14.563 12 13.915 18.391 1,249 2004 . 14.563 18.829 11 18.391 23.826 1,194 2005 . 18.829 19.859 9 23.826 25.179 883 2006 . 19.859 25.921 7 25.179 32.931 713 2007 . 25.921 21.954 7 32.931 27.946 448 2008 . 21.954 14.030 4 27.946 17.895 292 --------- ------ -------- -- ------ ------ ----- Delaware VIP Small Cap Value Series 1998 . 10.000 10.489* 17 1999 . 10.489 9.841 319 2000 . 9.841 11.468 625 2001 . 10.000 10.992(2) 3 11.468 12.648 1,319 2002 . 10.992 10.212 7 12.648 11.773 1,862 2003 . 10.212 14.269 15 11.773 16.483 1,885 2004 . 14.269 17.059 13 16.483 19.746 1,722 2005 . 17.059 18.369 14 19.746 21.305 1,491 2006 . 18.369 21.004 13 21.305 24.410 1,230 2007 . 21.004 19.302 9 24.410 22.476 886 2008 . 19.302 13.320 8 22.476 15.542 599 --------- ------ -------- -- ------ ------ ----- Delaware VIP Trend Series 1998 . 10.000 10.854* 7 1999 . 10.854 18.244 878 2000 . 18.244 16.751 3,196 2001 . 10.000 11.350(2) 5 16.751 13.984 3,573 2002 . 11.350 8.942 6 13.984 11.040 2,900 2003 . 8.942 11.890 7 11.040 14.708 2,667 2004 . 11.890 13.176 7 14.708 16.332 2,346 2005 . 13.176 13.726 6 16.332 17.049 1,785 2006 . 13.726 14.534 3 17.049 18.088 1,362 2007 . 14.534 15.841 4 18.088 19.754 946 2008 . 15.841 8.303 2 19.754 10.375 654 --------- ------ -------- -- ------ ------ ----- Delaware VIP US Growth Series 2003 . N/A N/A N/A 8.127 9.886 30 2004 . N/A N/A N/A 9.886 10.044 41 2005 . N/A N/A N/A 10.044 11.331 74 2006 . N/A N/A N/A 11.331 11.404 48 2007 . N/A N/A N/A 11.404 12.637 60 2008 . N/A N/A N/A 12.637 7.121 38 --------- ------ -------- --- ------ ------ ----- Delaware VIP Value Series(5) 1998 . 10.000 10.021* 23 1999 . 10.021 9.580 800 2000 . 9.580 10.517 1,143 2001 . 10.000 10.327(2) 4 10.517 9.968 1,478 2002 . 10.327 8.265 8 9.968 7.993 1,340 2003 . 8.265 10.435 7 7.993 10.112 1,624 2004 . 10.435 11.803 7 10.112 11.461 1,483 2005 . 11.803 12.315 7 11.461 11.983 1,452 2006 . 12.315 15.041 9 11.983 14.664 1,236 2007 . 15.041 14.399 10 14.664 14.066 1,024 2008 . 14.399 9.434 6 14.066 9.235 647 --------- ------ -------- --- ------ ------ -----
A-4
with EEB 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) DWS VIP Equity 500 Index 1998 . 10.000 10.353* 91 1999 . 10.353 12.299 3,761 2000 . 12.299 11.008 5,910 2001 . 10.000 10.491(2) 12 11.008 9.533 6,274 2002 . 10.491 8.020 30 9.533 7.302 5,366 2003 . 8.020 10.116 26 7.302 9.229 6,076 2004 . 10.116 11.010 24 9.229 10.064 4,840 2005 . 11.010 11.342 8 10.064 10.388 3,557 2006 . 11.342 12.894 6 10.388 11.834 2,494 2007 . 12.894 13.361 6 11.834 12.287 1,832 2008 . 13.361 8.264 5 12.287 7.615 1,325 --------- ------ -------- -- ------ ------ ----- DWS VIP Small Cap Index (7) 1998 . 10.000 11.014* 4 1999 . 11.014 14.602 405 2000 . 14.602 12.857 513 2001 . 10.000 12.225(1) 1*** 12.857 9.026 370 2002 . N/A N/A N/A 9.026 5.922 268 2003 . 9.470 13.647 1*** 9.494 13.708 424 2004 . 13.647 15.815 1 13.708 15.918 422 2005 . 15.815 16.227 1 15.918 16.366 324 2006 . 16.227 18.763 1*** 16.366 18.961 245 2007 . 18.763 18.114 1*** 18.961 18.342 173 2008 . 18.114 11.743 1* 18.342 11.915 120 --------- ------ -------- ---- ------ ------ ----- Fidelity VIP Contrafund Portfolio 2003 . N/A N/A N/A 9.757 12.334 69 2004 . N/A N/A N/A 12.334 14.007 287 2005 . 13.912 15.972 2 14.007 16.113 656 2006 . 15.972 17.515 9 16.113 17.705 646 2007 . 17.515 20.219 9 17.705 20.480 465 2008 . 20.219 11.403 10 20.480 11.574 367 --------- ------ -------- ---- ------ ------ ----- Fidelity VIP Equity-Income Portfolio 1998 . 10.000 10.101* 37 1999 . 10.101 10.588 1,464 2000 . 10.588 11.320 2,574 2001 . 10.000 10.304(2) 6 11.320 10.609 3,121 2002 . 10.304 8.422 24 10.609 8.689 3,153 2003 . 8.422 10.802 26 8.689 11.166 2,884 2004 . 10.802 11.857 28 11.166 12.281 2,659 2005 . 11.857 12.353 27 12.281 12.820 2,145 2006 . 12.353 14.612 18 12.820 15.195 1,685 2007 . 14.612 14.600 20 15.195 15.213 1,256 2008 . 14.600 8.239 10 15.213 8.603 858 --------- ------ -------- ---- ------ ------ ----- Fidelity VIP Growth Portfolio 1998 . 10.000 10.605* 43 1999 . 10.605 14.360 2,642 2000 . 14.360 12.605 4,685 2001 . 10.000 11.426(3) 2 12.605 10.236 4,843 2002 . 11.426 7.859 3 10.236 7.055 3,533 2003 . 7.859 10.275 3 7.055 9.242 3,043 2004 . 10.275 10.454 3 9.242 9.421 2,542 2005 . 10.454 10.884 2 9.421 9.829 1,950 2006 . 10.884 11.445 1*** 9.829 10.356 1,411 2007 . 11.445 14.300 1*** 10.356 12.966 1,036 2008 . 14.300 7.435 1 12.966 6.755 755 --------- ------ -------- ---- ------ ------ ----- Fidelity VIP Mid Cap 2005 . 10.000 11.568 2 10.000 11.581 128 2006 . 11.568 12.796 8 11.581 12.836 357 2007 . 12.796 14.524 8 12.836 14.599 293 2008 . 14.524 8.632 7 14.599 8.694 221 --------- ------ -------- ---- ------ ------ -----
A-5
with EEB 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) Fidelity VIP Overseas Portfolio 1998 . 10.000 10.106* 13 1999 . 10.106 14.210 628 2000 . 14.210 11.335 1,037 2001 . 10.000 10.871(3) 1*** 11.335 8.811 897 2002 . 10.871 8.528 1*** 8.811 6.926 723 2003 . 8.528 12.033 1*** 6.926 9.793 711 2004 . 12.033 13.457 1 9.793 10.973 676 2005 . 13.457 15.766 1 10.973 12.882 588 2006 . 15.766 18.320 1*** 12.882 14.999 466 2007 . 18.320 21.152 1*** 14.999 17.351 356 2008 . 21.152 11.698 1* 17.351 9.615 264 --------- ------ -------- - ------ ------ ----- FTVIPT Franklin Income Securities 2006 . 10.581 11.225 5 10.183 11.239 127 2007 . 11.225 11.462 5 11.239 11.499 285 2008 . 11.462 7.935 8 11.499 7.976 267 --------- ------ -------- - ------ ------ ----- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 1998 . N/A 1999 . N/A 2000 . 10.000 7.540** 834 2001 . 10.000 12.298(1) 4 7.540 6.301 1,471 2002 . 12.298 8.631 10 6.301 4.431 1,735 2003 . 8.631 11.658 6 4.431 5.997 1,519 2004 . 11.658 12.789 6 5.997 6.592 1,253 2005 . 12.789 13.189 2 6.592 6.812 1,081 2006 . 13.189 14.108 3 6.812 7.301 868 2007 . 14.108 15.445 2 7.301 8.009 666 2008 . 15.445 8.740 2 8.009 4.541 467 --------- ------ -------- -- ------ ------ ----- FTVIPT Mutual Shares Securities 2006 . 10.492 11.270 3 10.234 11.284 142 2007 . 11.270 11.477 5 11.284 11.514 262 2008 . 11.477 7.104 7 11.514 7.141 232 --------- ------ -------- -- ------ ------ ----- FTVIPT Templeton Global Income Securities 2005 . N/A N/A N/A 9.952 9.887 13 2006 . 10.526 10.960 7 9.887 10.995 465 2007 . 10.960 11.973 8 10.995 12.035 168 2008 . 11.973 12.514 12 12.035 12.604 383 --------- ------ -------- ---- ------ ------ ----- FTVIPT Templeton Growth Securities Fund 1998 . N/A 1999 . N/A 2000 . 10.000 11.029** 155 2001 . 10.000 11.172(1) 2 11.029 10.733 376 2002 . 11.172 8.962 8 10.733 8.627 609 2003 . 8.962 11.654 5 8.627 11.241 511 2004 . 11.654 13.307 5 11.241 12.861 514 2005 . 13.307 14.256 8 12.861 13.806 569 2006 . 14.256 17.090 4 13.806 16.583 479 2007 . 17.090 17.213 4 16.583 16.737 363 2008 . 17.213 9.770 4 16.737 9.519 242 --------- ------ -------- ---- ------ ------ ----- Janus Aspen Balanced Portfolio 2003 . N/A N/A N/A N/A N/A N/A 2004 . 10.960 11.680 1 11.011 11.758 56 2005 . 11.680 12.376 1 11.758 12.483 97 2006 . 12.376 13.448 1 12.483 13.591 64 2007 . 13.448 14.596 1 13.591 14.781 81 2008 . 14.596 12.057 1* 14.781 12.235 80 --------- ------ -------- ---- ------ ------ -----
A-6
with EEB 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) Janus Aspen Mid Cap Growth Portfolio 2003 . 8.052 10.679 1*** 8.073 10.729 10 2004 . 10.679 12.662 1*** 10.729 12.746 58 2005 . 12.662 13.959 1 12.746 14.080 88 2006 . 13.959 15.566 1 14.080 15.732 75 2007 . 15.566 18.649 1*** 15.732 18.886 75 2008 . 18.649 10.304 1 18.886 10.455 44 --------- ------ ------ - ------ ------ -- Janus Aspen Worldwide Growth Portfolio 2003 . N/A N/A N/A 8.439 10.292 6 2004 . N/A N/A N/A 10.292 10.609 6 2005 . N/A N/A N/A 10.609 11.044 9 2006 . N/A N/A N/A 11.044 12.843 6 2007 . N/A N/A N/A 12.843 13.851 7 2008 . 12.455 7.429 1* 13.851 7.538 4 --------- ------ ------ ---- ------ ------ -- Lincoln VIP Baron Growth Opportunities(11) 2006 . 9.758 10.619 2 10.172 10.632 28 2007 . 10.619 10.808 3 10.632 10.843 52 2008 . 10.808 6.474 3 10.843 6.508 71 --------- ------ ------ ---- ------ ------ -- Lincoln VIP Capital Growth 2007 . N/A N/A N/A 9.772 10.717 1 2008 . N/A N/A N/A 10.717 6.158 13 --------- ------ ------ ---- ------ ------ -- Lincoln VIP Cohen & Steers Global Real Estate 2007 . N/A N/A N/A 9.558 8.231 50 2008 . N/A N/A N/A 8.231 4.693 80 --------- ------ ------ ---- ------ ------ -- Lincoln VIP Columbia Value Opportunities 2007 . N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 8.144 6.086 21 --------- ------ ------ ---- ------ ------ ----- Lincoln VIP Core Fund(8) 2005 . N/A N/A N/A 10.095 10.275 13 2006 . N/A N/A N/A 10.275 11.545 12 --------- ------ ------ ---- ------ ------ ----- Lincoln VIP Delaware Bond 1998 . 10.000 10.095* 46 1999 . 10.095 9.631 1,260 2000 . 9.631 10.530 2,348 2001 . 10.000 10.101(2) 15 10.530 11.334 5,439 2002 . 10.101 10.951 114 11.334 12.312 10,002 2003 . 10.951 11.561 46 12.312 13.025 8,138 2004 . 11.561 11.981 44 13.025 13.525 6,719 2005 . 11.981 12.102 42 13.525 13.689 5,626 2006 . 12.102 12.472 32 13.689 14.135 4,174 2007 . 12.472 12.942 25 14.135 14.697 3,175 2008 . 12.942 12.364 18 14.697 14.069 2,333 --------- ------ -------- ---- ------ ------ ------ Lincoln VIP Delaware Growth and Income 2005 . N/A N/A N/A 10.058 10.379 14 2006 . N/A N/A N/A 10.379 11.471 20 2007 . N/A N/A N/A 11.471 11.973 29 2008 . N/A N/A N/A 11.973 7.557 15 --------- ------ -------- ---- ------ ------ ------ Lincoln VIP Delaware Social Awareness(6) 1998 . 10.000 10.659* 55 1999 . 10.659 11.870 611 2000 . 11.870 10.607 715 2001 . 10.000 11.535(1) 1*** 10.607 9.462 635 2002 . 11.535 8.758 1*** 9.462 7.199 575 2003 . 9.248 11.466 1*** 8.845 11.501 424 2004 . 11.466 12.717 1*** 11.501 12.782 427 2005 . 12.717 14.021 1*** 12.782 14.120 420 2006 . 14.021 15.496 1*** 14.120 15.638 307 2007 . 15.496 15.703 1*** 15.638 15.878 220 2008 . 15.703 10.136 1 15.878 10.269 174 --------- ------ -------- ---- ------ ------ ------
A-7
with EEB 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) Lincoln VIP Delaware Special Opportunities 2007 . N/A N/A N/A 10.033 9.154 10 2008 . N/A N/A N/A 9.154 5.700 43 --------- -- --- --- ------ ----- -- Lincoln VIP Growth Fund(9) 2005 . N/A N/A N/A 10.093 10.849 1 2006 . N/A N/A N/A 10.849 11.358 6 --------- -- --- --- ------ ------ -- Lincoln VIP Growth Opportunities(10) 2005 . N/A N/A N/A 10.494 11.456 16 2006 . N/A N/A N/A 11.456 12.414 3 --------- -- --- --- ------ ------ -- Lincoln VIP Janus Capital Appreciation 2003 . N/A N/A N/A 10.332 12.207 9 2004 . N/A N/A N/A 12.207 12.641 21 2005 . N/A N/A N/A 12.641 12.957 34 2006 . N/A N/A N/A 12.957 13.978 27 2007 . N/A N/A N/A 13.978 16.556 36 2008 . 15.319 9.530 1* 16.556 9.637 8 --------- ------ ------ --- ------ ------ -- Lincoln VIP Marsico International Growth 2007 . N/A N/A N/A 9.717 11.163 29 2008 . N/A N/A N/A 11.163 5.606 20 --------- ------ ------ --- ------ ------ -- Lincoln VIP MFS Value 2007 . N/A N/A N/A 9.710 9.721 1 2008 . N/A N/A N/A 9.721 6.475 19 --------- ------ ------ --- ------ ------ -- Lincoln VIP Mid-Cap Value 2007 . N/A N/A N/A 9.785 8.649 6 2008 . N/A N/A N/A 8.649 5.044 13 --------- ------ ------ --- ------ ------ -- Lincoln VIP Mondrian International Value 2003 . N/A N/A N/A 9.706 13.554 69 2004 . N/A N/A N/A 13.554 16.164 173 2005 . 16.060 17.788 1*** 16.164 17.939 239 2006 . 17.788 22.758 1*** 17.939 22.998 266 2007 . 22.758 24.970 1 22.998 25.283 197 2008 . 24.970 15.566 1 25.283 15.793 135 --------- ------ ------ --- ------ ------ --- Lincoln VIP Money Market Fund 1998 . 10.000 10.034* 348 1999 . 10.034 10.364 1,721 2000 . 10.364 10.840 2,790 2001 . 10.000 10.029(2) 27 10.840 11.119 5,801 2002 . 10.029 10.009 52 11.119 11.119 6,446 2003 . 10.009 9.917 27 11.119 11.039 3,443 2004 . 9.917 9.845 23 11.039 10.981 2,773 2005 . 9.845 9.959 20 10.981 11.131 2,440 2006 . 9.959 10.260 22 11.131 11.490 1,755 2007 . 10.260 10.598 36 11.490 11.892 2,055 2008 . 10.598 10.675 30 11.892 12.002 2,601 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA Bond Index 2008 . N/A N/A N/A 10.103 10.470 128 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA Developed International 150 2008 . N/A N/A N/A 9.170 6.267 12 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA Emerging Markets 100 2008 . N/A N/A N/A 9.499 6.058 10 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA International Index 2008 . N/A N/A N/A 9.474 6.403 13 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA Large Cap 100 2008 . N/A N/A N/A 9.119 6.980 24 --------- ------ -------- --- ------ ------ ----- Lincoln VIP SSgA S&P 500 Index 2007 . N/A N/A N/A 11.551 11.468 20 2008 . N/A N/A N/A 11.468 7.102 60 --------- ------ -------- --- ------ ------ -----
A-8
with EEB 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) Lincoln VIP SSgA Small Cap Index 2007 . N/A N/A N/A 9.914 9.158 8 2008 . N/A N/A N/A 9.158 5.948 30 --------- ------ ------ -------- ----- ----- -- Lincoln VIP SSgA Small/Mid Cap 200 2008 . N/A N/A N/A 9.073 7.231 7 --------- ------ ------ -------- ----- ----- -- Lincoln VIP T. Rowe Price Growth Stock 2007 . N/A N/A N/A 9.841 9.936 17 2008 . N/A N/A N/A 9.936 5.684 18 --------- ------ ------ -------- ----- ----- -- Lincoln VIP T. Rowe Price Structured Mid-Cap Growth 2003 . N/A N/A N/A 11.106 12.339 3 2004 . N/A N/A N/A 12.339 13.795 2 2005 . N/A N/A N/A 13.795 14.902 15 2006 . N/A N/A N/A 14.902 16.017 5 2007 . N/A N/A N/A 16.017 17.895 6 2008 . N/A N/A N/A 17.895 10.073 13 --------- ------ ------ -------- ------ ------ -- Lincoln VIP Templeton Growth 2007 . N/A N/A N/A 9.811 9.807 14 2008 . N/A N/A N/A 9.807 6.005 18 --------- ------ ------ -------- ------ ------ -- Lincoln VIP Turner Mid-Cap Growth 2007 . N/A N/A N/A 9.907 10.853 10 2008 . N/A N/A N/A 10.853 5.411 14 --------- ------ ------ -------- ------ ------ -- Lincoln VIP UBS Global Asset Allocation 2003 . 10.612 11.346 1 10.588 11.360 4 2004 . 11.346 12.648 1 11.360 12.688 46 2005 . 12.648 13.260 2 12.688 13.329 74 2006 . 13.260 14.905 2 13.329 15.014 67 2007 . 14.905 15.566 3 15.014 15.710 72 2008 . 15.566 10.204 3 15.710 10.319 47 --------- ------ ------ --- ------ ------ -- Lincoln VIP Wilshire 2010 Profile 2007 . N/A N/A N/A 9.815 10.450 20 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2020 Profile 2007 . N/A N/A N/A 9.551 10.296 17 2008 . N/A N/A N/A 10.296 7.404 19 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2030 Profile 2007 . N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2040 Profile 2007 . N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire Aggressive Profile 2005 . N/A N/A N/A 10.102 10.897 82 2006 . N/A N/A N/A 10.897 12.492 171 2007 . N/A N/A N/A 12.492 13.642 116 2008 . N/A N/A N/A 13.642 7.988 102 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire Conservative Profile 2005 . N/A N/A N/A 9.991 10.266 113 2006 . N/A N/A N/A 10.266 11.041 183 2007 . N/A N/A N/A 11.041 11.705 228 2008 . N/A N/A N/A 11.705 9.390 265 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire Moderate Profile 2005 . N/A N/A N/A 10.041 10.484 93 2006 . N/A N/A N/A 10.484 11.555 348 2007 . N/A N/A N/A 11.555 12.420 386 2008 . N/A N/A N/A 12.420 8.964 353 --------- ------ ------ --- ------ ------ ---
A-9
with EEB 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) Lincoln VIP Wilshire Moderately Aggressive Profile 2005 . N/A N/A N/A 9.989 10.661 99 2006 . N/A N/A N/A 10.661 11.970 124 2007 . N/A N/A N/A 11.970 12.929 177 2008 . N/A N/A N/A 12.929 8.468 123 --------- -- ---- --- ------ ------ --- MFS VIT Core Equity 2003 . N/A N/A N/A 8.235 10.322 1 2004 . N/A N/A N/A 10.322 11.408 7 2005 . N/A N/A N/A 11.408 11.414 5 2006 . N/A N/A N/A 11.414 12.776 4 2007 . N/A N/A N/A 12.776 13.968 2 2008 . N/A N/A N/A 13.968 8.358 1* --------- -- ---- --- ------ ------ --- MFS VIT Growth Series 1998 . 10.000 11.242* 6 1999 . 11.242 19.557 1,212 2000 . 19.557 15.504 2,387 2001 . 10.000 12.135(1) 1 15.504 10.169 2,292 2002 . 12.135 7.911 2 10.169 6.642 1,506 2003 . 7.911 10.139 3 6.642 8.529 1,322 2004 . 10.139 11.271 3 8.529 9.501 1,088 2005 . 11.271 12.111 4 9.501 10.230 879 2006 . 12.111 12.860 3 10.230 10.884 671 2007 . 12.860 15.335 1 10.884 13.005 503 2008 . 15.335 9.445 2 13.005 8.025 363 --------- ------ -------- ---- ------ ------ ----- MFS VIT Total Return Series 1998 . 10.000 10.136* 51 1999 . 10.136 10.303 1,271 2000 . 10.303 11.787 2,204 2001 . 10.000 10.288(2) 12 11.787 11.652 3,653 2002 . 10.288 9.602 42 11.652 10.896 4,271 2003 . 9.602 10.992 49 10.896 12.499 3,965 2004 . 10.992 12.042 50 12.499 13.720 3,555 2005 . 12.042 12.185 46 13.720 13.911 3,177 2006 . 12.185 13.418 42 13.911 15.349 2,489 2007 . 13.418 13.761 40 15.349 15.774 1,910 2008 . 13.761 10.546 33 15.774 12.112 1,364 --------- ------ -------- ---- ------ ------ ----- MFS VIT Utilities Series 1998 . 10.000 10.244* 67 1999 . 10.244 13.213 1,273 2000 . 13.213 13.950 3,275 2001 . 10.000 9.375(2) 3 13.950 10.426 3,697 2002 . 9.375 7.126 15 10.426 7.942 2,732 2003 . 7.126 9.531 22 7.942 10.642 2,491 2004 . 9.531 12.212 16 10.642 13.664 2,202 2005 . 12.212 14.042 16 13.664 15.743 2,081 2006 . 14.042 18.140 17 15.743 20.377 1,653 2007 . 18.140 22.832 17 20.377 25.700 1,226 2008 . 22.832 14.005 13 25.700 15.796 955 --------- ------ -------- ---- ------ ------ ----- Neuberger Berman AMT Mid-Cap Growth Portfolio 2003 . N/A N/A N/A 8.370 10.570 84 2004 . 10.522 12.044 1*** 10.570 12.123 114 2005 . 12.044 13.482 1 12.123 13.597 145 2006 . 13.482 15.218 4 13.597 15.378 126 2007 . 15.218 18.350 2 15.378 18.581 121 2008 . 18.350 10.226 2 18.581 10.376 60 --------- ------ -------- ---- ------ ------ ----- Neuberger Berman AMT Regency Portfolio 2003 . N/A N/A N/A 9.842 13.184 48 2004 . 13.123 15.802 1*** 13.184 15.907 145 2005 . 15.802 17.418 1*** 15.907 17.569 225 2006 . 17.418 19.055 1*** 17.569 19.259 163 2007 . 19.055 19.372 1*** 19.259 19.618 98 2008 . 19.372 10.329 1* 19.618 10.481 52 --------- ------ -------- ---- ------ ------ -----
A-10
with EEB 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) Putnam VT Growth and Income Fund 2003 . N/A N/A N/A 8.684 10.908 12 2004 . N/A N/A N/A 10.908 11.952 18 2005 . N/A N/A N/A 11.952 12.402 24 2006 . N/A N/A N/A 12.402 14.175 16 2007 . N/A N/A N/A 14.175 13.134 15 2008 . N/A N/A N/A 13.134 7.939 7 --------- ----------- -------- ------------- ------ ------ -- Putnam VT Health Sciences Fund 2003 . N/A N/A N/A 8.306 9.697 16 2004 . N/A N/A N/A 9.697 10.244 32 2005 . N/A N/A N/A 10.244 11.434 225 2006 . N/A N/A N/A 11.434 11.590 51 2007 . N/A N/A N/A 11.590 11.361 33 2008 . N/A N/A N/A 11.361 9.290 206 --------- ----------- -------- ------------- ------ ------ ---
* 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 (November 20, 1998) through December 31, 1998. ** 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 (February 22, 2000) through December 31, 2000. *** All numbers less than 500 were rounded up to 1,000. (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 Market Series. In 2004, the Delaware VIP Emerging Markets Series subaccount was added to the product. (5) Effective following the close of business on or about April 30, 2003, the Delaware VIP Devon Series merged with and into the Delaware Large Cap Value Series, which changed its name to the Delaware Value Series in 2004. (6) Effective following the close of business on May 19, 2003, shares of the Lincoln VIP Social Awareness Series 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. (7) Effective following the close of business on May 19, 2003, shares of the Scudder VIT Small Cap Index Fund were substituted for shares of the Scudder SVS Small Cap Growth Portfolio. The values in the table for periods prior to the substitution reflect investment in the Scudder SVS Small Cap Growth Portfolio. (8) 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. (9) 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. (10) 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. (11) 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-11 [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. Prior versions of these riders may have different features.
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to guarantee that Designed to guarantee that Designed to guarantee that at least the entire amount if you make your first if you make your first of your purchase payments withdrawal on or after the withdrawal on or after the will be returned to you date you reach age 65, you date you reach age 59 1/2 (age through periodic are guaranteed income for 65 under Joint Life), you withdrawals, regardless of your life (and your are guaranteed income for the investment performance spouse's, under Joint Life your life (and your of the contract. (no version), spouse's, under Joint Life longer available for even after the entire version). purchase on or after amount of purchase payments January 16, 2009) has been returned to you LINCOLN LIFETIME INCOME(SM) through periodic Advantage Plus is designed withdrawals. If lifetime to guarantee that contract withdrawals are not in value will not be less than effect, you may make the initial purchase periodic withdrawals of the payment (or contract value Guaranteed Amount. on rider date) at the end of a 7-year period if you make no withdrawals and cancel the LINCOLN LIFETIME INCOME(SM) Advantage at that time. ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee 0.65% of Guaranteed Amount 0.65% (Single Life) or 0.90% of Guaranteed Amount 0.80% (Joint Life) of (1.05% with LINCOLN Guaranteed Amount LIFETIME INCOME(SM) Advantage Plus) ------------------------------------------------------------------------------------------------------------------------- 3. Guaranteed 0.95% of Guaranteed Amount 1.50% of Guaranteed Amount 1.50% of Guaranteed Amount Maximum Fee -------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to provide an Designed to guarantee today Designed to use the Income income program that a future minimum payout Base established under combines variable lifetime floor for i4LIFE(R) Advantage 4LATER(R) Advantage (if income payments and a death regular income payments, 4LATER(R) Advantage benefit with the ability to regardless of investment Guaranteed Income Benefit make withdrawals during a performance, by providing is elected) or the Account defined period. an Income Base during the Value* established under accumulation period that i4LIFE(R) Advantage (if can be used to establish in i4LIFE(R) Advantage the future a Guaranteed Guaranteed Income Benefit Income Benefit with i4LIFE(R) is elected) or the Advantage. Guaranteed Amount under LINCOLN LIFETIME INCOME(SM) Advantage (for prior purchasers of LINCOLN LIFETIME INCOME(SM) Advantage) to provide a minimum payout floor for i4LIFE(R) Advantage regular income payments, regardless of investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee Varies based on product and 0.65% of Income Base 1) 0.65% added to the i4LIFE(R) death benefit option Advantage charge (assessed as a % of (4LATER(R) Advantage account value, and only Guaranteed Income Benefit) during annuity payout 2) 0.50% added to the i4LIFE(R) phase) Advantage charge (i4LIFE(R) Advantage Guaranteed Income Benefit) (assessed as a % of account value, and only during annuity payout phase ------------------------------------------------------------------------------------------------------------------------ 3. Guaranteed Same as current fee 1.50% of Income Base 1.50% added to the i4LIFE(R) Maximum Fee Advantage charge (assessed as a % of account value, and only during annuity payout phase) ------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes - 7% annually Yes - 5% annually Yes - 5% annually Permitted Withdrawals negate LINCOLN LIFETIME INCOME(SM) Advantage Plus ------------------------------------------------------------------------------------------------------------------------ 5. Payments No Yes (if conditions are met) Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential Purchase Payments Purchase Payments Purchase Payments Increases to Optional 5-Year Step-Ups Automatic Annual Step-Ups 5% Enhancements Guaranteed Amount, (if conditions are met) (if conditions are met) Automatic Annual Step-Ups Income Base, or 200% Step-Up Guaranteed Income (if conditions are met) Benefit (as applicable) ------------------------------------------------------------------------------------------------------------------------ 7. Investment Option 3 (different Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date apply depending upon date of purchase. See of purchase. See of purchase. See Investment Requirements Investment Requirements Investment Requirements section of prospectus for section of prospectus for section of prospectus for more details) more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to Yes Yes, after the first rider Yes-may impact the charge Make Additional anniversary, if cumulative Purchase payments are over $100,000 Payments if Contract and prior Home Office Value is greater than approval is provided zero ------------------------------------------------------------------------------------------------------------------------ 9. Spousal Yes Yes No Continuation ------------------------------------------------------------------------------------------------------------------------ 10. Ability to Yes, after 5 years Yes, after 5 years Yes, after 7 Years Cancel Rider following the later of following the later of rider effective date or rider effective date or contractowner-elected step- contractowner-elected step- up up ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No Yes Home Benefit (Not available in New York) ------------------------------------------------------------------------------------------------------------------------ 12. May Elect No No No Other Living Benefit Riders ------------------------------------------------------------------------------------------------------------------------
I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes, during Access Period Yes, only after you elect No Permitted i4LIFE(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 5. Payments Yes (if conditions are met) If elect i4LIFE(R)Advantage Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential N/A Purchase Payments Automatic Annual Step-Ups Increases to 15% Enhancements (every 3 Prior versions will have Guaranteed Amount, years) different Step-Up Income Base, or provisions Guaranteed Income Resets to contract value Benefit (as applicable) (if conditions are met) (if conditions are met) ------------------------------------------------------------------------------------------------------------------------ 7. Investment None Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date of purchase. See of purchase. See Investment Requirements Investment Requirements section of prospectus for section of prospectus for more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to No (non-qualified Yes No Make Additional contracts) Purchase Payments if Yes, during Access Period, Contract Value unless 4LATER(R) Advantage is greater than Guaranteed Income Benefit zero or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) ------------------------------------------------------------------------------------------------------------------------ 9. Spousal No Yes (prior to Periodic No Continuation Income Commencement Date) ------------------------------------------------------------------------------------------------------------------------ 10. Ability to No (non-qualified Yes, after 3 years Yes, after 3 years Cancel Rider contracts) following the later of following the later of rider effective date or rider effective date or Yes, at any time most recent Reset most recent Reset (if (qualified contracts) 4LATER(R) Advantage Guaranteed Income Benefit is elected or purchasers of LINCOLN LIFETIME INCOME(SM) Advantage elect the Guaranteed Income Benefit) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No No Home Benefit ------------------------------------------------------------------------------------------------------------------------ 12. May Elect Limited to Guaranteed No (prior to Periodic Limited to i4LIFE(R) Other Living Benefit Income Benefit Income Commencement Date) Advantage Riders ------------------------------------------------------------------------------------------------------------------------
SAI 1 Lincoln ChoicePlusSM 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 prospectus of Lincoln Life Variable Annuity Account N dated May 1, 2009. You may obtain a copy of the Lincoln ChoicePlusSM 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 Capital Markets B-5 Advertising & Ratings B-6 More About the S&P 500 Index B-6 Additional Services B-6 Other Information B-7 Financial Statements B-8
This SAI is not a prospectus. The date of this SAI is May 1, 2009. 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, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, 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 The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service. Principal Underwriter Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life, serves as principal underwriter (the "Principal Underwriter") for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives, who are associated with Lincoln Financial Advisors Corporation, 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, $162,288,944, $223,104,195, and $220,940,772 to LFA and Selling Firms in 2006, 2007 and 2008, respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts. Purchase of Securities Being Offered The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived. Both before and after the annuity commencement date, there are exchange privileges between subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts. The offering of the contracts is continuous. Interest Adjustment Example Note: This example is intended to show how the interest adjustment calculation impacts the surrender value of a representative contract. The surrender charges, annual account fee, adjustment factor, and guaranteed minimum interest rate values shown here are generally different from those that apply to specific contracts, particularly those contracts that deduct an initial sales load or pay a bonus on deposits. Calculations of the interest adjustment in your contract, if applicable, will be based on the factors applicable to your contract. The interest adjustment may be referred to as a market value adjustment in your contract. B-2 SAMPLE CALCULATIONS FOR MALE 35 ISSUE CASH SURRENDER VALUES Single Premium.................. $50,000 Premium taxes................... None Withdrawals..................... None Guaranteed Period............... 5 years Guaranteed Interest Rate........ 3.50% Annuity Date.................... Age 70 Index Rate A.................... 3.50% Index Rate B.................... 4.00% End of contract year 1 3.50% End of contract year 2 3.00% End of contract year 3 2.00% End of contract year 4 Percentage adjustment to B...... 0.50%
Interest Adjustment Formula (1 + Index A)n ------------------------------ -1 n = Remaining Guaranteed Period (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity 1 + Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment Formula Value Value (3) & (4) Charge Value --------------- --------- -------------------- ---------- --------- ------------ ----------- ---------- 1............ $51,710 0.962268 $49,759 $50,710 $50,710 $4,250 $46,460 2............ $53,480 0.985646 $52,712 $51,431 $52,712 $4,250 $48,462 3............ $55,312 1.000000 $55,312 $52,162 $55,312 $4,000 $51,312 4............ $57,208 1.009756 $57,766 $52,905 $57,766 $3,500 $54,266 5............ $59,170 N/A $59,170 $53,658 $59,170 $3,000 $56,170
ANNUITY VALUE CALCULATION
BOY* Annual EOY** Annuity Guaranteed Account Annuity Contract Year Value Interest Rate Fee Value ------------------ --------- --------------- --------- ---------- 1...............$50,000 x 1.035 - $40 = $51,710 2...............$51,710 x 1.035 - $40 = $53,480 3...............$53,480 x 1.035 - $40 = $55,312 4...............$55,312 x 1.035 - $40 = $57,208 5...............$57,208 x 1.035 - $40 = $59,170
SURRENDER CHARGE CALCULATION
Surrender Charge Surrender Contract Year Factor Deposit Charge ------------------ ---------- --------- ---------- 1............... 8.5% x $50,000 = $4,250 2............... 8.5% x $50,000 = $4,250 3............... 8.0% x $50,000 = $4,000 4............... 7.0% x $50,000 = $3,500 5............... 6.0% x $50,000 = $3,000
B-3 1 + INTEREST ADJUSTMENT FORMULA CALCULATION
Contract Year Index A Index B Adj Index B N Result ---------------- --------- --------- ------------- ----- --------- 1............. 3.50% 4.00% 4.50% 4 0.962268 2............. 3.50% 3.50% 4.00% 3 0.985646 3............. 3.50% 3.00% 3.50% 2 1.000000 4............. 3.50% 2.00% 2.50% 1 1.009756 5............. 3.50% N/A N/A N/A N/A
MINIMUM VALUE CALCULATION
Minimum Annual Guaranteed Account Minimum Contract Year Interest Rate Fee Value ------------------ --------------- --------- ---------- 1...............$50,000 x 1.015 - $40 = $50,710 2...............$50,710 x 1.015 - $40 = $51,431 3...............$51,431 x 1.015 - $40 = $52,162 4...............$52,162 x 1.015 - $40 = $52,905 5...............$52,905 x 1.015 - $40 = $53,658
* BOY = beginning of year ** EOY = end of year Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax; o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity Mortality Tables, modified, with an assumed investment return at the rate of 4% 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. Capital Markets Beginning in 2008 and continuing as of the date of this prospectus, the capital and credit markets have experienced an unusually high degree of volatility. As a result, the market for fixed income securities has experienced illiquidity, increased price volatility, credit downgrade events and increased expected probability of default. Securities that are less liquid are more difficult to value and may be B-5 hard to sell, if desired. During this time period, domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers (such as our company) that have exposure to the real estate, mortgage and credit markets particularly affected. In any particular year, our capital may increase or decrease depending on a variety of factors - the amount of our statutory income or losses (which itself is sensitive to equity market and credit market conditions), the amount of additional capital we must hold to support business growth, changes in reserving requirements, our inability to secure capital market solutions to provide reserve relief, such as issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio and changes in interest rates. Advertising & Ratings We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln Life or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. In late September and early October of 2008, A.M. Best Company, Fitch, Moody's and Standard & Poor's each revised their outlook for the U.S. life insurance sector from stable to negative. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis or in accordance with other terms we make available, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts or in accordance with other terms we make available. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. The minimum amount to be dollar cost averaged is $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; B-6 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. Currently, there is no charge for this service. However, we reserve the right to impose one. We reserve the right to restrict access to this program at any time. A transfer made as part of this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges or 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 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. To the extent that withdrawals under AWS do not qualify for an exemption from the contingent deferred sales charge, we will assess any applicable surrender charges on those withdrawals. See Contingent deferred sales charges. 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. Currently, there is no charge for this service. However, we reserve the right to impose one. 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. B-7 Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 consolidated financial statements of Lincoln Life appear on the following pages. B-8 PROSPECTUS 2 Lincoln ChoicePlus IISM 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.LincolnFinancial.com 1-888-868-2583 This prospectus describes an individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). This prospectus is primarily for use with 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 Thematic Growth Portfolio (formerly 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 BlackRock Variable Series Funds, Inc. (Class III): BlackRock Global Allocation V.I. Fund* 1 Delaware VIP Trust (Service Class): Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP High Yield Series Delaware VIP Limited-Term Diversified Income Series (formerly Delaware VIP Capital Reserves 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 DWS Variable Series II (Class B): DWS Alternative Asset Allocation Plus VIP Portfolio* Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund 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 Bond Securities Fund (formerly FTVIPT Templeton Global Income Securities Fund) FTVIPT Templeton Growth Securities Fund Janus Aspen Series (Service Class): Janus Aspen Balanced Portfolio* Janus Aspen Enterprise Portfolio* (formerly Janus Aspen Mid Cap Growth Portfolio) Janus Aspen Worldwide Portfolio* (formerly Janus Aspen Worldwide Growth Portfolio) Lincoln Variable Insurance Products Trust (Standard Class): LVIP Delaware Bond Fund LVIP Delaware Foundation Aggressive Allocation 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 LVIP Delaware Growth and Income Fund LVIP Delaware Special Opportunities Fund LVIP FI Equity-Income Fund* LVIP Global 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** LVIP SSgA Small-Cap Index Fund LVIP T. Rowe Price Growth Stock Fund LVIP Templeton Growth Fund LVIP Turner 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* 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 PIMCO Variable Insurance Trust (Advisor Class): PIMCO VIT Commodity Real Return Strategy Portfolio* Putnam Variable Trust (Class IB): Putnam VT Global Health Care Fund* (formerly Putnam VT Health Sciences Fund) Putnam VT Growth & Income 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 May 1, 2009 3 Table of Contents
Item Page Special Terms 5 Expense Tables 7 Summary of Common Questions 10 The Lincoln National Life Insurance Company 12 Variable Annuity Account (VAA) 13 Investments of the Variable Annuity Account 14 Charges and Other Deductions 19 The Contracts 25 Purchase Payments 25 Transfers On or Before the Annuity Commencement Date 26 Surrenders and Withdrawals 29 Death Benefit 32 Investment Requirements 37 Living Benefit Riders 41 Lincoln Lifetime IncomeSM Advantage 41 Lincoln SmartSecurity (Reg. TM) Advantage 51 i4LIFE (Reg. TM) Advantage 57 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 62 4LATER (Reg. TM) Advantage 64 Annuity Payouts 68 Fixed Side of the Contract 70 Distribution of the Contracts 73 Federal Tax Matters 74 Additional Information 78 Voting Rights 78 Return Privilege 79 Other Information 79 Legal Proceedings 79 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 81 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. Account Value - Under i4LIFE (Reg. TM) Advantage, the initial Account Value is the contract value on the valuation date that i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value equals the initial Account Value plus investment gains minus losses, regular income payments, Guaranteed Income Benefit payments, and withdrawals. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date and to calculate the i4LIFE (Reg. TM) Advantage Account Value during the Access Period. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout - An amount paid at regular intervals after the annuity commencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person you choose to receive any death benefit paid if you die before the annuity commencement date. Contractowner (you, your, owner) - The person who can exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the contractowner is the annuitant. Contract value (may be referenced to as account value in marketing materials) - At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract, if any. Contract year - Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit - Before the annuity commencement date, the amount payable to your designated beneficiary if the contractowner dies or, if selected, to the contractowner if the annuitant dies. See The Contracts - Death Benefit for a description of the various death benefit options. Good Order - The actual receipt at our Home Office of the requested transaction in writing or by other means we accept, along with all information and supporting legal documentation necessary to effect the transaction. The forms we provide will identify the necessary documentation. We may, in our sole discretion, determine whether any particular transaction request is in good order, and we reserve the right to change or waive any good order requirements at any time. Guaranteed Income Benefit - An option that provides a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. The calculation of the Guaranteed Income Benefit or the features applicable to the Guaranteed Income Benefit may vary based on the rider provisions applicable to certain contractowners. i4LIFE (Reg. TM) Advantage - An income program which combines periodic variable lifetime income payments with the ability to make withdrawals during a defined period. Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company. Lincoln Lifetime IncomeSM Advantage - 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. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you may be subject to Investment Requirements. 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. Selling group individuals - A contractowner who meets one of the following criteria at the time of the contract purchase and who purchases the contract without the assistance of a sales representative under contract with us: 5 o Employees and registered representatives of any member of the selling group (broker-dealers who have selling agreements with us) and their spouses and minor children. o Officers, directors, trustees or bona-fide full-time employees and their spouses and minor children, of Lincoln Financial Group or any of the investment advisers of the funds currently being offered, or their affiliated or managed companies. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 6 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options and/or the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: o Surrender charge (as a percentage of purchase payments surrendered/withdrawn): 7.00%*
* The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. See Charges and Other Deductions - Surrender Charge. 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, cross-reinvestment, withdrawals up to the Maximum Annual Withdrawal amount 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 1.50% o Administrative charge 0.15% ---- o Total annual charge for each subaccount 1.65% 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 1.45% 1.40% 1.25% 1.15% o 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o 1.60% 1.55% 1.40% 1.30%
*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 IncomeSM Advantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.90% 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. 7 Lincoln SmartSecurity (Reg. TM) Advantage:
Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-Up option+ ** --------------------------------- o Guaranteed maximum annual percentage charge* 0.95% o Current annual percentage charge* 0.65% Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Step-Up option Step-Up option - Single Life (and prior version) - Joint Life ----------------------------------- -------------------------------- o 1.50% 1.50% o 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount. +As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM)Advantage - 5 Year Elective Step-up option is no longer available for purchase. 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.65%
*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) Advantage charge is deducted from the subaccounts on a quarterly basis. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. 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* 1.85% 1.70% 1.65%
*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%*
4LATER (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 0.65%* ***
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 1.85% with the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.35% (as a daily percentage of average account value). *The percentage charge will change to the current charge in effect upon election of a new step-up period, not to exceed the guaranteed maximum charge. **Purchasers of Lincoln Lifetime IncomeSM Advantage with the Guaranteed Income Benefit may purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase the Lincoln Lifetime IncomeSM Advantage. ***For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. The next table describes the separate account annual expenses (as a percentage of average daily net assets in the subaccounts) you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
8 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, 2008. 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): 4.15% 0.33% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.81% 0.33%
9 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 the Lincoln Lifetime IncomeSMAdvantage Plus are in effect. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ----------- --------- --------- --------- $1,431 $2,700 $3,984 $7,480
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 -------- --------- --------- --------- $731 $2,200 $3,684 $7,480
For more information, see Charges and Other Deductions in this prospectus, and the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income payments or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage 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 Asset Allocation Models? Asset allocation models are designed to assist you in deciding how to allocate your purchase payments among the various subaccounts. Each model provides a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. See The Contracts - Asset Allocation Models. 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 will 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? If you withdraw purchase payments, you pay a surrender charge from 0% to 7.00% of the surrendered or withdrawn purchase payment, depending upon how long those payments have been invested in the contract. We may waive surrender charges in certain situations. See Charges and Other Deductions-Surrender Charge. 10 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. 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 increase in your contract value of 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 different types of minimum guarantees if you meet certain conditions. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you will be subject to Investment Requirements. These riders are the Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage (both of which are withdrawal benefit riders) and 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit) (both of which are annuity payout riders). These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders that is provided with 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. 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 11 charge, imposed only during the i4LIFE (Reg. TM) Advantage payout phase, based on the i4LIFE (Reg. TM) Advantage death benefit you choose and whether or not the Guaranteed Income Benefit is in effect. What is the Guaranteed Income Benefit? The Guaranteed Income Benefit provides a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. The i4LIFE (Reg. TM) Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period subject to terms and conditions at that time. 4LATER (Reg. TM) Advantage, Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage have features that may be used to establish the amount of the Guaranteed Income Benefit. 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 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. You may use your Guaranteed Amount from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to establish the Guaranteed Income Benefit at the time you terminate Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, and Lincoln Lifetime IncomeSM Advantage - i4LIFE (Reg. TM) Advantage option. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See The Contracts - Surrenders and Withdrawals. If you surrender the contract or make a withdrawal, certain charges may apply. See Charges and Other Deductions. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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, with or without contingent deferred sales charges. Results calculated without contingent deferred sales charges will be higher. Total returns include the reinvestment of all distributions, which are reflected in changes in unit value. The money market subaccount's yield is based upon investment performance over a 7-day period, which is then annualized. Note that there can be no assurance that any money market fund will be able to maintain a stable net asset value per share. During extended periods of low interest rates, and due in part to the contract fees and expenses, the yields of any subaccount investing in a money market fund may also become extremely low and possibly negative. The money market yield figure and annual performance of the subaccounts are based on past performance and do not indicate or represent future performance. The Lincoln National Life Insurance Company The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905, is an Indiana-domiciled insurance company, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln Life is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, such as those associated with death benefit options and Living Benefit riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. 12 We issue other types of insurance policies and financial products as well, and we also pay our obligations under these products from our assets in the general account. Moreover, unlike assets held in the VAA, the assets of the general account are subject to the general liabilities of the Company and, therefore, to the Company's general creditors. In the event of an insolvency or receivership, payments we make from our general account to satisfy claims under the contract would generally receive the same priority as our other contractowner obligations. Our Financial Condition. Among the laws and regulations applicable to us as an insurance company are those which regulate the investments we can make with assets held in our general account. In general, those laws and regulations determine the amount and type of investments which we can make with general account assets. In addition, state insurance regulations require that insurance companies calculate and establish on their financial statements, a specified amount of reserves in order to meet the contractual obligations to pay the claims of our policyholders. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product. State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer's operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value. How to Obtain More Information. We encourage both existing and prospective policyholders to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would like a free copy of the SAI, please write to us at: PO Box 7866, Fort Wayne, IN 46801-7866 , or call 1-888-868-2583. In addition, the Statement of Additional Information is available on the SEC's website at http://www.sec.gov. You may obtain our audited statutory financial statements and any unaudited statutory financial statements that may be available by visiting our website at www.LincolnFinancial.com. You also will find on our website information on ratings assigned to us by one or more independent rating organizations. These ratings are opinions of an operating insurance company's financial capacity to meet the obligations of its insurance and annuity contracts based on its financial strength and/or claims-paying ability. Additional information about rating agencies is included in the Statement of Additional Information. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. 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. Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 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. 13 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 0.50%, 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, BlackRock, Delaware, DWS, Fidelity, Franklin Templeton, Janus, Lincoln, MFS, PIMCO 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. AIM Variable Insurance Funds, advised by Invesco 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. 14 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 VPS Global Thematic Growth Portfolio (Class B): Maximum capital appreciation. (formerly AllianceBernstein Global Technology Portfolio) 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. This fund is not offered in contracts issued on or after June 6, 2005. o AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B): Long-term growth. American Century Investments Variable Products, advised by American Century Investment Management, Inc. 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. BlackRock Variable Series Funds, Inc., advised by BlackRock Advisors, LLC and subadvised by BlackRock Investment Management, LLC o BlackRock Global Allocation V.I. Fund (Class III): High total return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Delaware VIP Trust, advised by Delaware Management Company 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 Limited-Term Diversified Income Series (Service Class): Current income. (formerly Capital Reserves Series) o REIT Series (Service Class): Total return. This fund is not available in contracts issued after June 4, 2007. This fund will be reopened and available in all contracts on or about June 30, 2009. Consult your financial advisor. 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 Investment Management Americas, Inc. and subadvised by Northern Trust Investments, Inc. o DWS Equity 500 Index VIP (Class A): Capital appreciation. o DWS Small Cap Index VIP (Class A): Capital appreciation. DWS Variable Series II, advised by Deutsche Asset Management Inc, and subadvised by RREEF America L.L.C. o DWS Alternative Asset Allocation Plus VIP (Class B): Capital appreciation. This fund will be available on or about June 30, 2009. Consult your financial advisor. Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company and subadvised by FMR Co., Inc. 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. 15 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. 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 Bond 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 Bond Securities Fund (Class 2): Total return. (formerly Templeton Global Income Securities Fund) o Templeton Growth Securities Fund (Class 2): Long-term growth. 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 Enterprise Portfolio (Service Class): Long-term growth. (formerly Mid Cap Growth Portfolio) This fund is not offered in contracts issued on or after June 6, 2005. o Worldwide Portfolio (Service Class): Long-term growth. (formerly Worldwide Growth Portfolio) 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): Capital appreciation. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital growth. (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) o LVIP Delaware Bond Fund (Standard Class): Current income. (Subadvised by Delaware Management Company) o LVIP Delaware Foundation Aggressive Allocation Fund (Standard Class): Long-term capital growth. (Subadvised by Delaware Management Company) This fund will not be available until the merger with the LVIP UBS Global Asset Allocation Fund is complete. 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 Global Income Fund (Service Class): Current income consistent with preservation of capital. (Subadvised by Mondrian Investment Partners Limited and Templeton Investment Counsel, LLC) This fund will be available on or about June 30, 2009. Consult your financial advisor. o LVIP Janus Capital Appreciation Fund (Standard Class): Long-term growth. (Subadvised by Janus Capital Management LLC) 16 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) 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): Replicate Barclays Aggregate Bond Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA International Index Fund (Service Class): Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA S&P 500 Index Fund (Service Class): Replicate S&P 500 Index. (Subadvised by SSgA Funds Management, Inc.) o LVIP SSgA Small-Cap Index Fund (Service Class): Replicate Russell 2000 Index. (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. (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) The Board of Trustees of the Lincoln Variable Insurance Products Trust has approved a reorganization pursuant to which the assets of the LVIP UBS Global Asset Allocation Fund would be acquired and the liabilities of such fund would be assumed by the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund in exchange for shares of the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund. This reorganization is subject to the approval of the LVIP UBS Global Asset Allocation Fund's shareholders. This reorganization is expected to occur in June 2009. 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): Long-term growth of capital; 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) 17 o LVIP Wilshire Moderate Profile Fund (Service Class): Growth and income; 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. This fund is not offered in contracts issued on or after June 6, 2005. o Growth Series (Service Class): Capital appreciation. 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., and subadvised by Neuberger Berman, LLC. o Mid-Cap Growth Portfolio (I Class): Capital appreciation. o Regency Portfolio (I Class): Long-term growth. PIMCO Variable Insurance Trust, advised by PIMCO o PIMCO VIT Commodity Real Return Strategy Portfolio (Advisor Class): Maximum real return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Putnam Variable Trust, advised by Putnam Investment Management, LLC o Global Health Care Fund (Class IB): Capital appreciation. (formerly Health Sciences Fund) This fund is not offered in contracts issued on or after May 24, 2004. 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. 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. 18 Addition, Deletion or Substitution of Investments We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. 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 more owners than expected will qualify for waivers of the surrender charge; 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. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts. 19 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 1.50% o Administrative charge 0.15% ---- o Total annual charge for each subaccount 1.65% 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 1.45% 1.40% 1.25% 1.15% o 0.15% 0.15% 0.15% 0.15% ---- ---- ---- ---- o 1.60% 1.55% 1.40% 1.30%
Surrender Charge A surrender charge applies (except as described below) to surrenders and withdrawals of purchase payments that have been invested for the periods indicated as follows:
Number of contract anniversaries since purchase payment was invested --------------------------------------- 0 1 2 3 4 5 6 7+ Surrender charge as a percentage of the surrendered or 7% 6% 5% 4% 3% 2% 1% 0 withdrawn purchase payments
A surrender charge does not apply to: o A surrender or withdrawal of a purchase payment beyond the seventh anniversary since the purchase payment was invested; o Withdrawals of contract value during a contract year to the extent that the total contract value withdrawn during the current contract year does not exceed the free amount which is equal to 15% of the total purchase payments (this does not apply upon surrender of the contract); o When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (however, the surrender charge schedule of the original contract will continue to apply to the spouse's contract); o A surrender or withdrawal of any purchase payments as a result of admittance of the contractowner into an accredited nursing home or equivalent health care facility, where the admittance into such facility occurs after the effective date of the contract and the owner has been confined for at least 90 consecutive days; o A surrender of the contract as a result of the death of the contractowner, joint owner or annuitant; o Purchase payments when used in the calculation of the initial periodic income payment and the initial Account Value under the i4LIFE (Reg. TM) Advantage option or the contract value applied to calculate the benefit amount under any annuity payout option made available by us; o Regular income payments made under i4LIFE (Reg. TM) Advantage, including any payments to provide the 4LATER (Reg. TM) or i4LIFE (Reg. TM) Guaranteed Income Benefits, or periodic payments made under any annuity payout option made available by us; o A surrender of a contract or withdrawal of a contract value from contracts issued to selling group individuals; o A surrender or withdrawal of any purchase payments after the onset of a permanent and total disability of the contractowner as defined in Section 22(e)(3) of the tax code, if the disability occurred after the effective date of the contract and before the 65th birthday of the contractowner. For contracts issued in the State of New Jersey, a different definition of permanent and total disability applies; o A surrender or withdrawal of any purchase payments as a result of the diagnosis of a terminal illness that is after the effective date of the contract and results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; o Withdrawals up to the Maximum Annual Withdrawal amount under the Lincoln SmartSecurity (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage, subject to certain conditions. For purposes of calculating the surrender charge on withdrawals, we assume that: 1. The free amount will be withdrawn from purchase payments on a "first in-first out (FIFO)" basis. 2. Prior to the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) until exhausted; then o from earnings until exhausted. 20 3. On or after the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then o from earnings until exhausted; then o from purchase payments (on a FIFO basis) to which a surrender charge still applies until exhausted. We apply the surrender charge as a percentage of purchase payments, which means that you would pay the same surrender charge at the time of surrender regardless of whether your contract value has increased or decreased. The surrender charge is calculated separately for each purchase payment. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. Account Fee During the accumulation period, we will deduct $35 from the contract value on each contract anniversary to compensate us for the administrative services provided to you; this $35 account fee will also be deducted from the contract value upon surrender. This fee may be lower in certain states, if required, and will be waived after the fifteenth contract year. The account fee will be waived for any contract with a contract value that is equal to or greater than $100,000 on the contract anniversary. There is no account fee on contracts issued to selling group individuals. 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 0.90% of the Guaranteed Amount (0.225% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 1.05% of the Guaranteed Amount. See The Contracts - Lincoln Lifetime IncomeSM Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. 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. For riders purchased on or after March 2, 2009, the charge will also be deducted in proportion to the value in the fixed account used for dollar cost averaging purposes. 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% of the Guaranteed Amount. 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. 21 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% of the Guaranteed Amount will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 1.05% 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) 0.65% of the Guaranteed Amount (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option (for riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount); or 2) 0.65% of the Guaranteed Amount (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% of the Guaranteed Amount (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up Option is no longer available for 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. If you elect to step-up the Guaranteed Amount for another step-up period (including if we administer the step-up election for you or if you make a change from a Joint Life to a Single Life option after a death or divorce), a pro-rata deduction of the Rider charge based on the Guaranteed Amount immediately prior to the step-up will be made on the valuation date of the step-up. This deduction covers the cost of the Rider from the time of the previous deduction to the date of the step-up. After a contractowner's step-up, we will deduct the Rider charge for the stepped-up Guaranteed Amount on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the step-up. At the time of the elected step-up, the Rider percentage charge will change to the current charge in effect at that time (if the current charge has changed), but it will never exceed the guaranteed maximum annual percentage charge of 0.95% of the Guaranteed Amount for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% of the Guaranteed Amount 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. 22 4LATER (Reg. TM) Advantage Charge. Prior to the periodic income commencement date (which is defined as the valuation date the initial regular income payment under i4LIFE (Reg. TM) Advantage is determined), the annual 4LATER (Reg. TM) charge is currently 0.65% of the Income Base. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset 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% of the Income Base. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. i4LIFE (Reg. TM) Advantage Charge . i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the Account Value. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.65% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 1.70% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 1.85% 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% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.20% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.35% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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 0.65% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.30% for the i4LIFE (Reg. TM) Account Value death benefit; 2.35% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.50% for the EGMDB. (For riders purchased before January 20, 2009, the current annual percentage charge is 0.50%, but will increase to 0.65% upon the next election to reset the Income Base.) These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On and after the periodic income commencement date, the 4LATER (Reg. TM) Guaranteed Income Benefit charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of 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 23 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) Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) Guaranteed Income Benefit percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50% of Account Value. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Guaranteed Income Benefit annual charge will also terminate. Guaranteed Income Benefit Charge for Lincoln Lifetime IncomeSM Advantage purchasers. For purchasers of Lincoln Lifetime IncomeSM Advantage who terminate their rider and purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, the Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50% of the Account Value, which is added to the i4LIFE (Reg. TM)Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.20% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.35% for the i4LIFE (Reg. TM) Advantage EGMDB. Purchasers of Lincoln Lifetime IncomeSM Advantage are guaranteed that in the future the guaranteed maximum charge for the Guaranteed Income Benefit will be the guaranteed maximum charge then in effect at the time that they purchase the Lincoln Lifetime IncomeSM Advantage. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30-day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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% of the contract value will be assessed on all variable annuity payouts (except for the i4LIFE (Reg. TM) Advantage, which has a different charge), including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the services will exceed our revenues from contract charges. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. 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, 24 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. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract and/or a new surrender charge period may be imposed with the purchase of, or transfer into, this contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum for selling group individuals is $1500. 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. 25 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. 26 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 may also transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. 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 27 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. 28 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. 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. You may request that surrender proceeds be paid directly to you instead of deposited in a SecureLine (Reg. TM) account. There are charges associated with surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. If the charges are deducted from the remaining contract value, the amount of the total withdrawal will increase according to the impact of the applicable surrender charge percentage; consequently, the dollar amount of the surrender charge associated with the withdrawal will also increase. In other words, the dollar amount deducted to cover the surrender charge is also subject to a surrender charge. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. 29 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 or in accordance with other terms we make available. We reserve the right to discontinue or modify this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. 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 were designed and prepared by the Company, in consultation with SSgA Funds Management, Inc., 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 LVIP 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. The election of 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. At this time, the available models are as follows: 30 o The Lincoln 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 Lincoln 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 Lincoln SSgA Moderately Aggressive Equity Index Model (formerly known as the Lincoln 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. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in three equity subaccounts and 30% 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. (Available on or after June 30, 2009) o The Lincoln 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 Lincoln 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 Lincoln 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 Lincoln SSgA Structured Moderately Aggressive Equity Model (formerly known as the Lincoln SSgA Structured Moderately Aggressive Model) is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven 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 a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in seven equity subaccounts and 30% 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 a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Available on or after June 30, 2009) o The Lincoln 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. Your registered representative will have more information on the specific investments of each model. 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. If you choose to follow this strategy you will invest 100% of your contract value according to the strategy. You may invest in any of the three funds without adopting the strategy. 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 in accordance with the strategy. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. You may terminate the strategy at any time and reallocate your contract value to other investment options. 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. 31 o FTVIPT Franklin Income Securities 34% of contract value o FTVIPT Mutual Shares Securities 33% of contract value o LVIP Templeton Growth Fund 33% of contract value
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. 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. 32 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. In a declining market, withdrawals deducted in the same proportion that withdrawals reduce the contract value may have a magnified effect on the reduction of the death benefit payable. All references to withdrawals include deductions for any applicable charges associated with those withdrawals (surrender charges for example) and premium taxes, if any. Enhanced Guaranteed Minimum Death Benefit (EGMDB). If the EGMDB is in effect, the death benefit paid will be the greatest of: o the current contract value as of the valuation date we approve the payment of the claim; or o the sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the 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 any applicable charges associated with that withdrawal (surrender charges for example) 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: 33 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) (determined before the allocation of any purchase payments on that contract anniversary) 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 (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 any applicable charges associated with that withdrawal (surrender charges for example) 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 any contractual basis that has previously been withdrawn, which is 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 previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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 34 o any contractual basis that has previously been withdrawn, which is 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 previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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: 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. 35 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 1.55%, and the EEB Rider death benefit will be reduced to the EGMDB death benefit for an annual charge of 1.40%. 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) 36 account. The recipient of death benefit proceeds may request to receive the proceeds in the form of a check rather than a deposit into the SecureLine (Reg. TM) account. Investment Requirements If you purchase a Living Benefit rider (Lincoln Lifetime IncomeSM Advantage, 4LATER (Reg. TM) Advantage, Lincoln SmartSecuritySM Advantage, or the Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage), you will be subject to Investment Requirements, and you will be limited in how much you can invest in certain subaccounts of your contract. The Living Benefit rider you purchase and the date of purchase will determine which Investment Requirements Option will apply to your contract. See Option 1, Option 2, and Option 3 below. Under each Option, we have divided the subaccounts of your contract into groups and have specified the minimum or maximum percentages of contract value that must be in each group at the time you purchase the rider (or when the rider Investment Requirements are enforced, if later). 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 subaccounts are not available to you if you purchase certain Riders. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. The chart below is provided to help you determine which Option of Investment Requirements, if any, applies to the Living Benefit rider you purchase. If you do not elect a Living Benefit rider, the Investment Requirements will not apply to your contract. Different Investment Requirements may apply if you drop one rider and elect another rider.
YOU WILL BE SUBJECT TO IF YOU ELECT... AND THE DATE OF ELECTION IS... INVESTMENT REQUIREMENTS Lincoln Lifetime IncomeSM Advantage Between February 19, 2008 and January 20, 2009 Option 2 On or after January 20, 2009 Option 3 Lincoln SmartSecurity (Reg. TM) Advantage Prior to April 10, 2006 N/A Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 4LATER (Reg. TM) Advantage Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Prior to April 10, 2006 N/A Benefit (v.1) On or after April 10, 2006 Option 1 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between April 10, 2006 and January 20, 2009 Option 1 Benefit (v.2) On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between October 6, 2008 and January 20, 2009 Option 2 Benefit (v.3) On or after January 20, 2009 Option 3
Investment Requirements - Option 1 We intend to enforce these Investment Requirements on June 30, 2009 for contracts purchased with Investment Requirements Option 1. 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 VPS Global Thematic Growth Portfolio o AllianceBernstein VPS International Value Portfolio o AllianceBernstein VPS 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 High Yield 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 Mid-Cap Portfolio o Fidelity (Reg. TM) VIP Overseas Portfolio 37 o FTVIPT Franklin Income Securities Fund o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Mutual Shares Securities Fund o FTVIPT Templeton Growth Securities Fund o Janus Aspen Enterprise Portfolio o Janus Aspen Worldwide Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Columbia Value Opportunities Fund o LVIP Delaware Foundation Aggressive Allocation Fund o LVIP Delaware Special Opportunities Fund o LVIP Marsico International Growth Fund o LVIP Mid-Cap Value 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 LVIP UBS Global Asset Allocation Fund o LVIP Wilshire 2040 Profile o LVIP Wilshire Aggressive Profile o MFS VIT Growth Series o MFS VIT Utilities Series o Neuberger Berman AMT Mid-Cap Growth Portfolio o Neuberger Berman AMT Regency Portfolio o Putnam VT Global Health Care Fund All other variable subaccounts will be referred to as "Non-Limited Subaccounts" except DWS Alternative Asset Allocation Plus VIP Portfolio and PIMCO VIT Commodity Real Return Strategy Portfolio, which are unavailable to any contract holder with a Living Benefit rider. The Founding Investment Strategy is also unavailable for investment. 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 reserve the right to designate a different investment option other than the LVIP Money Market subaccount as the default investment option should there be no contract value in the Non-Limited Subaccounts. We will provide you with notice of such change. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We may move subaccounts on or off the Limited Subaccount list, exclude Subaccounts and asset allocation models from being available for investment, change the number of Limited Subaccount groups, 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. 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 38 3. take no action and be subject to the quarterly rebalancing as described above. Investment Requirements - Option 2 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion. 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. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group or change the investment options that are or are not available to you, at any time, in our sole discretion. 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 purchase payments 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 purchase payment or a contract transfer, in excess of the new percentage applicable to a subaccount or subaccount group. This does not apply to subaccounts added to Investment Requirements on or after June 30, 2009. 4. for subaccounts added to Investment Requirements on or after June 30, 2009, you may be subject to rebalancing as described above. If this results in a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% of contract value Investments cannot exceed 75% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. American Century VP Inflation Protection Fund All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Limited-Term Diversified Income Series 5. Delaware VIP Diversified Income Series 6. FTVIPT Templeton Global Bond Securities Fund 7. LVIP SSgA Bond Index Fund 8. LVIP Global Income Fund Group 3 Investments cannot exceed 10% of contract value or ----------------------------------------------------------------- Account Value ---------------------------------------------------- 1. Delaware VIP REIT Series 2. LVIP SSgA Emerging Markets 100 Fund
39 To satisfy the Investment Requirements, you may allocate 100% of your contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the available 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% of contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile 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 DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Structured Moderately Aggressive Equity Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index Model, Lincoln SSgA Moderately Aggressive Index Model and Lincoln SSgA Moderately Aggressive Equity Index Model. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described above. 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. You may also allocate 100% of your contract value to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. Investment Requirements - Option 3 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts within the group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group, change the investment options that are or are not available to you, or change the rebalancing frequency at any time in our sole discretion. You will be notified at least 30 days prior to the date of any change. We may make such modifications at any time when we believe the modifications are necessary to protect our ability to provide the guarantees under these Riders. Our decision to make modifications will be based on several factors including the general market conditions and the style and investment objectives of the subaccount investments. At the time you receive notice of a change to the Investment Requirements, you may: 1. drop the applicable rider immediately, without waiting for a termination event if you do not wish to be subject to these Investment Requirements; or 2. submit your own reallocation instructions for the contract value, before the effective date specified in the notice, so that the Investment Requirements are satisfied; or 3. take no action and be subject to the quarterly rebalancing as described above. If this results is a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2
40 Investments must be at least 30% of contract value Investments cannot exceed 70% of contract value or Account Value ------------------------------------------------------------------ or Account Value --------------------------------------------------- 1. American Century VP Inflation Protection Fund All other funds except as described below. 2. LVIP Delaware Bond Fund 3. Delaware VIP Limited-Term Diversified Income Series 4. Delaware VIP Diversified Income Series 5. FTVIPT Templeton Global Bond Securities Fund 6. LVIP SSgA Bond Index Fund 7. LVIP Global Income Fund
Group 3 Investments cannot exceed 10% of contract value or Account Value --------------------------------------------------- 1. Delware VIP Emerging Markets Series 2. LVIP SSgA Emerging Markets 100 Fund 3. Delaware VIP REIT Series 4. LVIP Cohen & Steers Global Real Estate Fund 5. MFS VIT Utilities Series 6. AllianceBernstein VPS Global Thematic Growth Portfolio
To satisfy these Investment Requirements, you may allocate 100% of your contract value among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 70% may be allocated to the LVIP Wilshire Aggressive Profile Fund, LVIP Wilshire 2030 Profile Fund and LVIP Wilshire 2040 Profile Fund. If you allocate less than 100% of contract value to or among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund or the available LVIP Wilshire Profile Funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. The DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index Model and Lincoln SSgA Moderately Aggressive Index Model. You may only choose one asset allocation at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described in your prospectus. If you purchase Lincoln Lifetime IncomeSM Advantage Plus rider on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. Living Benefit Riders The optional Living Benefit Riders offered under this variable annuity contract - Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage - are described in the following sections. The riders offer either a minimum withdrawal benefit (Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage) or a minimum annuity payout (i4LIFE (Reg. TM) Advantage and 4LATER (Reg. TM) Advantage). You may not elect more than one Living Benefit rider at a time. Upon election of a Living Benefit rider, you will be subject to Investment Requirements. The overview chart provided with this prospectus provides a brief description and comparison of each Living Benefit rider. Terms and conditions may change after the contract is purchased. 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 $25,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contractowner/annuitant (Single Life Option) or for the lives of you as contractowner/annuitant and your spouse as joint owner 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 41 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 3 if you purchased the Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009. See The Contracts - Investment Requirements - Option 2 if you purchased Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option before January 20, 2009, your only investment options until the seventh Benefit Year anniversary are: 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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. 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 (see Lincoln Lifetime IncomeSM Advantage - Compare to Lincoln SmartSecurity (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage option). 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. 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. 42 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 and the Rider is within the 10 year period described below. 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 10 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 10-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. For riders purchased prior to January 20, 2009, the 5% Enhancement will be in effect for 15 years from the effective date of the Rider, and a new 15-year period will begin following each Automatic Annual Step-up. 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 10-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2 or older or the contractowner and spouse (Joint Life Option) are age 65 or older. 43 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 10-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 10 1st Benefit Year Anniversary......... $54,000 $54,000 Yes 10 2nd Benefit Year Anniversary......... $53,900 $56,700 No 9 3rd Benefit Year Anniversary......... $57,000 $59,535 No 8 4th Benefit Year Anniversary......... $64,000 $64,000 Yes 10
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. For contractowners who purchase Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009, on the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 65, 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). 44 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). If you purchased the Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009, you will not be eligible to receive the 200% Step-up of the Guaranteed Amount until 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. 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 (RMDs) 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 Amount 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 55 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 65, 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 Joint Life Option) 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 60 months or more after the effective date of the Rider (36 months or more for contractowners who purchased this Rider prior to January 20, 2009), 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. For riders purchased on or after January 20, 2009, the admittance to a nursing home must be pursuant to a plan of care provided by a licensed health care practitioner, and the nursing home must be located in the United States. The remaining references to the 5% Maximum Annual Withdrawal amount also include the Nursing Home Enhancement Maximum Annual Withdrawal amount. 45 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 within the Maximum Annual Withdrawal amount are not subject to surrender charges. 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 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 and will not be subject to surrender charges. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the 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. 46 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 - $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. Excess Withdrawals will be subject to surrender charges unless one of the waiver of surrender charge provisions set forth in your prospectus is applicable. Continuing with the prior example of the $12,000 withdrawal: the $5,000 Maximum Annual Withdrawal amount is not subject to surrender charges; the $7,000 Excess Withdrawal may be subject to surrender charges. See Charges and Other Deductions - Surrender Charge. 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). Surrender charges will apply unless one of the waiver of surrender charge provisions is applicable. See Charges and Other Deductions - Surrender Charge. 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 47 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. If you choose to surrender your contract at this time, any applicable surrender charges will apply. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts or required minimum distributions, 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 purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option prior to January 20, 2009, 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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 exercise of 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. 48 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. 49 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 Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage. Owners of the Lincoln Lifetime IncomeSM Advantage rider are guaranteed the ability to purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit in the future even if it is no longer generally available for purchase. Owners of Lincoln Lifetime IncomeSM Advantage are also guaranteed that the annuity factors that are used to calculate the initial Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage will be the annuity factors in effect as of the day they purchased Lincoln Lifetime IncomeSM Advantage. In addition, owners of Lincoln Lifetime IncomeSM Advantage may in the future purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase Lincoln Lifetime IncomeSM Advantage. i4LIFE (Reg. TM)Advantage with the Guaranteed Income Benefit for Lincoln Lifetime IncomeSM Advantage purchasers 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 charge for new purchasers in effect for the i4LIFE (Reg. TM) Advantage and the current Guaranteed Income Benefit charge in effect for prior purchasers of Lincoln Lifetime IncomeSM Advantage at the time of election of these benefits. If you use 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. 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 = $150,000 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 = $7,537.50 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime IncomeSMAdvantage 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 The Contracts - Death Benefits. 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 50 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. 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. 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 beneficiary. 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. There are two options that step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up): Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase after January 16, 2009. 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 will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. We offer other optional riders available for purchase with 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. 51 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 SmartSecurity (Reg. TM) 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 surrender charges and 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 purchase payment $50,000 $50,000 $50,000 o 1st Benefit Year Anniversary $54,000 $54,000 o 2nd Benefit Year Anniversary $53,900 $54,000 o 3rd Benefit Year Anniversary $57,000 $57,000
Annual step-ups, if the conditions are met, will continue until (and including) the 10th Benefit Year Anniversary. If you had elected to have the next ten-year period of step-ups begin automatically after the prior ten-year period, annual step-ups, if conditions are met, will continue beginning on the 11th Benefit Year Anniversary. 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. 52 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 surrender charges or the interest adjustment on the amount withdrawn from the fixed account, if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up 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. 53 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 surrender charges (to the extent that total withdrawals exceed the free amount of withdrawals allowed during a contract year) and an interest adjustment on the amount withdrawn from the fixed account. Refer to the Statement of Additional Information for an example of the interest adjustment calculation. Lifetime Withdrawals. (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. 54 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 55 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 terminate the Lincoln SmartSecurity (Reg. TM) Advantage rider and purchase i4LIFE (Reg. TM) Advantage can use any remaining Guaranteed Amount to establish the Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage terms and charge in effect at the time of the i4LIFE (Reg. TM) Advantage election. Contractowners may consider this if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. There are many factors to consider when making this decision, including the cost of the riders, the payout amounts and applicable guarantees. You should discuss this decision with your registered representative. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option 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 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. The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase. 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. 56 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. 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. 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. Additional restrictions may apply if you are under age 591/2 when you request a change to the Access Period. Currently, if you extend the Access Period, it must be extended at least 5 years. If you change the Access Period, subsequent regular income payments will be adjusted accordingly, and the Account Value remaining at the end of the new Access Period will be applied to continue regular income payments for your life. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. We may reduce or terminate the Access Period for IRA i4LIFE (Reg. TM) Advantage contracts in order to keep the regular income payments in compliance with IRC provisions for required minimum distributions. The minimum Access Period requirements for Guaranteed Income Benefits are longer than the requirements for i4LIFE (Reg. TM) Advantage without a Guaranteed Income Benefit. Shortening the Access Period will terminate the Guaranteed Income Benefit. See The Contracts - Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. 57 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 and Guaranteed Income Benefit 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 surrender charges or applicable interest adjustments. See Charges and Other Deductions. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (or purchase payment if elected at contract issue), less applicable premium taxes by 1000 and multiplying the result by an annuity factor. The annuity factor is based upon: o the age and sex of the annuitant and secondary life, if applicable; o the length of the Access Period selected; o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The annuity factor used to determine the regular income payments reflects the fact that, during the Access Period, you have the ability to withdraw the entire Account Value and that a death benefit of the entire Account Value will be paid to your beneficiary upon your death. These benefits during the Access Period result in a slightly lower regular income payment, during both the Access Period and the Lifetime Income Period, than would be payable if this access was not permitted and no lump-sum death benefit of the full Account Value was payable (The contractowner must elect an Access Period of no less than the minimum Access Period which is currently set at 5 years.) The annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the Guaranteed Income Benefit (if any) will terminate and the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the 58 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 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 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 59 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. 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. If death occurs during the Access Period, the value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us; and 60 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). 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. 61 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage A Guaranteed Income Benefit is available for purchase when you elect i4LIFE (Reg. TM) Advantage which ensures that your regular income payments will never be less than a minimum payout floor, regardless of the actual investment performance of your contract. See Charges and Other Deductions for a discussion of the Guaranteed Income Benefit charges. As discussed below, certain features of the Guaranteed Income Benefit may be impacted if you purchased Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage (withdrawal benefit riders) prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (annuity payout rider). Refer to the 4LATER (Reg. TM)Advantage section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider will limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements. The version of the Guaranteed Income Benefit, the date that you purchased it, and/or whether you previously owned Lincoln Lifetime IncomeSM Advantage will determine which Investment Requirement option applies to you. 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 Account Value as defined in the i4LIFE (Reg. TM) Advantage rider section) 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 (In other words, Guaranteed Income Benefit payments reduce the Account Value by the entire amount of the Guaranteed Income Benefit payment.) (Regular income payments also reduce the Account Value). This 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. Additional amounts withdrawn from the Account Value to provide the Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled, and will reduce your death benefit. If your Account Value equals zero, no death benefit will be paid. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living. 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: 62 o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
The contractowner receives an amount equal to the Guaranteed Income Benefit. The entire amount of the Guaranteed Income Benefit is deducted from the Account Value. If you purchased the Guaranteed Income Benefit (version 3) on or after January 20, 2009, the Guaranteed Income Benefit will automatically step-up every year to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. If you purchased the Guaranteed Income Benefit (version 2) prior to January 20, 2009, the Guaranteed Income Benefit will automatically step-up every three years on the periodic income commencement date anniversary to 75% of the current regular income payment, if the result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every periodic income commencement date anniversary during either a 5-year step-up period (version 3) or every third periodic income commencement date anniversary for a 15 year step-up period (version 2). At the end of a step-up period, you may elect a new 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. Step-ups for qualified contracts, including IRAs, will occur on a calendar year basis. At the time of a reset of the step-up period the i4LIFE (Reg. TM) Guaranteed Income Benefit percentage charge may increase subject to the maximum guaranteed charge of 1.50%. This means that your charge may change every five years for version 3 of the Guaranteed Income Benefit or every 15 years for version 2 of the Guaranteed Income Benefit. If we automatically administer a new step-up period for you and if your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the periodic income commencement anniversary. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period. i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit Charges. 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 below in 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. We may change this Access Period requirement prior to election of the Guaranteed Income Benefit. 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 regular income payment frequency; or o upon written notice to us; or o assignment of the contract. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and not the i4LIFE (Reg. TM)Advantage election, unless otherwise specified. 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 63 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. 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. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. The following example demonstrates the impact of a withdrawal on the regular income payments and the Guaranteed Income Benefit payments: o i4LIFE (Reg. TM) Regular Income Payment before Withdrawal $ 1,200 o Guaranteed Income Benefit before Withdrawal $ 900 o Account Value at time of Additional Withdrawal $150,000 o Additional Withdrawal $ 15,000 (a 10% withdrawal)
Reduction in i4LIFE (Reg. TM) Regular Income payment for Withdrawal = $1,200 X 10 % = $120 i4LIFE (Reg. TM) Regular Income payment after Withdrawal = $1,200 - $120 = $1,080 Reduction in Guaranteed Income Benefit for Withdrawal = $900 X 10% = $90 Guaranteed Income Benefit after Withdrawal = $900 - $90 = $810 Surrender. At any time prior to or during the Access Period, you may surrender the contract by withdrawing the surrender value. If the contract is surrendered, the contract terminates and no further regular income payments will be made. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. Termination. For IRA annuity contracts, you may terminate i4LIFE (Reg. TM) Advantage prior to the end of the Access Period by notifying us in writing. The termination will be effective on the next valuation date after we receive the notice and your contract will return to the accumulation phase. Your i4LIFE (Reg. TM) Advantage death benefit will terminate and you 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 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 64 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. 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. 65 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 66 Guaranteed Income Benefit Table in your 4LATER (Reg. TM) Rider. If the contract value is used to establish the 4LATER (Reg. TM) Guaranteed Income Benefit, this rate provides a Guaranteed Income Benefit not less than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment (which is also based on the contract value). If the Income Base is used to establish the Guaranteed Income Benefit (because it is larger than the contract value), the resulting Guaranteed Income Benefit will be more than 75% of the initial i4LIFE (Reg. TM) Advantage regular income payment. If the amount of your i4LIFE (Reg. TM) Advantage regular income payment (which is based on your i4LIFE (Reg. TM) Advantage Account Value) has fallen below the 4LATER (Reg. TM) Guaranteed Income Benefit, because of poor investment results, a payment equal to the 4LATER (Reg. TM) Guaranteed Income Benefit is the minimum payment you will receive. If the 4LATER (Reg. TM) Guaranteed Income Benefit is paid, it will be paid with the same frequency as your i4LIFE (Reg. TM) Advantage regular income payment. If your regular income payment is less than the 4LATER (Reg. TM) Guaranteed Income Benefit, we will reduce your i4LIFE (Reg. TM) Advantage Account Value by the regular income payment plus an additional amount equal to the difference between your regular income payment and the 4LATER (Reg. TM) Guaranteed Income Benefit. This withdrawal from your Account Value will be made from the subaccounts and the fixed account on a pro-rata basis according to your investment allocations. The following example illustrates how poor investment performance, which results in a Guaranteed Income Benefit payment, affects the i4LIFE (Reg. TM) Account Value: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the 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). If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. Additional purchase payments cannot be made to your contract after the periodic income commencement date. The 4LATER (Reg. TM) Guaranteed Income Benefit is reduced by withdrawals (other than regular income payments) in the same proportion that the withdrawals reduce the Account Value. You may want to discuss the impact of additional withdrawals with your financial adviser. Impacts to i4LIFE (Reg. TM) Advantage Regular Income Payments. At the time you elect i4LIFE (Reg. TM) Advantage, you also select the Access Period. See i4LIFE (Reg. TM) Advantage - Access Period. Generally, shorter Access Periods will produce a higher initial i4LIFE (Reg. TM) Advantage regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit currently is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. We reserve the right to increase this minimum prior to election of 4LATER (Reg. TM) Advantage, subject to the terms in your rider. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. 67 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 - $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. 68 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 69 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. 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. 70 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. The interest adjustment is calculated by multiplying the transaction amount by: (1+A)n -1 ------------- (1+B +K )n
where: 71 A = yield rate for a U.S. Treasury security with time to maturity equal to the subaccount's guaranteed period, determined at the beginning of the guaranteed period. B = yield rate for a U.S. Treasury security with time to maturity equal to the time remaining in the subaccount's guaranteed period if greater than one year, determined at the time of surrender, withdrawal or transfer. For remaining periods of one year or less, the yield rate for a one year U.S. Treasury security is used. K = a 0.25% adjustment (unless otherwise limited by applicable state law). This adjustment builds into the formula a factor representing direct and indirect costs to us associated with liquidating general account assets in order to satisfy surrender requests. This adjustment of 0.25% has been added to the denominator of the formula because it is anticipated that a substantial portion of applicable general account portfolio assets will be in relatively illiquid securities. Thus, in addition to direct transaction costs, if such securities must be sold (e.g., because of surrenders), the market price may be lower. Accordingly, even if interest rates decline, there will not be a positive adjustment until this factor is overcome, and then any adjustment will be lower than otherwise, to compensate for this factor. Similarly, if interest rates rise, any negative adjustment will be greater than otherwise, to compensate for this factor. If interest rates stay the same, there will be no interest adjustment. n = The number of years remaining in the guaranteed period (e.g., 1 year and 73 days = 1 + (73 divided by 365) = 1.2 years) Straight-Line interpolation is used for periods to maturity not quoted. See the SAI for examples of the application of the interest adjustment. Small Contract Surrenders We may surrender your contract, in accordance with the laws of your state if: o your contract value drops below certain state specified minimum amounts ($1,000 or less) for any reason, including if your contract value decreases due to the performance of the subaccounts you selected; o no purchase payments have been received for two (2) full, consecutive contract years; and o the paid up annuity benefit at maturity would be less than $20.00 per month (these requirements may differ in some states). At least 60 days before we surrender your contract, we will send you a letter at your last address we have on file, to inform you that your contract will be surrendered. You will have the opportunity to make additional purchase payments to bring your contract value above the minimum level to avoid surrender. If we surrender your contract, we will not assess any surrender charge. 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, and we will recredit that portion of the surrender/withdrawal charges attributable to the amount returned. This election must be made by your written authorization to us on an approved Lincoln reinvestment form and received in our 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. 72 Amendment of Contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Any changes are subject to prior approval of your state's insurance department (if required). Distribution of the Contracts Lincoln Financial Distributors, Inc. ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln Life and is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a member of FINRA. The Principal Underwriter has entered into selling agreements with Lincoln Financial Advisors Corporation ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us ("Selling Firms"). While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. 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 6.50% of purchase payments. 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 6.50% 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 6.50% 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 6.50% 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 2008 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 73 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 decedent; o Certain qualified contracts; o Contracts purchased by employers upon the termination of certain qualified plans; and o Certain contracts used in connection with structured settlement agreements. Investments In The VAA Must Be Diversified For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be "adequately diversified." IRS regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the contract purchase payments. Although we do not control the investments of the underlying investment options, we expect that the underlying investment options will comply with the IRS regulations so that the VAA will be considered "adequately diversified." Restrictions 74 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 subject to an exclusion ratio that is determined based on the amount of the payment. Taxation Of Death Benefits We may distribute amounts from your contract because of the death of a contractowner or an annuitant. The tax treatment of these amounts depends on whether you or the annuitant dies before or after the annuity commencement date. Death prior to the annuity commencement date: o If the beneficiary receives death benefits under an annuity payout option, they are taxed in the same manner as annuity payouts. o If the beneficiary does not receive death benefits under an annuity payout option, they are taxed in the same manner as a withdrawal. Death after the annuity commencement date: o If death benefits are received in accordance with the existing annuity payout option, they are excludible from income if they do not exceed the purchase payments not yet distributed from the contract. All annuity payouts in excess of the purchase payments not previously received are includible in income. o If death benefits are received in a lump sum, the tax law imposes tax on the amount of death benefits which exceeds the amount of purchase payments not previously received. Penalty Taxes Payable On Withdrawals, Surrenders, Or Annuity Payouts 75 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. 76 We will amend contracts to be used with a qualified plan as generally necessary to conform to the tax law requirements for the type of plan. However, the rights of a person to any qualified plan benefits may be subject to the plan's terms and conditions, regardless of the contract's terms and conditions. In addition, we are not bound by the terms and conditions of qualified plans to the extent such terms and conditions contradict the contract, unless we consent. Pursuant to new tax regulations, starting September 24, 2007, the contract is not available for purchase under a 403(b) plan and since July 31, 2008, we do not accept additional premiums or transfers to existing 403(b) contracts. Also, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that surrenders, loans or transfers you request comply with applicable tax requirements and to decline requests that are not in compliance. We will defer processing payments you request until all information required under the tax law has been received. By requesting a surrender, loan or transfer, you consent to the sharing of confidential information about you, your contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, as described below. o Loans are allowed under certain types of qualified plans, but Federal income tax rules prohibit loans under other types of qualified plans. For example, Federal income tax rules permit loans under some section 403(b) plans, but prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject to a variety of limitations, including restrictions as to the loan amount, the loan's duration, the rate of interest, and the manner of repayment. Your contract or plan may not permit loans. Tax Treatment of Payments The Federal income tax rules generally include distributions from a qualified contract in the participant's income as ordinary income. These taxable distributions will include purchase payments that were deductible or excludible from income. Thus, under many qualified contracts, the total amount received is included in income since a deduction or exclusion from income was taken for purchase payments. There are exceptions. For example, you do not include amounts received from a Roth IRA in income if certain conditions are satisfied. Required Minimum Distributions Under most qualified plans, you must begin receiving payments from the contract in certain minimum amounts by the later of age 701/2 or retirement. You are required to take distributions from your traditional IRAs beginning in the year you reach age 701/2. If you own a Roth IRA, you are not required to receive minimum distributions from your Roth IRA during your life. Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan. The IRS 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. Congress enacted The Worker, Retiree, and Employer recovery Act of 2008 (the Act) in December, 2008. The Act includes a number of relief provisions, including the suspension of the RMD requirement for IRAs and certain qualified plans in 2009. You should consult your tax advisor to determine whether the RMD relief applies to your annuity contract. If your RMD is currently paid automatically each year, Lincoln will not make any changes to your payments for 2009 unless you specifically request that a change be made. 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 77 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. Federal Income Tax Withholding We will withhold and remit to the IRS a part of the taxable portion of each distribution made under a contract unless you notify us prior to the distribution that tax is not to be withheld. In certain circumstances, Federal income tax rules may require us to withhold tax. At the time a withdrawal, surrender, or annuity payout is requested, we will give you an explanation of the withholding requirements. Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans. Our Tax Status Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes. Changes in the Law The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by applying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a "quorum"), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the 78 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 surrender charges or interest adjustment will apply. A purchaser who participates in the VAA is subject to the risk of a market loss on the contract value during the free-look period. For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return the greater of the purchase payment(s) or contract value as of the valuation date we receive the cancellation request, plus any premium taxes that had been deducted. IRA purchasers will also receive the greater of purchase payments or contract value as of the valuation date. State Regulation As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Department of Insurance at all times. A full examination of our operations is conducted by that Department at least every five years. Records and Reports As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Home office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Other Information 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.LincolnFinancial.com, select service centers and continue on through the Internet Service Center. Legal Proceedings In the ordinary course of its business, Lincoln Life, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is 79 management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of Lincoln Life, the financial position of the VAA, or the principal underwriter. 80 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Interest Adjustment Example Annuity Payouts Examples of Regular Income Payment Calculations Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below. Statement of Additional Information Request Card Lincoln ChoicePlus IISM Lincoln Life Variable Annuity Account N . Please send me a free copy of the current Statement of Additional Information for Lincoln Life Variable Annuity Account N Lincoln ChoicePlus IISM. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 81 (This page intentionally left blank) 82 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 . 11.581 11.401 1 11.608 11.431 3 11.636 11.462 2007 . 11.401 12.530 1 11.431 12.570 3 11.462 12.610 2008 . 12.530 7.071 1 12.570 7.097 3 12.610 7.123 --------- ------ ------ - ------ ------ - ------ ------ AIM V.I. Core Equity 2006 . 10.725 11.561 17 10.749 11.590 7 10.774 11.621 2007 . 11.561 12.267 13 11.590 12.305 6 11.621 12.344 2008 . 12.267 8.408 12 12.305 8.438 4 12.344 8.469 --------- ------ ------ -- ------ ------ - ------ ------ AIM V.I. International Growth Fund 1998 . 1999 . 2000 . 2001 . 10.000 10.613(1) 1*** 10.000 10.614(1) 1*** 10.000 10.619(1) 2002 . 10.613 8.779 1*** 10.614 8.782 1*** 10.619 8.792 2003 . 8.779 11.104 2 8.782 11.113 2 8.792 11.133 2004 . 11.104 13.512 1 11.113 13.530 3 11.133 13.560 2005 . 13.512 15.643 1 13.530 15.672 4 13.560 15.715 2006 . 15.643 19.678 1 15.672 19.723 6 15.715 19.788 2007 . 19.678 22.152 1 19.723 22.215 6 19.788 22.298 2008 . N/A N/A N/A 22.215 12.998 2 22.298 13.053 --------- ------ -------- ---- ------ -------- - ------ -------- AllianceBernstein VPS Global Technology 1998 . 1999 . 2000 . 2001 . 10.000 12.874(1) 1*** 10.000 12.876(1) 1 10.000 12.882(1) 2002 . 12.874 7.369 1 12.876 7.374 5 12.882 7.379 2003 . 7.369 10.423 3 7.374 10.435 5 7.379 10.447 2004 . 10.423 10.774 4 10.435 10.791 6 10.447 10.810 2005 . 10.774 10.984 4 10.791 11.007 3 10.810 11.032 2006 . 10.984 11.710 4 11.007 11.740 3 11.032 11.773 2007 . 11.710 13.810 7 11.740 13.854 3 11.773 13.898 2008 . 13.810 7.136 3 13.854 7.162 3 13.898 7.189 --------- ------ -------- ---- ------ -------- - ------ -------- AllianceBernstein VPS Growth and Income 1998 . 1999 . 2000 . 2001 . 10.000 11.320(1) 16 10.000 10.350(2) 12 10.000 11.324(1) 2002 . 11.320 8.655 51 10.350 7.918 53 11.324 8.667 2003 . 8.655 11.254 91 7.918 10.300 39 8.667 11.281 2004 . 11.254 12.312 83 10.300 11.274 48 11.281 12.354 2005 . 12.312 12.667 77 11.274 11.605 47 12.354 12.723 2006 . 12.667 14.576 72 11.605 13.361 42 12.723 14.655 2007 . 14.576 15.035 59 13.361 13.788 38 14.655 15.130 2008 . 15.035 8.770 51 13.788 8.047 29 15.130 8.835 --------- ------ -------- ---- ------ -------- -- ------ -------- AllianceBernstein VPS International Value 2006 . 11.399 11.842 3 11.780 11.846 1 N/A N/A 2007 . 11.842 12.297 3 11.846 12.309 14 N/A N/A 2008 . 12.297 5.651 4 12.309 5.659 10 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) AIM V.I. Capital Appreciation 2006 . 3 11.718 11.555 115 14.693 14.498 6 2007 . 3 11.555 12.731 91 14.498 15.990 5 2008 . 3 12.731 7.203 71 15.990 9.056 3 --------- - ------ ------ ---- ------ ------ - AIM V.I. Core Equity 2006 . 41 10.850 11.714 161 13.391 14.467 18 2007 . 36 11.714 12.461 125 14.467 15.406 17 2008 . 30 12.461 8.562 105 15.406 10.596 14 --------- -- ------ ------ ---- ------ ------ -- AIM V.I. International Growth Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.621(1) 1*** 2002 . 5 10.621 8.808 40 2003 . 14 8.808 11.169 84 10.562 12.496 3 2004 . 14 11.169 13.625 96 12.496 15.258 3 2005 . 13 13.625 15.814 98 15.258 17.727 3 2006 . 15 15.814 19.942 101 17.727 22.377 3 2007 . 15 19.942 22.506 88 22.377 25.279 5 2008 . 14 22.506 13.194 63 25.279 14.835 2 --------- -- ------ -------- ----- ------ ------ -- AllianceBernstein VPS Global Technology 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 6.961** 1,898 2001 . 1*** 6.961 5.117 2,652 2002 . 7 5.117 2.936 2,062 2003 . 10 2.936 4.163 111 10.970 13.012 11 2004 . 7 4.163 4.314 143 13.012 13.497 23 2005 . 6 4.314 4.410 125 13.497 13.809 19 2006 . 5 4.410 4.713 75 13.809 14.773 19 2007 . 4 4.713 5.572 79 14.773 17.483 18 2008 . 1 5.572 2.887 74 17.483 9.066 21 --------- -- ------ -------- ----- ------ ------ -- AllianceBernstein VPS Growth and Income 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 12.485** 763 2001 . 15 12.485 12.330 2,870 2002 . 121 12.330 9.451 3,415 2003 . 159 9.451 12.320 872 10.654 12.033 140 2004 . 109 12.320 13.512 1,095 12.033 13.210 296 2005 . 96 13.512 13.936 1,070 13.210 13.639 286 2006 . 79 13.936 16.076 950 13.639 15.749 287 2007 . 65 16.076 16.624 813 15.749 16.302 272 2008 . 52 16.624 9.722 687 16.302 9.543 247 --------- --- ------ -------- ----- ------ ------ --- AllianceBernstein VPS International Value 2006 . N/A 10.256 11.861 37 10.497 11.868 10 2007 . N/A 11.861 12.348 122 11.868 12.367 20 2008 . N/A 12.348 5.688 116 12.367 5.703 15 --------- ---- ------ -------- ----- ------ ------ ---
A-1
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) AllianceBernstein VPS Large Cap Growth 1998 . 1999 . 2000 . 2001 . 10.000 11.952(1) 8 10.000 11.007(2) 3 10.000 11.958(1) 2002 . 11.952 8.130 15 11.007 7.492 9 11.958 8.142 2003 . 8.130 9.866 25 7.492 9.096 11 8.142 9.891 2004 . 9.866 10.514 24 9.096 9.698 18 9.891 10.551 2005 . 10.514 11.878 23 9.698 10.961 18 10.551 11.931 2006 . 11.878 11.608 22 10.961 10.718 15 11.931 11.672 2007 . 11.608 12.973 19 10.718 11.984 11 11.672 13.057 2008 . 12.973 7.679 16 11.984 7.097 10 13.057 7.737 --------- ------ -------- -- ------ -------- -- ------ -------- AllianceBernstein VPS Small/Mid Cap Value 1998 . 1999 . 2000 . 2001 . 10.000 11.875(1) 1*** 10.000 11.876(1) 1*** 10.000 11.878(1) 2002 . 11.875 10.937 11 11.876 10.943 10 11.878 10.950 2003 . 10.937 15.158 15 10.943 15.174 11 10.950 15.191 2004 . 15.158 17.754 13 15.174 17.781 21 15.191 17.811 2005 . 17.754 18.621 15 17.781 18.659 19 17.811 18.700 2006 . 18.621 20.918 14 18.659 20.971 15 18.700 21.027 2007 . 20.918 20.890 11 20.971 20.954 14 21.027 21.020 2008 . 20.890 13.203 10 20.954 13.250 14 21.020 13.298 --------- ------ -------- -- ------ -------- -- ------ -------- American Century Investments VP Inflation Protection Fund 2004 . 9.905 10.404 2 10.000 10.407 1 10.042 10.410 2005 . 10.404 10.393 8 10.407 10.402 12 10.410 10.410 2006 . 10.393 10.384 11 10.402 10.398 12 10.410 10.411 2007 . 10.384 11.185 6 10.398 11.206 10 10.411 11.226 2008 . 11.185 10.826 25 11.206 10.851 14 11.226 10.876 --------- ------ -------- -- ------ -------- -- ------ -------- American Funds Global Growth Fund 2004 . N/A N/A N/A 10.000 11.269 20 N/A N/A 2005 . 11.266 12.641 2 11.269 12.652 27 11.273 12.662 2006 . 12.641 14.975 5 12.652 14.994 28 12.662 15.014 2007 . 14.975 16.917 9 14.994 16.947 39 15.014 16.978 2008 . 16.917 10.252 7 16.947 10.275 31 16.978 10.299 --------- ------ -------- ---- ------ -------- -- ------ -------- American Funds Global Small Capitalization Fund 1998 . 1999 . 2000 . 2001 . 10.000 12.502(1) 1*** 10.000 11.134(2) 2 10.000 12.508(1) 2002 . 12.502 9.954 8 11.134 8.870 11 12.508 9.969 2003 . 9.954 15.032 29 8.870 13.402 28 9.969 15.071 2004 . 15.032 17.874 33 13.402 15.943 43 15.071 17.937 2005 . 17.874 22.039 37 15.943 19.668 43 17.937 22.139 2006 . 22.039 26.893 32 19.668 24.011 44 22.139 27.042 2007 . 26.893 32.121 26 24.011 28.694 47 27.042 32.332 2008 . 32.121 14.685 19 28.694 13.124 41 32.332 14.796 --------- ------ -------- ---- ------ -------- -- ------ -------- American Funds Growth Fund 1998 . 1999 . 2000 . 2001 . 10.000 12.315(1) 7 10.000 10.820(2) 20 10.000 12.320(1) 2002 . 12.315 9.151 107 10.820 8.044 140 12.320 9.164 2003 . 9.151 12.314 224 8.044 10.830 307 9.164 12.344 2004 . 12.314 13.627 233 10.830 11.990 443 12.344 13.673 2005 . 13.627 15.574 265 11.990 13.711 467 13.673 15.643 2006 . 15.574 16.884 230 13.711 14.872 460 15.643 16.976 2007 . 16.884 18.659 203 14.872 16.443 423 16.976 18.779 2008 . 18.659 10.283 167 16.443 9.066 394 18.779 10.360 --------- ------ -------- ---- ------ -------- --- ------ -------- 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) AllianceBernstein VPS Large Cap Growth 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 8.941** 898 2001 . 2 8.941 7.282 1,902 2002 . 23 7.282 4.966 2,049 2003 . 30 4.966 6.042 457 10.400 11.512 60 2004 . 27 6.042 6.455 540 11.512 12.312 118 2005 . 24 6.455 7.310 536 12.312 13.957 112 2006 . 22 7.310 7.162 444 13.957 13.688 107 2007 . 18 7.162 8.024 441 13.688 15.351 97 2008 . 9 8.024 4.762 344 15.351 9.119 72 --------- -- ------ ------ ----- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 4 10.000 11.883(1) 1 2002 . 40 11.883 10.971 98 2003 . 50 10.971 15.243 198 10.878 13.147 23 2004 . 54 15.243 17.898 221 13.147 15.452 55 2005 . 27 17.898 18.820 227 15.452 16.264 43 2006 . 21 18.820 21.194 210 16.264 18.334 37 2007 . 22 21.194 21.219 205 18.334 18.374 41 2008 . 16 21.219 13.444 165 18.374 11.653 39 --------- -- ------ -------- ----- ------ ------ --- American Century Investments VP Inflation Protection Fund 2004 . 7 10.000 10.420 121 9.910 10.426 17 2005 . 87 10.420 10.435 255 10.426 10.452 91 2006 . 109 10.435 10.452 270 10.452 10.479 88 2007 . 107 10.452 11.287 234 10.479 11.328 81 2008 . 31 11.287 10.952 357 11.328 11.002 117 --------- --- ------ -------- ----- ------ ------ --- American Funds Global Growth Fund 2004 . N/A 10.221 11.283 52 10.131 11.290 41 2005 . 3 11.283 12.692 125 11.290 12.713 123 2006 . 6 12.692 15.072 223 12.713 15.112 132 2007 . 9 15.072 17.070 242 15.112 17.131 106 2008 . 6 17.070 10.370 236 17.131 10.418 93 --------- --- ------ -------- ----- ------ ------ --- American Funds Global Small Capitalization Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 6.920** 687 2001 . 1 6.920 5.946 1,070 2002 . 32 5.946 4.746 1,260 2003 . 55 4.746 7.186 421 11.382 14.156 41 2004 . 54 7.186 8.566 1,110 14.156 16.891 123 2005 . 30 8.566 10.588 1,257 16.891 20.900 162 2006 . 31 10.588 12.952 1,225 20.900 25.593 160 2007 . 25 12.952 15.509 1,133 25.593 30.675 140 2008 . 24 15.509 7.108 963 30.675 14.073 119 --------- --- ------ -------- ----- ------ ------ --- American Funds Growth Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 9.691** 2,845 2001 . 21 9.691 7.821 7,187 2002 . 225 7.821 5.826 10,157 2003 . 311 5.826 7.860 5,111 10.694 12.337 441 2004 . 297 7.860 8.720 7,627 12.337 13.700 1,530 2005 . 256 8.720 9.991 7,686 13.700 15.712 1,627 2006 . 247 9.991 10.858 7,419 15.712 17.094 1,571 2007 . 236 10.858 12.029 6,813 17.094 18.957 1,389 2008 . 193 12.029 6.646 5,899 18.957 10.484 1,194 --------- --- ------ -------- ------ ------ ------ -----
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) American Funds Growth-Income Fund 1998 . 1999 . 2000 . 2001 . 10.000 11.314(1) 7 10.000 10.535(2) 48 10.000 11.320(1) 2002 . 11.314 9.088 199 10.535 8.466 279 11.320 9.101 2003 . 9.088 11.838 365 8.466 11.033 385 9.101 11.867 2004 . 11.838 12.852 372 11.033 11.984 581 11.867 12.897 2005 . 12.852 13.379 378 11.984 12.482 604 12.897 13.439 2006 . 13.379 15.161 327 12.482 14.151 577 13.439 15.244 2007 . 15.161 15.665 285 14.151 14.629 524 15.244 15.767 2008 . 15.665 9.576 236 14.629 8.948 486 15.767 9.648 --------- ------ -------- --- ------ -------- --- ------ -------- American Funds International Fund 1998 . 1999 . 2000 . 2001 . 10.000 10.840(1) 3 10.000 10.224(2) 3 10.000 10.846(1) 2002 . 10.840 9.080 45 10.224 8.568 26 10.846 9.094 2003 . 9.080 12.045 97 8.568 11.371 82 9.094 12.075 2004 . 12.045 14.136 86 11.371 13.353 125 12.075 14.186 2005 . 14.136 16.895 102 13.353 15.966 129 14.186 16.972 2006 . 16.895 19.773 87 15.966 18.695 131 16.972 19.882 2007 . 19.773 23.344 76 18.695 22.082 125 19.882 23.496 2008 . 23.344 13.289 65 22.082 12.577 109 23.496 13.389 --------- ------ -------- --- ------ -------- --- ------ -------- Delaware VIP Capital Reserves 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 10.323 10.466 2008 . 10.188 10.202 9 10.341 10.270 3 N/A N/A --------- ------ -------- --- ------ -------- ---- ------ -------- Delaware VIP Diversified Income Series 2004 . 10.207 10.872 2 10.000 10.875 3 10.080 10.878 2005 . 10.872 10.631 4 10.875 10.639 10 10.878 10.648 2006 . 10.631 11.248 9 10.639 11.263 8 10.648 11.277 2007 . 11.248 11.884 9 11.263 11.906 10 11.277 11.927 2008 . 11.884 11.117 13 11.906 11.143 9 11.927 11.168 --------- ------ -------- --- ------ -------- ---- ------ -------- Delaware VIP Emerging Markets Series(4) 2004 . N/A N/A N/A 14.430 19.378 1 10.243 13.572 2005 . 19.360 24.206 8 19.378 24.241 2 13.572 16.986 2006 . 24.206 30.194 8 24.241 30.253 7 16.986 21.209 2007 . 30.194 41.137 8 30.253 41.238 9 21.209 28.925 2008 . 41.137 19.550 9 41.238 19.608 8 28.925 13.760 --------- ------ -------- --- ------ -------- ---- ------ -------- Delaware VIP High Yield Series 1998 . 1999 . 2000 . 2001 . 10.000 10.309(1) 1 10.000 10.311(1) 1*** 10.000 10.313(1) 2002 . 10.309 10.307 13 10.311 10.315 2 10.313 10.322 2003 . 10.307 13.039 51 10.315 13.055 42 10.322 13.071 2004 . 13.039 14.625 46 13.055 14.650 50 13.071 14.675 2005 . 14.625 14.866 46 14.650 14.899 48 14.675 14.932 2006 . 14.866 16.406 38 14.899 16.451 23 14.932 16.495 2007 . 16.406 16.549 24 16.451 16.602 23 16.495 16.655 2008 . 16.549 12.301 23 16.602 12.347 19 16.655 12.393 --------- ------ -------- --- ------ -------- ---- ------ -------- 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) American Funds Growth-Income Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 11.279** 1,269 2001 . 21 11.279 11.407 4,314 2002 . 333 11.407 9.185 7,545 2003 . 526 9.185 11.994 4,400 10.817 12.312 751 2004 . 546 11.994 13.055 6,929 12.312 13.413 2,255 2005 . 498 13.055 13.624 6,890 13.413 14.012 2,484 2006 . 455 13.624 15.477 6,695 14.012 15.934 2,323 2007 . 428 15.477 16.031 5,983 15.934 16.521 2,115 2008 . 375 16.031 9.825 5,045 16.521 10.136 1,799 --------- --- ------ ------ ----- ------ ------ ----- American Funds International Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 6.845** 1,907 2001 . 9 6.845 5.407 3,660 2002 . 128 5.407 4.541 4,553 2003 . 196 4.541 6.038 1,896 10.748 13.219 108 2004 . 201 6.038 7.104 3,302 13.219 15.569 425 2005 . 117 7.104 8.512 3,720 15.569 18.673 478 2006 . 118 8.512 9.987 3,826 18.673 21.930 466 2007 . 117 9.987 11.820 3,591 21.930 25.981 450 2008 . 80 11.820 6.746 3,202 25.981 14.842 397 --------- --- ------ ------ ----- ------ ------ ----- Delaware VIP Capital Reserves 2005 . N/A 9.922 9.936 11 10.015 9.940 1*** 2006 . N/A 9.936 10.222 17 9.940 10.237 7 2007 . 1 10.222 10.506 23 10.237 10.532 7 2008 . N/A 10.506 10.293 74 10.532 10.329 13 --------- --- ------ ------ ----- ------ ------ ----- Delaware VIP Diversified Income Series 2004 . 18 10.000 10.888 204 10.041 10.895 63 2005 . 21 10.888 10.673 337 10.895 10.690 113 2006 . 68 10.673 11.321 459 10.690 11.351 131 2007 . 71 11.321 11.992 545 11.351 12.035 119 2008 . 48 11.992 11.246 572 12.035 11.298 137 --------- --- ------ ------ ----- ------ ------ ----- Delaware VIP Emerging Markets Series(4) 2004 . 4 10.103 13.584 32 10.271 13.592 4 2005 . 21 13.584 17.027 147 13.592 17.054 22 2006 . 23 17.027 21.293 153 17.054 21.347 29 2007 . 22 21.293 29.082 167 21.347 29.186 35 2008 . 8 29.082 13.856 164 29.186 13.919 22 --------- --- ------ ------ ----- ------ ------ ----- Delaware VIP High Yield Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 2 10.000 10.317(1) 1 2002 . 24 10.317 10.341 153 2003 . 68 10.341 13.114 600 10.208 11.092 104 2004 . 71 13.114 14.746 752 11.092 12.484 292 2005 . 71 14.746 15.027 642 12.484 12.734 288 2006 . 49 15.027 16.625 582 12.734 14.103 243 2007 . 42 16.625 16.811 531 14.103 14.275 213 2008 . 28 16.811 12.528 400 14.275 10.649 183 --------- --- ------ -------- ----- ------ ------ -----
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) Delaware VIP REIT Series 1998 . 1999 . 2000 . 2001 . 10.000 10.704(1) 1 10.000 10.707(1) 1*** 10.000 10.708(1) 2002 . 10.704 10.989 18 10.707 10.997 11 10.708 11.006 2003 . 10.989 14.455 57 10.997 14.473 37 11.006 14.491 2004 . 14.455 18.639 48 14.473 18.671 55 14.491 18.704 2005 . 18.639 19.592 49 18.671 19.635 55 18.704 19.679 2006 . 19.592 25.500 41 19.635 25.569 52 19.679 25.640 2007 . 25.500 21.527 22 25.569 21.596 43 25.640 21.666 2008 . 21.527 13.702 19 21.596 13.753 39 21.666 13.805 --------- ------ -------- -- ------ -------- -- ------ -------- Delaware VIP Small Cap Value Series 1998 . 1999 . 2000 . 2001 . 10.000 11.798(1) 1 10.000 11.799(1) 2 10.000 11.801(1) 2002 . 11.798 10.940 28 11.799 10.947 15 11.801 10.954 2003 . 10.940 15.245 50 10.947 15.262 35 10.954 15.280 2004 . 15.245 18.169 49 15.262 18.199 46 15.280 18.229 2005 . 18.169 19.507 58 18.199 19.548 45 18.229 19.590 2006 . 19.507 22.235 49 19.548 22.294 44 19.590 22.353 2007 . 22.235 20.376 42 22.294 20.440 34 22.353 20.504 2008 . 20.376 14.016 32 20.440 14.067 24 20.504 14.118 --------- ------ -------- -- ------ -------- -- ------ -------- Delaware VIP Trend Series 1998 . 1999 . 2000 . 2001 . 10.000 12.792(1) 2 10.000 12.794(1) 1 10.000 12.795(1) 2002 . 12.792 10.058 15 12.794 10.064 10 12.795 10.070 2003 . 10.058 13.335 39 10.064 13.351 37 10.070 13.365 2004 . 13.335 14.733 43 13.351 14.757 39 13.365 14.780 2005 . 14.733 15.305 31 14.757 15.338 32 14.780 15.370 2006 . 15.305 16.159 28 15.338 16.202 31 15.370 16.244 2007 . 16.159 17.557 23 16.202 17.613 25 16.244 17.666 2008 . 17.557 9.177 18 17.613 9.211 18 17.666 9.243 --------- ------ -------- -- ------ -------- -- ------ -------- Delaware VIP US Growth Series 1998 . 1999 . 2000 . 2001 . 10.000 11.643(1) 1*** 10.000 11.645(1) 1*** 10.000 11.646(1) 2002 . 11.643 8.101 2 N/A N/A N/A 11.646 8.110 2003 . 8.101 9.830 3 8.511 9.851 12 8.110 9.851 2004 . 9.830 9.962 3 9.851 9.988 15 9.851 9.993 2005 . 9.962 11.211 6 9.988 11.246 14 9.993 11.257 2006 . 11.211 11.254 3 11.246 11.296 13 11.257 11.313 2007 . 11.254 12.440 3 11.296 12.492 11 11.313 12.517 2008 . 12.440 6.992 2 12.492 7.025 8 12.517 7.042 --------- ------ -------- -- ------ -------- ---- ------ -------- Delaware VIP Value Series 1998 . 1999 . 2000 . 2001 . 10.000 11.099(1) 1*** 10.000 11.100(1) 1*** 10.000 11.103(1) 2002 . 11.099 8.864 3 11.100 8.869 1 11.103 8.875 2003 . 8.864 11.169 11 8.869 11.182 14 8.875 11.195 2004 . 11.169 12.589 11 11.182 12.610 17 11.195 12.631 2005 . 12.589 13.100 28 12.610 13.128 20 12.631 13.157 2006 . 13.100 15.952 20 13.128 15.994 22 13.157 16.037 2007 . 15.952 15.221 13 15.994 15.269 21 16.037 15.317 2008 . 15.221 9.946 12 15.269 9.982 19 15.317 10.018 --------- ------ -------- -- ------ -------- ---- ------ -------- 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 REIT Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 3 10.000 10.711(1) 4 2002 . 63 10.711 11.025 229 2003 . 81 11.025 14.539 506 10.399 12.212 68 2004 . 84 14.539 18.793 700 12.212 15.802 153 2005 . 68 18.793 19.803 644 15.802 16.668 157 2006 . 48 19.803 25.840 606 16.668 21.771 142 2007 . 41 25.840 21.868 443 21.771 18.442 117 2008 . 32 21.868 13.955 339 18.442 11.781 102 --------- -- ------ -------- ---- ------ ------ --- Delaware VIP Small Cap Value Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 2 10.000 11.807(1) 8 2002 . 71 11.807 10.976 299 2003 . 95 10.976 15.333 667 10.703 13.184 76 2004 . 97 15.333 18.319 878 13.184 15.767 194 2005 . 64 18.319 19.717 866 15.767 16.988 213 2006 . 52 19.717 22.532 829 16.988 19.432 217 2007 . 43 22.532 20.699 724 19.432 17.869 190 2008 . 36 20.699 14.274 583 17.869 12.335 149 --------- -- ------ -------- ---- ------ ------ --- Delaware VIP Trend Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 5 10.000 12.801(1) 6 2002 . 47 12.801 10.090 229 2003 . 53 10.090 13.412 524 11.056 12.566 52 2004 . 63 13.412 14.854 735 12.566 13.931 160 2005 . 50 14.854 15.470 628 13.931 14.523 160 2006 . 42 15.470 16.374 614 14.523 15.387 146 2007 . 38 16.374 17.835 524 15.387 16.777 132 2008 . 28 17.835 9.346 394 16.777 8.800 110 --------- -- ------ -------- ---- ------ ------ --- Delaware VIP US Growth Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.652(1) 1*** 2002 . 3 11.652 8.127 7 2003 . 8 8.127 9.886 65 10.337 11.484 4 2004 . 9 9.886 10.044 198 11.484 11.679 55 2005 . 8 10.044 11.331 195 11.679 13.189 48 2006 . 8 11.331 11.404 175 13.189 13.287 44 2007 . 10 11.404 12.637 163 13.287 14.738 37 2008 . 10 12.637 7.121 137 14.738 8.313 32 --------- -- ------ -------- ---- ------ ------ --- Delaware VIP Value Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.107(1) 1*** 2002 . 17 11.107 8.893 36 2003 . 28 8.893 11.234 92 11.097 12.064 27 2004 . 30 11.234 12.694 197 12.064 13.645 83 2005 . 51 12.694 13.242 268 13.645 14.249 83 2006 . 55 13.242 16.166 360 14.249 17.411 85 2007 . 54 16.166 15.463 406 17.411 16.672 77 2008 . 22 15.463 10.129 303 16.672 10.932 68 --------- -- ------ -------- ---- ------ ------ ---
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) DWS VIP Equity 500 Index 1998 . 1999 . 2000 . 2001 . 10.000 11.280(1) 1*** 10.000 10.491(2) 12 10.000 11.285(1) 2002 . 11.280 8.620 11 10.491 8.020 30 11.285 8.631 2003 . 8.620 10.866 15 8.020 10.116 22 8.631 10.891 2004 . 10.866 11.820 21 10.116 11.010 25 10.891 11.859 2005 . 11.820 12.170 15 11.010 11.342 27 11.859 12.223 2006 . 12.170 13.829 13 11.342 12.894 29 12.223 13.903 2007 . 13.829 14.324 8 12.894 13.361 29 13.903 14.414 2008 . 14.324 8.855 5 13.361 8.264 26 14.414 8.920 --------- ------ -------- -- ------ -------- -- ------ -------- DWS VIP Small Cap Index 1998 . 1999 . 2000 . 2001 . 10.000 12.116(1) 1*** 10.000 12.117(1) 1*** 10.000 12.118(1) 2002 . 12.116 9.464 3 12.117 9.470 1*** 12.118 9.475 2003 . 9.464 13.632 4 9.470 13.647 3 9.475 13.661 2004 . 13.632 15.790 3 13.647 15.815 5 13.661 15.840 2005 . 15.790 16.193 4 15.815 16.227 4 15.840 16.261 2006 . 16.193 18.714 4 16.227 18.763 8 16.261 18.811 2007 . 18.714 18.058 4 18.763 18.114 5 18.811 18.170 2008 . 18.058 11.701 4 18.114 11.743 5 18.170 11.785 --------- ------ -------- -- ------ -------- -- ------ -------- Fidelity VIP Contrafund Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 10.938(1) 1*** 10.000 10.939(1) 1*** 10.000 10.941(1) 2002 . 10.938 9.725 4 10.939 9.730 3 10.941 9.737 2003 . 9.725 12.263 30 9.730 12.275 49 9.737 12.291 2004 . 12.263 13.891 24 12.275 13.912 76 12.291 13.937 2005 . 13.891 15.940 45 13.912 15.972 80 13.937 16.008 2006 . 15.940 17.471 36 15.972 17.515 90 16.008 17.564 2007 . 17.471 20.159 37 17.515 20.219 80 17.564 20.286 2008 . 20.159 11.363 35 20.219 11.403 67 20.286 11.447 --------- ------ -------- -- ------ -------- -- ------ -------- Fidelity VIP Equity-Income Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 11.098(1) 3 10.000 11.100(1) 1*** 10.000 11.102(1) 2002 . 11.098 9.044 21 11.100 9.050 3 11.102 9.056 2003 . 9.044 11.568 46 9.050 11.580 35 9.056 11.595 2004 . 11.568 12.656 53 11.580 12.677 66 11.595 12.699 2005 . 12.657 13.143 59 12.677 13.171 66 12.699 13.200 2006 . 13.143 15.504 51 13.171 15.545 75 13.200 15.587 2007 . 15.504 15.445 40 15.545 15.492 79 15.587 15.543 2008 . 15.445 8.688 34 15.492 8.719 75 15.543 8.752 --------- ------ -------- -- ------ -------- -- ------ -------- Fidelity VIP Growth Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 11.775(1) 1*** 10.000 11.777(1) 1*** 10.000 11.778(1) 2002 . 11.775 8.073 4 11.777 8.078 2 11.778 8.083 2003 . 8.073 10.525 17 8.078 10.537 4 8.083 10.549 2004 . 10.525 10.676 25 10.537 10.694 4 10.549 10.711 2005 . 10.676 11.079 25 10.694 11.103 7 10.711 11.126 2006 . 11.079 11.614 24 11.103 11.645 7 11.126 11.675 2007 . 11.614 14.470 15 11.645 14.515 6 11.675 14.560 2008 . 14.470 7.499 15 14.515 7.527 7 14.560 7.554 --------- ------ -------- -- ------ -------- -- ------ -------- 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 Equity 500 Index 1998 . 10.000 10.353* 91 1999 . 10.353 12.299 3,761 2000 . 12.299 11.008 5,905 2001 . 1*** 11.008 9.533 6,274 2002 . 10 9.533 7.302 5,366 2003 . 48 7.302 9.229 310 10.693 12.078 27 2004 . 32 9.229 10.064 371 12.078 13.185 88 2005 . 31 10.064 10.388 339 13.185 13.623 76 2006 . 36 10.388 11.834 325 13.623 15.534 68 2007 . 28 11.834 12.287 293 15.534 16.146 66 2008 . 19 12.287 7.615 229 16.146 10.016 34 --------- -- ------ ------ ----- ------ ------ -- DWS VIP Small Cap Index 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 12.124(1) 1*** 2002 . 5 12.124 9.494 17 2003 . 7 9.494 13.708 52 11.993 13.582 11 2004 . 8 13.708 15.918 92 13.582 15.787 20 2005 . 9 15.918 16.366 105 15.787 16.247 26 2006 . 20 16.366 18.961 109 16.247 18.842 28 2007 . 19 18.961 18.342 92 18.842 18.246 27 2008 . 8 18.342 11.915 77 18.246 11.864 23 --------- -- ------ -------- ----- ------ ------ -- Fidelity VIP Contrafund Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.946(1) 1 2002 . 17 10.946 9.757 121 2003 . 37 9.757 12.334 384 10.435 12.276 62 2004 . 69 12.334 14.007 727 12.276 13.954 226 2005 . 88 14.007 16.113 878 13.954 16.069 313 2006 . 101 16.113 17.705 957 16.069 17.674 312 2007 . 94 17.705 20.480 887 17.674 20.465 268 2008 . 57 20.480 11.574 730 20.465 11.577 229 --------- --- ------ -------- ----- ------ ------ --- Fidelity VIP Equity-Income Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.107(1) 4 2002 . 22 11.107 9.074 225 2003 . 54 9.074 11.635 559 10.739 12.419 51 2004 . 57 11.635 12.762 721 12.419 13.636 307 2005 . 50 12.762 13.285 682 13.636 14.209 306 2006 . 56 13.285 15.711 655 14.209 16.821 299 2007 . 43 15.711 15.690 600 16.821 16.815 274 2008 . 29 15.690 8.848 473 16.815 9.492 225 --------- --- ------ -------- ----- ------ ------ --- Fidelity VIP Growth Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.783(1) 12 2002 . 6 11.783 8.099 84 2003 . 15 8.099 10.585 167 10.891 12.308 7 2004 . 18 10.585 10.764 190 12.308 12.528 53 2005 . 23 10.764 11.198 187 12.528 13.047 42 2006 . 23 11.198 11.768 164 13.047 13.725 44 2007 . 15 11.768 14.699 158 13.725 17.159 39 2008 . 9 14.699 7.637 141 17.159 8.925 38 --------- --- ------ -------- ----- ------ ------ ---
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) Fidelity VIP Mid Cap 2005 . 10.237 11.564 1 10.000 11.568 1 10.182 11.571 2006 . 11.564 12.786 5 11.568 12.796 17 11.571 12.806 2007 . 12.786 14.506 7 12.796 14.524 13 12.806 14.543 2008 . 14.506 8.617 5 14.524 8.632 8 14.543 8.648 --------- ------ ------ - ------ ------ -- ------ ------ Fidelity VIP Overseas Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 10.902(1) 1*** 10.000 10.903(1) 1*** 10.000 10.905(1) 2002 . 10.902 8.528 1*** 10.903 8.534 1*** 10.905 8.540 2003 . 8.528 11.999 7 10.476 12.017 1 8.540 12.028 2004 . 11.999 13.374 11 12.017 13.401 9 12.028 13.419 2005 . 13.374 15.626 16 13.401 15.665 13 13.419 15.695 2006 . 15.626 18.102 16 15.665 18.156 9 15.695 18.200 2007 . 18.102 20.843 11 18.156 20.915 7 18.200 20.976 2008 . 20.843 11.490 9 20.915 11.535 5 20.976 11.575 --------- ------ -------- -- ------ -------- -- ------ -------- FTVIPT Franklin Income Securities 2006 . N/A N/A N/A 10.438 11.225 3 N/A N/A 2007 . 11.375 11.453 30 11.225 11.462 14 11.474 11.471 2008 . 11.453 7.925 7 11.462 7.935 13 11.471 7.945 --------- ------ -------- ---- ------ -------- -- ------ -------- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 1998 . 1999 . 2000 . 2001 . 10.000 12.296(1) 2 10.000 12.298(1) 4 10.000 12.301(1) 2002 . 12.296 8.625 12 12.298 8.631 10 12.301 8.637 2003 . 8.625 11.644 29 8.631 11.658 15 8.637 11.672 2004 . 11.644 12.768 21 11.658 12.789 16 11.672 12.811 2005 . 12.768 13.160 20 12.789 13.189 15 12.811 13.218 2006 . 13.160 14.070 19 13.189 14.108 15 13.218 14.146 2007 . 14.070 15.396 17 14.108 15.445 15 14.146 15.494 2008 . 15.396 8.708 14 15.445 8.740 13 15.494 8.773 --------- ------ -------- ---- ------ -------- -- ------ -------- FTVIPT Mutual Shares Securities 2006 . 10.492 11.267 4 10.134 11.270 5 11.151 11.274 2007 . 11.267 11.467 5 11.270 11.477 12 11.274 11.486 2008 . 11.467 7.093 2 11.477 7.104 10 11.486 7.112 --------- ------ -------- ---- ------ -------- -- ------ -------- FTVIPT Templeton Global Income Securities 2005 . 9.944 9.873 4 N/A N/A N/A 9.763 9.879 2006 . 9.873 10.952 5 10.217 10.960 2 9.879 10.969 2007 . 10.952 11.958 5 10.960 11.973 6 10.969 11.988 2008 . 11.958 12.492 6 11.973 12.514 5 11.988 12.537 --------- ------ -------- ---- ------ -------- ---- ------ -------- FTVIPT Templeton Growth Securities Fund 1998 . 1999 . 2000 . 2001 . 10.000 11.171(1) 1*** 10.000 11.172(1) 2 10.000 11.177(1) 2002 . 11.171 8.956 6 11.172 8.962 8 11.177 8.969 2003 . 8.956 11.641 18 8.962 11.654 25 8.969 11.670 2004 . 11.641 13.285 19 11.654 13.307 34 11.670 13.332 2005 . 13.285 14.226 20 13.307 14.256 35 13.332 14.290 2006 . 14.226 17.045 17 14.256 17.090 36 14.290 17.139 2007 . 17.045 17.160 15 17.090 17.213 31 17.139 17.271 2008 . 17.160 9.735 12 17.213 9.770 28 17.271 9.808 --------- ------ -------- ---- ------ -------- ---- ------ -------- 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) Fidelity VIP Mid Cap 2005 . 15 10.000 11.581 72 10.145 11.587 32 2006 . 10 11.581 12.836 211 11.587 12.856 77 2007 . 10 12.836 14.599 181 12.856 14.637 78 2008 . 18 14.599 8.694 212 14.637 8.725 57 --------- -- ------ ------ --- ------ ------ -- Fidelity VIP Overseas Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.910(1) 5 2002 . 8 10.910 8.557 23 2003 . 16 8.557 12.069 63 11.430 14.211 4 2004 . 12 12.069 13.486 194 14.211 15.895 57 2005 . 9 13.486 15.796 227 15.895 18.637 60 2006 . 13 15.796 18.345 220 18.637 21.665 56 2007 . 11 18.345 21.175 183 21.665 25.033 54 2008 . 7 21.175 11.702 187 25.033 13.847 52 --------- -- ------ -------- ---- ------ ------ -- FTVIPT Franklin Income Securities 2006 . N/A 9.990 11.239 103 10.106 11.246 16 2007 . 3 11.239 11.499 353 11.246 11.518 37 2008 . 11 11.499 7.976 342 11.518 7.997 60 --------- ---- ------ -------- ---- ------ ------ -- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 7.540** 834 2001 . 1 7.540 6.301 1,471 2002 . 14 6.301 4.431 1,735 2003 . 25 4.431 5.997 495 10.959 12.971 19 2004 . 19 5.997 6.592 747 12.971 14.273 55 2005 . 13 6.592 6.812 787 14.273 14.763 51 2006 . 12 6.812 7.301 760 14.763 15.839 51 2007 . 9 7.301 8.009 678 15.839 17.392 44 2008 . 14 8.009 4.541 537 17.392 9.872 43 --------- ---- ------ -------- ----- ------ ------ -- FTVIPT Mutual Shares Securities 2006 . 1*** 9.899 11.284 68 10.057 11.291 24 2007 . 18 11.284 11.514 223 11.291 11.532 45 2008 . 7 11.514 7.141 244 11.532 7.159 39 --------- ---- ------ -------- ----- ------ ------ -- FTVIPT Templeton Global Income Securities 2005 . 4 9.952 9.887 26 9.912 9.893 11 2006 . 8 9.887 10.995 95 9.893 11.012 20 2007 . 18 10.995 12.035 153 11.012 12.066 24 2008 . 35 12.035 12.604 338 12.066 12.649 75 --------- ---- ------ -------- ----- ------ ------ -- FTVIPT Templeton Growth Securities Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . 10.000 11.029** 155 2001 . 1*** 11.029 10.733 376 2002 . 18 10.733 8.627 609 2003 . 24 8.627 11.241 326 10.803 12.709 44 2004 . 25 11.241 12.861 451 12.709 14.555 104 2005 . 23 12.861 13.806 508 14.555 15.641 105 2006 . 21 13.806 16.583 528 15.641 18.806 112 2007 . 17 16.583 16.737 495 18.806 18.998 103 2008 . 15 16.737 9.519 419 18.998 10.816 83 --------- ---- ------ -------- ----- ------ ------ ---
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) Janus Aspen Balanced Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 10.661(1) 1*** 10.000 10.662(1) 1*** 10.000 10.665(1) 2002 . 10.661 9.786 7 10.662 9.793 1 10.665 9.800 2003 . 9.786 10.947 38 9.793 10.960 20 9.800 10.973 2004 . 10.947 11.660 24 10.960 11.680 46 10.973 11.701 2005 . 11.660 12.348 31 11.680 12.376 43 11.701 12.403 2006 . 12.348 13.411 26 12.376 13.448 43 12.403 13.484 2007 . 13.411 14.549 22 13.448 14.596 35 13.484 14.643 2008 . 14.549 12.012 19 14.596 12.057 37 14.643 12.102 --------- ------ -------- -- ------ -------- -- ------ -------- Janus Aspen Mid Cap Growth Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 11.386(1) 1*** 10.000 11.387(1) 1*** 10.000 11.389(1) 2002 . 11.386 8.047 2 11.387 8.052 2 11.389 8.058 2003 . 8.047 10.667 2 8.052 10.679 5 8.058 10.692 2004 . 10.667 12.640 2 10.679 12.662 10 10.692 12.683 2005 . 12.640 13.929 2 12.662 13.959 10 12.683 13.990 2006 . 13.929 15.524 2 13.959 15.566 8 13.990 15.608 2007 . 15.524 18.590 2 15.566 18.649 9 15.608 18.709 2008 . 18.590 10.266 1 18.649 10.304 7 18.709 10.342 --------- ------ -------- -- ------ -------- -- ------ -------- Janus Aspen Worldwide Growth Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 11.512(1) 1*** 10.000 11.513(1) 1*** 10.000 11.514(1) 2002 . 11.512 8.412 1 11.513 8.417 6 11.514 8.422 2003 . 8.412 10.234 3 8.417 10.245 5 8.422 10.256 2004 . 10.234 10.522 2 10.245 10.539 5 10.256 10.556 2005 . 10.522 10.926 3 10.539 10.949 5 10.556 10.972 2006 . 10.926 12.675 3 10.949 12.708 4 10.972 12.741 2007 . 12.675 13.635 1 12.708 13.678 4 12.741 13.720 2008 . 13.635 7.402 1 13.678 7.429 1 13.720 7.456 --------- ------ -------- -- ------ -------- -- ------ -------- Lincoln VIP Baron Growth Opportunities(6) 2006 . N/A N/A N/A N/A N/A N/A 10.764 10.623 2007 . 11.522 10.800 1* 11.133 10.808 1 10.623 10.817 2008 . 10.800 6.465 1* 10.808 6.474 1* 10.817 6.482 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Capital Growth 2007 . N/A N/A N/A 10.195 10.704 1* N/A N/A 2008 . N/A N/A N/A 10.704 6.138 1* N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Cohen & Steers Global Real Estate 2007 . 9.557 8.218 6 9.275 8.221 2 9.509 8.223 2008 . 8.218 4.674 9 8.221 4.678 3 8.223 4.682 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Columbia Value Opportunities 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 8.620 6.067 2 N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Core Fund(3) 2005 . N/A N/A N/A N/A N/A N/A N/A N/A 2006 . 10.629 11.454 1 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) Janus Aspen Balanced Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 3 10.000 10.669(1) 3 2002 . 41 10.669 9.819 310 2003 . 90 9.819 11.011 659 10.208 10.863 47 2004 . 85 11.011 11.758 668 10.863 11.612 115 2005 . 82 11.758 12.483 593 11.612 12.340 119 2006 . 58 12.483 13.591 503 12.340 13.450 107 2007 . 48 13.591 14.781 428 13.450 14.642 104 2008 . 37 14.781 12.235 364 14.642 12.131 81 --------- -- ------ -------- --- ------ ------ --- Janus Aspen Mid Cap Growth Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.394(1) 1 2002 . 4 11.394 8.073 14 2003 . 4 8.073 10.729 35 10.848 12.428 7 2004 . 5 10.729 12.746 94 12.428 14.780 16 2005 . 5 12.746 14.080 93 14.780 16.343 12 2006 . 4 14.080 15.732 81 16.343 18.279 10 2007 . 4 15.732 18.886 74 18.279 21.966 10 2008 . 4 18.886 10.455 64 21.966 12.173 11 --------- -- ------ -------- --- ------ ------ --- Janus Aspen Worldwide Growth Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.520(1) 2 2002 . 11 11.520 8.439 89 2003 . 11 8.439 10.292 124 11.070 12.228 4 2004 . 5 10.292 10.609 122 12.228 12.617 11 2005 . 4 10.609 11.044 110 12.617 13.147 8 2006 . 3 11.044 12.843 105 13.147 15.305 8 2007 . 3 12.843 13.851 101 15.305 16.522 7 2008 . 3 13.851 7.538 89 16.522 9.001 5 --------- -- ------ -------- --- ------ ------ --- Lincoln VIP Baron Growth Opportunities(6) 2006 . 1*** 9.473 10.632 4 N/A N/A N/A 2007 . 1 10.632 10.843 23 11.264 10.861 3 2008 . 8 10.843 6.508 43 10.861 6.525 7 --------- -- ------ -------- --- ------ ------ --- Lincoln VIP Capital Growth 2007 . N/A 10.601 10.717 2 N/A N/A N/A 2008 . N/A 10.717 6.158 2 N/A N/A N/A --------- ---- ------ -------- --- ------ ------ --- Lincoln VIP Cohen & Steers Global Real Estate 2007 . 1 9.510 8.231 48 9.403 8.236 2 2008 . 4 8.231 4.693 89 8.236 4.701 6 --------- ---- ------ -------- --- ------ ------ --- Lincoln VIP Columbia Value Opportuni 2007 . N/A 10.204 9.370 3 9.371 9.375 1 2008 . N/A 9.370 6.086 6 9.375 6.095 6 --------- ---- ------ -------- --- ------ ------ --- Lincoln VIP Core Fund(3) 2005 . N/A 10.047 10.259 6 N/A N/A N/A 2006 . N/A 10.259 11.499 24 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) Lincoln VIP Delaware Bond 1998 . 1999 . 2000 . 2001 . 10.000 10.118(1) 21 10.000 10.101(2) 15 10.000 10.124(1) 2002 . 10.118 10.963 115 10.101 10.951 114 10.124 10.980 2003 . 10.963 11.569 189 10.951 11.561 203 10.980 11.599 2004 . 11.569 11.983 228 11.561 11.981 217 11.599 12.026 2005 . 11.983 12.098 191 11.981 12.102 224 12.026 12.154 2006 . 12.098 12.461 176 12.102 12.472 176 12.154 12.531 2007 . 12.461 12.925 136 12.472 12.942 174 12.531 13.010 2008 . 12.925 12.341 107 12.942 12.364 150 13.010 12.435 --------- ------ -------- --- ------ -------- --- ------ -------- Lincoln VIP 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 10.784 11.444 2007 . N/A N/A N/A N/A N/A N/A 11.444 11.928 2008 . N/A N/A N/A 10.231 7.504 3 11.928 7.517 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Delaware Social Awareness 1998 . 1999 . 2000 . 2001 . 10.000 11.512(1) 1*** 10.000 11.513(1) 1*** 10.000 11.515(1) 2002 . 11.512 8.817 3 N/A N/A N/A 11.515 8.827 2003 . 8.817 11.436 7 9.248 11.466 2 8.827 11.460 2004 . 11.436 12.678 7 11.466 12.717 9 11.460 12.717 2005 . 12.678 13.970 12 12.717 14.021 7 12.717 14.028 2006 . 13.970 15.433 11 14.021 15.496 7 14.028 15.512 2007 . 15.433 15.631 5 15.496 15.703 6 15.512 15.726 2008 . 15.631 10.084 5 15.703 10.136 6 15.726 10.156 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Delaware Special Opportunities 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 9.042 5.681 1* N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP 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 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Growth Fund(4) 2005 . N/A N/A N/A N/A N/A N/A N/A N/A 2006 . N/A N/A N/A 11.350 11.279 1*** N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Growth Opportunities(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 12.505 12.375 1* N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Janus Capital Appreciation 1998 . 1999 . 2000 . 2001 . 10.000 11.623(1) 1*** 10.000 11.625(1) 1*** 10.000 11.626(1) 2002 . 11.623 8.348 1 11.625 8.353 1 11.626 8.358 2003 . 8.348 10.877 1 8.353 10.889 1 8.358 10.901 2004 . 10.877 11.264 1 10.889 11.282 2 10.901 11.300 2005 . 11.264 11.546 3 11.282 11.569 2 11.300 11.594 2006 . 11.546 12.455 2 11.569 12.487 3 11.594 12.520 2007 . N/A N/A N/A 12.487 14.798 2 12.520 14.844 2008 . 14.476 8.587 1 14.798 8.618 2 14.844 8.649 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Marsico International Growth 2007 . N/A N/A N/A 11.369 11.149 1 9.732 11.153 2008 . 10.439 5.584 1* 11.149 5.588 3 11.153 5.593 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP MFS Value 2007 . N/A N/A N/A 10.025 9.710 1* N/A N/A 2008 . 9.500 6.449 2 9.710 6.454 1* 8.938 6.459 --------- ------ -------- ---- ------ -------- ---- ------ -------- 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 VIP Delaware Bond 1998 . 10.000 10.095* 46 1999 . 10.095 9.631 1,260 2000 . 9.631 10.530 2,348 2001 . 19 10.530 11.334 5,439 2002 . 302 11.334 12.312 10,002 2003 . 398 12.312 13.025 2,682 10.165 10.049 286 2004 . 356 13.025 13.525 3,237 10.049 10.445 897 2005 . 343 13.525 13.689 3,147 10.445 10.582 1,024 2006 . 295 13.689 14.135 2,837 10.582 10.938 1,006 2007 . 297 14.135 14.697 2,630 10.938 11.384 955 2008 . 240 14.697 14.069 2,117 11.384 10.909 822 --------- --- ------ ------ ------ ------ ------ ----- Lincoln VIP Delaware Growth and Income 2005 . N/A 10.058 10.379 1 N/A N/A N/A 2006 . 8 10.379 11.471 10 10.569 11.489 5 2007 . 9 11.471 11.973 18 11.489 12.005 6 2008 . 10 11.973 7.557 25 12.005 7.584 1 --------- ---- ------ ------ ------ ------ ------ ----- Lincoln VIP Delaware Social Awareness 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.520(1) 1*** 2002 . 9 11.520 8.845 11 2003 . 11 8.845 11.501 72 10.740 12.305 11 2004 . 11 11.501 12.782 205 12.305 13.689 81 2005 . 11 12.782 14.120 234 13.689 15.137 90 2006 . 11 14.120 15.638 204 15.137 16.781 83 2007 . 11 15.638 15.878 187 16.781 17.055 77 2008 . 9 15.878 10.269 155 17.055 11.042 72 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP Delaware Special Opportuni 2007 . N/A N/A N/A N/A N/A N/A N/A 2008 . N/A 8.895 5.700 11 8.901 5.709 1 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP FI Equity-Income 2005 . N/A 10.039 10.487 9 10.040 10.493 15 2006 . N/A 10.487 11.478 18 10.493 11.496 15 2007 . N/A 11.478 11.782 18 11.496 11.812 14 2008 . N/A 11.782 7.147 18 11.812 7.173 13 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP Growth Fund(4) 2005 . N/A 10.126 10.834 1 N/A N/A N/A 2006 . N/A 10.834 11.315 3 11.073 11.333 1 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP Growth Opportunities(5) 2005 . N/A N/A N/A N/A 10.243 11.462 3 2006 . N/A 12.692 12.414 1 11.462 12.434 3 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP Janus Capital Appreciation 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.631(1) 1*** 2002 . 4 11.631 8.374 12 2003 . 5 8.374 10.939 29 10.658 12.233 5 2004 . 4 10.939 11.357 43 12.233 12.713 14 2005 . 4 11.357 11.669 50 12.713 13.076 14 2006 . 3 11.669 12.620 44 13.076 14.155 14 2007 . 1 12.620 14.985 42 14.155 16.825 15 2008 . 1 14.985 8.745 40 16.825 9.828 13 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP Marsico Internati Growth 2007 . 4 9.838 11.163 18 11.383 11.170 1 2008 . 4 11.163 5.606 33 11.170 5.615 5 --------- ---- ------ -------- ------ ------ ------ ----- Lincoln VIP MFS Value 2007 . N/A 9.683 9.721 1* 9.458 9.727 1 2008 . 4 9.721 6.475 37 9.727 6.485 5 --------- ---- ------ -------- ------ ------ ------ -----
A-8
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 VIP Mid-Cap Value 2007 . N/A N/A N/A 9.601 8.638 1* 9.948 8.641 2008 . N/A N/A N/A 8.638 5.028 1* 8.641 5.032 --------- -- ---- --- ----- ----- - ----- ----- Lincoln VIP Mondrian International Value 1998 . 1999 . 2000 . 2001 . 10.000 11.026(1) 1*** 10.000 11.027(1) 1*** 10.000 11.029(1) 2002 . 11.026 9.676 2 11.027 9.682 1 11.029 9.686 2003 . 9.676 13.478 7 9.682 13.494 10 9.686 13.506 2004 . 13.478 16.033 7 13.494 16.060 14 13.506 16.083 2005 . 16.033 17.749 12 16.060 17.788 16 16.083 17.822 2006 . 17.749 22.698 15 17.788 22.758 14 17.822 22.814 2007 . 22.698 24.891 14 22.758 24.970 14 22.814 25.043 2008 . 24.891 15.509 10 24.970 15.566 12 25.043 15.619 --------- ------ -------- ---- ------ -------- -- ------ -------- Lincoln VIP Money Market Fund 1998 . 1999 . 2000 . 2001 . 10.000 10.022(1) 9 10.000 10.029(2) 27 10.000 10.027(1) 2002 . 10.022 9.997 24 10.029 10.009 52 10.027 10.012 2003 . 9.997 9.900 27 10.009 9.917 61 10.012 9.925 2004 . 9.900 9.823 73 9.917 9.845 31 9.925 9.858 2005 . 9.823 9.932 39 9.845 9.959 53 9.858 9.977 2006 . 9.932 10.227 67 9.959 10.260 77 9.977 10.284 2007 . 10.227 10.559 37 10.260 10.598 83 10.284 10.628 2008 . 10.559 10.630 130 10.598 10.675 173 10.628 10.710 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Bond Index 2008 . 10.143 10.457 1 10.171 10.459 11 10.051 10.462 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Developed International 150 2008 . 9.374 6.259 1* 8.275 6.260 1 9.156 6.262 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Emerging Markets 100 2008 . 9.394 6.050 1* 7.881 6.052 1 9.874 6.053 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA International Index 2008 . 9.572 6.395 1* 8.231 6.397 1 9.315 6.398 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Large Cap 100 2008 . 9.368 6.971 1* 9.735 6.973 2 9.558 6.975 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA S&P 500 Index 2007 . 11.442 11.320 1 N/A N/A N/A N/A N/A 2008 . 11.320 6.976 1* 9.318 6.989 2 9.654 7.001 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Small Cap Index 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . 7.878 5.924 1* 8.517 5.929 3 8.357 5.934 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP SSgA Small/Mid Cap 200 2008 . 9.188 7.222 1* 10.664 7.224 1* 10.018 7.225 --------- ------ -------- ---- ------ -------- --- ------ -------- Lincoln VIP T. Rowe Price Growth Stock 2007 . N/A N/A N/A 10.386 9.924 1* N/A N/A 2008 . N/A N/A N/A 9.924 5.665 1* 8.553 5.670 --------- ------ -------- ---- ------ -------- --- ------ -------- 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 VIP Mid-Cap Value 2007 . 4 9.949 8.649 29 N/A N/A N/A 2008 . 4 8.649 5.044 27 N/A N/A N/A --------- - ----- ----- --- -- --- Lincoln VIP Mondrian International Value 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.034(1) 1*** 2002 . 2 11.034 9.706 39 2003 . 7 9.706 13.554 132 11.006 13.177 19 2004 . 14 13.554 16.164 320 13.177 15.730 106 2005 . 30 16.164 17.939 355 15.730 17.474 118 2006 . 30 17.939 22.998 352 17.474 22.424 115 2007 . 29 22.998 25.283 294 22.424 24.678 101 2008 . 10 25.283 15.793 251 24.678 15.430 81 --------- -- ------ -------- ----- ------ ------ --- Lincoln VIP Money Market Fund 1998 . 10.000 10.034* 348 1999 . 10.034 10.364 1,721 2000 . 10.364 10.840 2,790 2001 . 27 10.840 11.119 5,801 2002 . 117 11.119 11.119 6,446 2003 . 79 11.119 11.039 723 9.994 9.956 58 2004 . 137 11.039 10.981 753 9.956 9.914 156 2005 . 144 10.981 11.131 839 9.914 10.058 174 2006 . 157 11.131 11.490 1,011 10.058 10.393 305 2007 . 149 11.490 11.892 1,153 10.393 10.768 385 2008 . 195 11.892 12.002 1,949 10.768 10.879 539 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Bond Index 2008 . 5 10.020 10.470 73 10.073 10.476 16 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Developed Internati 150 2008 . 1 9.408 6.267 20 9.851 6.270 11 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Emerging Markets 100 2008 . 1* 9.395 6.058 29 9.823 6.061 9 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Internati Index 2008 . 1 9.602 6.403 19 9.903 6.407 12 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Large Cap 100 2008 . 1 9.474 6.980 31 9.685 6.984 14 --------- --- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA S&P 500 Index 2007 . N/A 11.496 11.394 27 N/A N/A N/A 2008 . 1 11.394 7.039 62 9.964 7.066 16 --------- ---- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Small Cap Index 2007 . N/A 9.746 9.158 2 N/A N/A N/A 2008 . 1* 9.158 5.948 22 8.327 5.958 6 --------- ---- ------ -------- ----- ------ ------ --- Lincoln VIP SSgA Small/Mid Cap 200 2008 . 1* 9.698 7.231 9 9.652 7.235 4 --------- ---- ------ -------- ----- ------ ------ --- Lincoln VIP T. Rowe Price Growth Stock 2007 . N/A 10.087 9.936 1 N/A N/A N/A 2008 . 2 9.936 5.684 3 9.396 5.693 2 --------- ---- ------ -------- ----- ------ ------ ---
A-9
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 VIP T. Rowe Price Structured Mid-Cap Growth 1998 . 1999 . 2000 . 2001 . 10.000 12.414(1) 1*** 10.000 12.416(1) 1*** 10.000 12.417(1) 2002 . 12.414 8.510 1 N/A N/A N/A N/A N/A 2003 . 8.510 11.103 2 8.985 11.139 3 9.908 11.132 2004 . 11.103 12.414 2 11.139 12.461 3 N/A N/A 2005 . 12.414 13.408 1 12.461 13.465 3 N/A N/A 2006 . 13.408 14.412 1 13.465 14.481 1 14.510 14.493 2007 . 14.412 16.103 1 14.481 16.187 1 14.493 16.209 2008 . 16.103 9.063 1 16.187 9.115 2 16.209 9.132 --------- ------ -------- - ------ -------- ---- ------ -------- Lincoln VIP Templeton Growth 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Turner Mid-Cap Growth 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP UBS Global Asset Allocation 1998 . 1999 . 2000 . 2001 . 10.000 10.969(1) 1*** 10.000 10.970(1) 1*** 10.000 10.973(1) 2002 . 10.969 9.494 1*** 10.970 9.499 1*** 10.973 9.506 2003 . 9.494 11.244 2 9.499 11.255 4 9.506 11.270 2004 . 11.244 12.558 2 11.255 12.577 7 11.270 12.599 2005 . 12.558 13.192 2 12.577 13.219 9 12.599 13.249 2006 . 13.192 14.859 3 13.219 14.897 8 13.249 14.938 2007 . 14.859 15.548 3 14.897 15.595 8 14.938 15.646 2008 . 15.548 10.212 2 15.595 10.248 7 15.646 10.287 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire 2010 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A 10.374 7.802 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire 2020 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A 10.157 7.387 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire 2030 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire 2040 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire Aggressive Profile 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 . 12.733 13.555 2 N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A N/A --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire Conservative Profile 2005 . N/A N/A N/A N/A N/A N/A N/A N/A 2006 . 10.443 10.998 4 N/A N/A N/A N/A N/A 2007 . 10.998 11.630 17 11.296 11.645 5 11.064 11.660 2008 . 11.630 9.306 4 11.645 9.323 5 11.660 9.340 --------- ------ -------- ---- ------ -------- ---- ------ -------- Lincoln VIP Wilshire Moderate Profile 2005 . 10.008 10.469 9 10.031 10.472 15 10.000 10.475 2006 . 10.469 11.510 9 10.472 11.519 15 10.475 11.528 2007 . N/A N/A N/A 11.519 12.356 24 11.528 12.372 2008 . N/A N/A N/A 12.356 8.900 12 12.372 8.916 --------- ------ -------- ---- ------ -------- ---- ------ -------- 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 VIP T. Rowe Price Structured Mid-Cap Growth 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 12.422(1) 1*** 2002 . N/A 12.422 8.535 2 2003 . 1*** 8.535 11.163 48 11.363 12.364 2 2004 . N/A 11.163 12.512 11 12.364 13.872 5 2005 . N/A 12.512 13.548 19 13.872 15.036 16 2006 . 1 13.548 14.599 25 15.036 16.219 17 2007 . 1 14.599 16.352 25 16.219 18.184 17 2008 . 2 16.352 9.227 22 18.184 10.271 18 --------- ---- ------ -------- ---- ------ ------ -- Lincoln VIP Templeton Growth 2007 . N/A 9.688 9.807 3 9.472 9.813 1* 2008 . N/A 9.807 6.005 23 9.813 6.015 14 --------- ---- ------ -------- ---- ------ ------ -- Lincoln VIP Turner Mid-Cap Growth 2007 . N/A 10.046 10.853 6 N/A N/A N/A 2008 . N/A 10.853 5.411 4 N/A N/A N/A --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP UBS Global Asset Allocation 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.978(1) 1*** 2002 . 1 10.978 9.527 11 2003 . 3 9.527 11.311 68 10.577 11.385 8 2004 . 5 11.311 12.664 131 11.385 12.760 54 2005 . 5 12.664 13.338 165 12.760 13.452 150 2006 . 12 13.338 15.060 159 13.452 15.205 151 2007 . 16 15.060 15.797 159 15.205 15.965 138 2008 . 10 15.797 10.402 137 15.965 10.523 63 --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire 2010 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A 2008 . 1* 10.049 7.821 10 N/A N/A N/A --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire 2020 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A 2008 . 1* 9.715 7.404 3 N/A N/A N/A --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire 2030 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire 2040 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A N/A N/A N/A N/A --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire Aggressive Profile 2005 . N/A 10.102 10.897 13 10.294 10.903 1* 2006 . N/A 10.897 12.492 15 10.903 12.512 24 2007 . N/A 12.492 13.642 19 12.512 13.677 20 2008 . N/A 13.642 7.988 36 13.677 8.017 19 --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire Conservative Profile 2005 . N/A 9.991 10.266 29 10.030 10.272 17 2006 . N/A 10.266 11.041 67 10.272 11.059 26 2007 . 2 11.041 11.705 162 11.059 11.735 26 2008 . 6 11.705 9.390 211 11.735 9.423 42 --------- ---- ------ -------- ---- ------ ------ --- Lincoln VIP Wilshire Moderate Profile 2005 . 24 10.041 10.484 106 9.991 10.490 87 2006 . 37 10.484 11.555 523 10.490 11.573 295 2007 . 13 11.555 12.420 545 11.573 12.452 360 2008 . 13 12.420 8.964 675 12.452 8.996 358 --------- ---- ------ -------- ---- ------ ------ ---
A-10
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 VIP Wilshire Moderately Aggressive Profile 2005 . N/A N/A N/A N/A N/A N/A 10.122 10.652 2006 . N/A N/A N/A N/A N/A N/A 10.652 11.941 2007 . 11.994 12.847 2 12.801 12.863 1 N/A N/A 2008 . 12.847 8.393 2 12.863 8.408 1 N/A N/A --------- ------ ------ ---- ------ ------ ---- ------ ------ MFS VIT Core Equity 1998 . 1999 . 2000 . 2001 . 10.000 11.893(1) 2 10.000 11.895(1) 1*** 10.000 11.896(1) 2002 . 11.893 8.208 1 11.895 8.212 1*** 11.896 8.218 2003 . 8.208 10.263 16 8.212 10.273 9 8.218 10.285 2004 . 10.263 11.315 6 10.273 11.332 8 10.285 11.351 2005 . 11.315 11.293 5 11.332 11.316 8 11.351 11.340 2006 . 11.293 12.608 4 11.316 12.640 8 11.340 12.673 2007 . 12.608 13.750 4 12.640 13.792 8 12.673 13.835 2008 . 13.750 8.206 3 13.792 8.236 8 13.835 8.266 --------- ------ -------- ---- ------ -------- ---- ------ -------- MFS VIT Growth Series 1998 . 1999 . 2000 . 2001 . 10.000 12.136(1) 1*** 10.000 12.137(1) 1*** 10.000 12.139(1) 2002 . 12.136 7.893 3 12.137 7.899 1*** 12.139 7.904 2003 . 7.893 10.089 5 7.899 10.101 1 7.904 10.112 2004 . 10.089 11.186 7 10.101 11.205 6 10.112 11.223 2005 . 11.186 11.985 7 11.205 12.011 6 11.223 12.037 2006 . 11.985 12.686 6 12.011 12.720 5 12.037 12.754 2007 . 12.686 15.083 3 12.720 15.131 5 12.754 15.179 2008 . 15.083 9.265 3 15.131 9.300 3 15.179 9.334 --------- ------ -------- ---- ------ -------- ---- ------ -------- MFS VIT Total Return Series 1998 . 1999 . 2000 . 2001 . 10.000 10.636(1) 1*** 10.000 10.637(1) 1*** 10.000 10.642(1) 2002 . 10.636 9.902 44 10.637 9.908 7 10.642 9.918 2003 . 9.902 11.298 84 9.908 11.312 82 9.918 11.328 2004 . 11.298 12.339 85 11.312 12.360 137 11.328 12.384 2005 . 12.339 12.453 100 12.360 12.479 139 12.384 12.510 2006 . 12.453 13.673 77 12.479 13.709 139 12.510 13.750 2007 . 13.673 13.978 63 13.709 14.022 131 13.750 14.071 2008 . 13.978 10.680 52 14.022 10.719 118 14.071 10.762 --------- ------ -------- ---- ------ -------- ---- ------ -------- MFS VIT Utilities Series 1998 . 1999 . 2000 . 2001 . 10.000 9.848(1) 1*** 10.000 9.851(1) 1 10.000 9.851(1) 2002 . 9.848 7.470 1 9.851 7.474 1 9.851 7.478 2003 . 7.470 9.962 6 7.474 9.972 12 7.478 9.983 2004 . 9.962 12.723 5 9.972 12.743 15 9.983 12.763 2005 . 12.723 14.589 11 12.743 14.619 27 12.763 14.649 2006 . 14.589 18.793 17 14.619 18.842 28 14.649 18.890 2007 . 18.793 23.580 17 18.842 23.652 23 18.890 23.725 2008 . 23.580 14.424 17 23.652 14.476 17 23.725 14.528 --------- ------ -------- ---- ------ -------- ---- ------ -------- 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 VIP Wilshire Moderately Aggressive Profile 2005 . 2 9.989 10.661 89 9.989 10.667 87 2006 . 2 10.661 11.970 172 10.667 11.988 107 2007 . N/A 11.970 12.929 360 11.988 12.963 94 2008 . N/A 12.929 8.468 268 12.963 8.498 130 --------- ---- ------ ------ ---- ------ ------ --- MFS VIT Core Equity 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.902(1) 1*** 2002 . 1 11.902 8.235 31 2003 . 6 8.235 10.322 43 10.967 11.930 20 2004 . 6 10.322 11.408 54 11.930 13.199 24 2005 . 1 11.408 11.414 46 13.199 13.219 24 2006 . 1 11.414 12.776 42 13.219 14.811 22 2007 . 1 12.776 13.968 36 14.811 16.209 22 2008 . 1 13.968 8.358 33 16.209 9.708 20 --------- ---- ------ -------- ----- ------ ------ --- MFS VIT Growth Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 12.144(1) 1*** 2002 . 8 12.144 7.919 17 2003 . 12 7.919 10.147 41 10.900 11.878 8 2004 . 17 10.147 11.279 71 11.878 13.216 14 2005 . 15 11.279 12.114 73 13.216 14.209 13 2006 . 14 12.114 12.855 69 14.209 15.093 10 2007 . 13 12.855 15.322 58 15.093 18.008 11 2008 . 14 15.322 9.436 49 18.008 11.101 11 --------- ---- ------ -------- ----- ------ ------ --- MFS VIT Total Return Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.644(1) 11 2002 . 84 10.644 9.935 460 2003 . 143 9.935 11.364 1,164 10.413 11.115 185 2004 . 143 11.364 12.442 1,698 11.115 12.181 602 2005 . 131 12.442 12.588 1,685 12.181 12.336 692 2006 . 126 12.588 13.856 1,562 12.336 13.592 667 2007 . 106 13.856 14.201 1,394 13.592 13.945 632 2008 . 99 14.201 10.878 997 13.945 10.692 564 --------- ---- ------ -------- ----- ------ ------ --- MFS VIT Utilities Series 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 5 10.000 9.854(1) 3 2002 . 14 9.854 7.492 109 2003 . 25 7.492 10.016 200 10.751 11.953 28 2004 . 30 10.016 12.825 253 11.953 15.320 72 2005 . 54 12.825 14.742 314 15.320 17.629 125 2006 . 45 14.742 19.038 309 17.629 22.788 103 2007 . 37 19.038 23.947 330 22.788 28.693 97 2008 . 26 23.947 14.686 288 28.693 17.614 70 --------- ---- ------ -------- ----- ------ ------ ---
A-11
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) Neuberger Berman AMT Mid-Cap Growth Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 12.004(1) 1*** 10.000 12.007(1) 1*** 10.000 12.007(1) 2002 . 12.004 8.343 5 12.007 8.349 8 12.007 8.353 2003 . 8.343 10.510 14 8.349 10.522 20 8.353 10.534 2004 . 10.510 12.024 10 10.522 12.044 36 10.534 12.063 2005 . 12.024 13.452 12 12.044 13.482 34 12.063 13.510 2006 . 13.452 15.177 13 13.482 15.218 35 13.510 15.256 2007 . 15.177 18.291 13 15.218 18.350 34 15.256 18.406 2008 . 18.291 10.189 10 18.350 10.226 26 18.406 10.263 --------- ------ -------- -- ------ -------- -- ------ -------- Neuberger Berman AMT Regency Portfolio 1998 . 1999 . 2000 . 2001 . 10.000 11.150(1) 1*** 10.000 11.152(1) 1*** 10.000 11.155(1) 2002 . 11.150 9.810 1*** 11.152 9.816 1*** 11.155 9.823 2003 . 9.810 13.108 7 9.816 13.123 6 9.823 13.139 2004 . 13.108 15.777 9 13.123 15.802 11 13.139 15.830 2005 . 15.777 17.381 13 15.802 17.418 14 15.830 17.457 2006 . 17.381 19.005 14 17.418 19.055 14 17.457 19.108 2007 . 19.005 19.311 7 19.055 19.372 10 19.108 19.435 2008 . 19.311 10.292 5 19.372 10.329 8 19.435 10.368 --------- ------ -------- -- ------ -------- -- ------ -------- Putnam VT Growth and Income Fund 1998 . 1999 . 2000 . 2001 . 10.000 10.862(1) 1*** 10.000 10.864(1) 1*** 10.000 10.867(1) 2002 . 10.862 8.655 5 N/A N/A N/A 10.867 8.668 2003 . 8.655 10.844 2 9.115 10.872 16 8.668 10.871 2004 . 10.844 11.852 2 10.872 11.888 14 10.871 11.894 2005 . 11.852 12.268 2 11.888 12.311 14 11.894 12.323 2006 . 12.268 13.987 2 12.311 14.043 13 12.323 14.064 2007 . 13.987 12.927 2 14.043 12.986 12 14.064 13.011 2008 . 12.927 7.795 1 12.986 7.834 11 13.011 7.854 --------- ------ -------- -- ------ -------- ---- ------ -------- Putnam VT Health Sciences Fund 1998 . 1999 . 2000 . 2001 . 10.000 10.567(1) 1*** 10.000 10.568(1) 1*** 10.000 10.571(1) 2002 . 10.567 8.279 1 10.568 8.283 10 10.571 8.291 2003 . 8.279 9.641 2 8.283 9.651 12 8.291 9.664 2004 . 9.641 10.159 2 9.651 10.174 8 9.664 10.193 2005 . 10.159 11.312 2 10.174 11.334 8 10.193 11.361 2006 . 11.312 11.437 3 11.334 11.466 7 11.361 11.499 2007 . 11.437 11.183 2 11.466 11.216 8 11.499 11.254 2008 . 11.183 9.121 1 11.216 9.153 5 11.254 9.189 --------- ------ -------- -- ------ -------- ---- ------ -------- 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) Neuberger Berman AMT Mid-Cap Growth Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 12.013(1) 5 2002 . 22 12.013 8.370 117 2003 . 36 8.370 10.570 299 10.839 12.166 24 2004 . 38 10.570 12.123 401 12.166 13.967 99 2005 . 34 12.123 13.597 417 13.967 15.681 105 2006 . 37 13.597 15.378 402 15.681 17.753 101 2007 . 33 15.378 18.581 429 17.753 21.472 95 2008 . 31 18.581 10.376 341 21.472 12.002 86 --------- -- ------ -------- ---- ------ ------ --- Neuberger Berman AMT Regency Portfolio 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 11.159(1) 1*** 2002 . 49 11.159 9.842 42 2003 . 66 9.842 13.184 120 10.627 12.827 10 2004 . 71 13.184 15.907 221 12.827 15.493 61 2005 . 17 15.907 17.569 257 15.493 17.128 73 2006 . 23 17.569 19.259 239 17.128 18.794 69 2007 . 20 19.259 19.618 199 18.794 19.164 66 2008 . 13 19.618 10.481 159 19.164 10.249 53 --------- -- ------ -------- ---- ------ ------ --- Putnam VT Growth and Income Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1*** 10.000 10.871(1) 1 2002 . 4 10.871 8.684 57 2003 . 8 8.684 10.908 154 10.926 12.163 10 2004 . 5 10.908 11.952 155 12.163 13.340 13 2005 . 5 11.952 12.402 150 13.340 13.857 10 2006 . 4 12.402 14.175 146 13.857 15.854 10 2007 . 3 14.175 13.134 122 15.854 14.704 9 2008 . 6 13.134 7.939 97 14.704 8.897 7 --------- -- ------ -------- ---- ------ ------ --- Putnam VT Health Sciences Fund 1998 . N/A N/A N/A 1999 . N/A N/A N/A 2000 . N/A N/A N/A 2001 . 1 10.000 10.575(1) 1 2002 . 11 10.575 8.306 54 2003 . 20 8.306 9.697 90 10.679 11.003 13 2004 . 15 9.697 10.244 104 11.003 11.635 27 2005 . 11 10.244 11.434 103 11.635 13.000 23 2006 . 13 11.434 11.590 96 13.000 13.191 22 2007 . 10 11.590 11.361 73 13.191 12.942 22 2008 . 9 11.361 9.290 63 12.942 10.594 18 --------- -- ------ -------- ---- ------ ------ ---
* 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 (November 20, 1998) through December 31, 1998. ** 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 (February 22, 2000) through December 31, 2000. *** All numbers less than 500 were rounded up to 1,000. (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) 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. (4) 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. (5) 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. A-12 (6) 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-13 [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. Prior versions of these riders may have different features.
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to guarantee that Designed to guarantee that Designed to guarantee that at least the entire amount if you make your first if you make your first of your purchase payments withdrawal on or after the withdrawal on or after the will be returned to you date you reach age 65, you date you reach age 59 1/2 (age through periodic are guaranteed income for 65 under Joint Life), you withdrawals, regardless of your life (and your are guaranteed income for the investment performance spouse's, under Joint Life your life (and your of the contract. (no version), spouse's, under Joint Life longer available for even after the entire version). purchase on or after amount of purchase payments January 16, 2009) has been returned to you LINCOLN LIFETIME INCOME(SM) through periodic Advantage Plus is designed withdrawals. If lifetime to guarantee that contract withdrawals are not in value will not be less than effect, you may make the initial purchase periodic withdrawals of the payment (or contract value Guaranteed Amount. on rider date) at the end of a 7-year period if you make no withdrawals and cancel the LINCOLN LIFETIME INCOME(SM) Advantage at that time. ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee 0.65% of Guaranteed Amount 0.65% (Single Life) or 0.90% of Guaranteed Amount 0.80% (Joint Life) of (1.05% with LINCOLN Guaranteed Amount LIFETIME INCOME(SM) Advantage Plus) ------------------------------------------------------------------------------------------------------------------------- 3. Guaranteed 0.95% of Guaranteed Amount 1.50% of Guaranteed Amount 1.50% of Guaranteed Amount Maximum Fee -------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to provide an Designed to guarantee today Designed to use the Income income program that a future minimum payout Base established under combines variable lifetime floor for i4LIFE(R) Advantage 4LATER(R) Advantage (if income payments and a death regular income payments, 4LATER(R) Advantage benefit with the ability to regardless of investment Guaranteed Income Benefit make withdrawals during a performance, by providing is elected) or the Account defined period. an Income Base during the Value* established under accumulation period that i4LIFE(R) Advantage (if can be used to establish in i4LIFE(R) Advantage the future a Guaranteed Guaranteed Income Benefit Income Benefit with i4LIFE(R) is elected) or the Advantage. Guaranteed Amount under LINCOLN LIFETIME INCOME(SM) Advantage (for prior purchasers of LINCOLN LIFETIME INCOME(SM) Advantage) to provide a minimum payout floor for i4LIFE(R) Advantage regular income payments, regardless of investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee Varies based on product and 0.65% of Income Base 1) 0.65% added to the i4LIFE(R) death benefit option Advantage charge (assessed as a % of (4LATER(R) Advantage account value, and only Guaranteed Income Benefit) during annuity payout 2) 0.50% added to the i4LIFE(R) phase) Advantage charge (i4LIFE(R) Advantage Guaranteed Income Benefit) (assessed as a % of account value, and only during annuity payout phase ------------------------------------------------------------------------------------------------------------------------ 3. Guaranteed Same as current fee 1.50% of Income Base 1.50% added to the i4LIFE(R) Maximum Fee Advantage charge (assessed as a % of account value, and only during annuity payout phase) ------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes - 7% annually Yes - 5% annually Yes - 5% annually Permitted Withdrawals negate LINCOLN LIFETIME INCOME(SM) Advantage Plus ------------------------------------------------------------------------------------------------------------------------ 5. Payments No Yes (if conditions are met) Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential Purchase Payments Purchase Payments Purchase Payments Increases to Optional 5-Year Step-Ups Automatic Annual Step-Ups 5% Enhancements Guaranteed Amount, (if conditions are met) (if conditions are met) Automatic Annual Step-Ups Income Base, or 200% Step-Up Guaranteed Income (if conditions are met) Benefit (as applicable) ------------------------------------------------------------------------------------------------------------------------ 7. Investment Option 3 (different Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date apply depending upon date of purchase. See of purchase. See of purchase. See Investment Requirements Investment Requirements Investment Requirements section of prospectus for section of prospectus for section of prospectus for more details) more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to Yes Yes, after the first rider Yes-may impact the charge Make Additional anniversary, if cumulative Purchase payments are over $100,000 Payments if Contract and prior Home Office Value is greater than approval is provided zero ------------------------------------------------------------------------------------------------------------------------ 9. Spousal Yes Yes No Continuation ------------------------------------------------------------------------------------------------------------------------ 10. Ability to Yes, after 5 years Yes, after 5 years Yes, after 7 Years Cancel Rider following the later of following the later of rider effective date or rider effective date or contractowner-elected step- contractowner-elected step- up up ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No Yes Home Benefit (Not available in New York) ------------------------------------------------------------------------------------------------------------------------ 12. May Elect No No No Other Living Benefit Riders ------------------------------------------------------------------------------------------------------------------------
I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes, during Access Period Yes, only after you elect No Permitted i4LIFE(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 5. Payments Yes (if conditions are met) If elect i4LIFE(R)Advantage Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential N/A Purchase Payments Automatic Annual Step-Ups Increases to 15% Enhancements (every 3 Prior versions will have Guaranteed Amount, years) different Step-Up Income Base, or provisions Guaranteed Income Resets to contract value Benefit (as applicable) (if conditions are met) (if conditions are met) ------------------------------------------------------------------------------------------------------------------------ 7. Investment None Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date of purchase. See of purchase. See Investment Requirements Investment Requirements section of prospectus for section of prospectus for more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to No (non-qualified Yes No Make Additional contracts) Purchase Payments if Yes, during Access Period, Contract Value unless 4LATER(R) Advantage is greater than Guaranteed Income Benefit zero or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) ------------------------------------------------------------------------------------------------------------------------ 9. Spousal No Yes (prior to Periodic No Continuation Income Commencement Date) ------------------------------------------------------------------------------------------------------------------------ 10. Ability to No (non-qualified Yes, after 3 years Yes, after 3 years Cancel Rider contracts) following the later of following the later of rider effective date or rider effective date or Yes, at any time most recent Reset most recent Reset (if (qualified contracts) 4LATER(R) Advantage Guaranteed Income Benefit is elected or purchasers of LINCOLN LIFETIME INCOME(SM) Advantage elect the Guaranteed Income Benefit) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No No Home Benefit ------------------------------------------------------------------------------------------------------------------------ 12. May Elect Limited to Guaranteed No (prior to Periodic Limited to i4LIFE(R) Other Living Benefit Income Benefit Income Commencement Date) Advantage Riders ------------------------------------------------------------------------------------------------------------------------
SAI 2 Lincoln ChoicePlus IISM 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 prospectus of Lincoln Life Variable Annuity Account N dated May 1, 2009. You may obtain a copy of the Lincoln ChoicePlus IISM 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 Capital Markets B-5 Advertising & Ratings B-6 More About the S&P 500 Index B-6 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is May 1, 2009. 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, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, 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 The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service. Principal Underwriter Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life, serves as principal underwriter (the "Principal Underwriter") for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives, who are associated with Lincoln Financial Advisors Corporation, 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, $162,288,944, $223,104,195, and $220,940,772 to LFA and Selling Firms in 2006, 2007 and 2008, respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts. Purchase of Securities Being Offered The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived. Both before and after the annuity commencement date, there are exchange privileges between subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts. The offering of the contracts is continuous. Interest Adjustment Example Note: This example is intended to show how the interest adjustment calculation impacts the surrender value of a representative contract. The surrender charges, annual account fee, adjustment factor, and guaranteed minimum interest rate values shown here are generally different from those that apply to specific contracts, particularly those contracts that deduct an initial sales load or pay a bonus on deposits. Calculations of the interest adjustment in your contract, if applicable, will be based on the factors applicable to your contract. The interest adjustment may be referred to as a market value adjustment in your contract. B-2 SAMPLE CALCULATIONS FOR MALE 35 ISSUE CASH SURRENDER VALUES Single Premium.................. $50,000 Premium taxes................... None Withdrawals..................... None Guaranteed Period............... 5 years Guaranteed Interest Rate........ 3.50% Annuity Date.................... Age 70 Index Rate A.................... 3.50% Index Rate B.................... 4.00% End of contract year 1 3.50% End of contract year 2 3.00% End of contract year 3 2.00% End of contract year 4 Percentage adjustment to B...... 0.50%
Interest Adjustment Formula (1 + Index A)n ------------------------------ -1 n = Remaining Guaranteed Period (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity 1 + Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment Formula Value Value (3) & (4) Charge Value --------------- --------- -------------------- ---------- --------- ------------ ----------- ---------- 1............ $51,710 0.962268 $49,759 $50,710 $50,710 $4,250 $46,460 2............ $53,480 0.985646 $52,712 $51,431 $52,712 $4,250 $48,462 3............ $55,312 1.000000 $55,312 $52,162 $55,312 $4,000 $51,312 4............ $57,208 1.009756 $57,766 $52,905 $57,766 $3,500 $54,266 5............ $59,170 N/A $59,170 $53,658 $59,170 $3,000 $56,170
ANNUITY VALUE CALCULATION
BOY* Annual EOY** Annuity Guaranteed Account Annuity Contract Year Value Interest Rate Fee Value ------------------ --------- --------------- --------- ---------- 1...............$50,000 x 1.035 - $40 = $51,710 2...............$51,710 x 1.035 - $40 = $53,480 3...............$53,480 x 1.035 - $40 = $55,312 4...............$55,312 x 1.035 - $40 = $57,208 5...............$57,208 x 1.035 - $40 = $59,170
SURRENDER CHARGE CALCULATION
Surrender Charge Surrender Contract Year Factor Deposit Charge ------------------ ---------- --------- ---------- 1............... 8.5% x $50,000 = $4,250 2............... 8.5% x $50,000 = $4,250 3............... 8.0% x $50,000 = $4,000 4............... 7.0% x $50,000 = $3,500 5............... 6.0% x $50,000 = $3,000
B-3 1 + INTEREST ADJUSTMENT FORMULA CALCULATION
Contract Year Index A Index B Adj Index B N Result ---------------- --------- --------- ------------- ----- --------- 1............. 3.50% 4.00% 4.50% 4 0.962268 2............. 3.50% 3.50% 4.00% 3 0.985646 3............. 3.50% 3.00% 3.50% 2 1.000000 4............. 3.50% 2.00% 2.50% 1 1.009756 5............. 3.50% N/A N/A N/A N/A
MINIMUM VALUE CALCULATION
Minimum Annual Guaranteed Account Minimum Contract Year Interest Rate Fee Value ------------------ --------------- --------- ---------- 1...............$50,000 x 1.015 - $40 = $50,710 2...............$50,710 x 1.015 - $40 = $51,431 3...............$51,431 x 1.015 - $40 = $52,162 4...............$52,162 x 1.015 - $40 = $52,905 5...............$52,905 x 1.015 - $40 = $53,658
* BOY = beginning of year ** EOY = end of year Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax; o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity Mortality Tables, modified, with an assumed investment return at the rate of 3%, 4%, 5% or 6% per annum, depending on the terms of your contract. The first annuity payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The assumed interest rate is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than the assumed interest rate, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. We may use sex-distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law. At an annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying B-4 the contractowner's fixed number of annuity units in each subaccount by the appropriate annuity unit value for the valuation date ending 14 days prior to the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immediately preceding valuation date by the product of: o The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and o A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days prior to the payment date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of Age, Sex and Survival We may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. Examples of Regular Income Payment Calculations These examples will illustrate the impact of the length of the access period and the impact of a withdrawal on the regular income payments. These examples assume that the investment return is the same as the assumed investment return (AIR) to make the regular income payment calculations simpler to understand. The regular income payments will vary based on the investment performance of the underlying funds. Annuitant............................ Male, Age 65 Secondary Life....................... Female, Age 63 Purchase Payment..................... $200,000.00 Regular Income Payment Frequency..... Annual AIR.................................. 4.0% Hypothetical Investment Return....... 4.0% 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. Capital Markets Beginning in 2008 and continuing as of the date of this prospectus, the capital and credit markets have experienced an unusually high degree of volatility. As a result, the market for fixed income securities has experienced illiquidity, increased price volatility, credit downgrade events and increased expected probability of default. Securities that are less liquid are more difficult to value and may be B-5 hard to sell, if desired. During this time period, domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers (such as our company) that have exposure to the real estate, mortgage and credit markets particularly affected. In any particular year, our capital may increase or decrease depending on a variety of factors - the amount of our statutory income or losses (which itself is sensitive to equity market and credit market conditions), the amount of additional capital we must hold to support business growth, changes in reserving requirements, our inability to secure capital market solutions to provide reserve relief, such as issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio and changes in interest rates. Advertising & Ratings We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln Life or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. In late September and early October of 2008, A.M. Best Company, Fitch, Moody's and Standard & Poor's each revised their outlook for the U.S. life insurance sector from stable to negative. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis or in accordance with other terms we make available, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts or in accordance with other terms we make available. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. The minimum amount to be dollar cost averaged is $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; B-6 o the value of the amount being DCA'd is depleted; or o you cancel the program by written request or by telephone if we have your telephone authorization on file. We reserve the right to restrict access to this program at any time. A transfer made as part of this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges or interest adjustment which may apply to transfers. Upon receipt of an additional purchase payment allocated to the DCA fixed account, the existing program duration will be extended to reflect the end date of the new DCA program. However, the existing interest crediting rate will not be extended. The existing interest crediting rate will expire at its originally scheduled expiration date and the value remaining in the DCA account from the original amount as well as any additional purchase payments will be credited with interest at the standard DCA rate at the time. We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. Automatic Withdrawal Service (AWS) - AWS provides an automatic, periodic withdrawal of contract value to you. AWS may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. You may elect to participate in AWS at the time of application or at any time before the annuity commencement date by sending a written request to us. The minimum contract value required to establish AWS is $10,000. You may cancel or make changes to your AWS program at any time by sending a written request to us. If telephone authorization has been elected, certain changes may be made by telephone. Notwithstanding the requirements of the program, any withdrawal must be permitted under Section 401(a)(9) of the IRC for qualified plans or permitted under Section 72 of the IRC for non-qualified contracts. To the extent that withdrawals under AWS do not qualify for an exemption from the contingent deferred sales charge, we will assess any applicable surrender charges on those withdrawals. See Contingent deferred sales charges. 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 The December 31, 2008 financial statements of the VAA and the December 31, 2008 consolidated financial statements of Lincoln Life appear on the following pages. B-7 PROSPECTUS 3 Lincoln ChoicePlus AssuranceSM (B 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.LincolnFinancial.com 1-888-868-2583 This prospectus describes an individual flexible premium deferred variable annuity contract that is issued by The Lincoln National Life Insurance Company (Lincoln Life). This prospectus is primarily for use with 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. 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 Thematic Growth Portfolio (formerly 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 BlackRock Variable Series Funds, Inc. (Class III) BlackRock Global Allocation V.I. Fund* 1 Delaware VIP Trust (Service Class): Delaware VIP Diversified Income Series Delaware VIP Emerging Markets Series Delaware VIP High Yield Series Delaware VIP Limited-Term Diversified Income Series (formerly Delaware VIP Capital Reserves 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* DWS Variable Series II (Class B): DWS Alternative Asset Allocation Plus VIP Portfolio* Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) VIP Contrafund 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 Bond Securities Fund* (formerly FTVIPT Templeton Global Income Securities Fund) FTVIPT Templeton Growth Securities Fund* Janus Aspen Series (Service Class): Janus Aspen Balanced Portfolio* Janus Aspen Enterprise Portfolio* (formerly Janus Aspen Mid Cap Growth Portfolio) Janus Aspen Worldwide Portfolio* (formerly 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 LVIP Delaware Bond Fund LVIP Delaware Foundation Aggressive Allocation Fund* LVIP Delaware Growth and Income Fund LVIP Delaware Social Awareness Fund LVIP Delaware Special Opportunities Fund LVIP FI Equity-Income Fund* LVIP Global 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** LVIP SSgA 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 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* 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* PIMCO Variable Insurance Trust (Advisor Class) PIMCO VIT Commodity Real Return Strategy Portfolio* Putnam Variable Trust (Class IB): Putnam VT Global Health Care Fund* (formerly Putnam VT Health Sciences Fund) Putnam VT Growth & Income 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. May 1, 2009 3 Table of Contents
Item Page Special Terms 5 Expense Tables 7 Summary of Common Questions 15 The Lincoln National Life Insurance Company 17 Variable Annuity Account (VAA) 18 Investments of the Variable Annuity Account 19 Charges and Other Deductions 24 The Contracts 30 Purchase Payments 31 Transfers On or Before the Annuity Commencement Date 32 Surrenders and Withdrawals 34 Death Benefit 37 Investment Requirements 41 Living Benefit Riders 45 Lincoln Lifetime IncomeSM Advantage 46 Lincoln SmartSecurity (Reg. TM) Advantage 55 i4LIFE (Reg. TM) Advantage 61 Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage 66 4LATER (Reg. TM) Advantage 68 Annuity Payouts 73 Fixed Side of the Contract 74 Distribution of the Contracts 77 Federal Tax Matters 78 Additional Information 82 Voting Rights 82 Return Privilege 83 Other Information 83 Legal Proceedings 84 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N 85 Appendix A - Condensed Financial Information A-1 Appendix B - Condensed Financial Information B-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. Account Value - Under i4LIFE (Reg. TM) Advantage, the initial Account Value is the contract value on the valuation date that i4LIFE (Reg. TM) Advantage is effective, less any applicable premium taxes. During the Access Period, the Account Value equals the initial Account Value plus investment gains minus losses, regular income payments, Guaranteed Income Benefit payments, and withdrawals. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date and to calculate the i4LIFE (Reg. TM) Advantage Account Value during the Access Period. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout - An amount paid at regular intervals after the annuity commencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person you choose to receive any death benefit paid if you die before the annuity commencement date. Contractowner (you, your, owner) - The person who can exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the contractowner is the annuitant. Contract value (may be referenced to as account value in marketing materials) - At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract, if any. Contract year - Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit - Before the annuity commencement date, the amount payable to your designated beneficiary if the contractowner dies or, if selected, to the contractowner if the annuitant dies. See The Contracts - Death Benefit for a description of the various death benefit options. Good Order - The actual receipt at our Home Office of the requested transaction in writing or by other means we accept, along with all information and supporting legal documentation necessary to effect the transaction. The forms we provide will identify the necessary documentation. We may, in our sole discretion, determine whether any particular transaction request is in good order, and we reserve the right to change or waive any good order requirements at any time. Guaranteed Income Benefit - An option that provides a guaranteed minimum payout floor for the i4LIFE (Reg. TM) Advantage regular income payments. The calculation of the Guaranteed Income Benefit or the features applicable to the Guaranteed Income Benefit may vary based on the rider provisions applicable to certain contractowners. i4LIFE (Reg. TM) Advantage - An income program which combines periodic variable lifetime income payments with the ability to make withdrawals during a defined period. Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company. Lincoln Lifetime IncomeSM Advantage - 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. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you may be subject to Investment Requirements. 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. Selling group individuals - A contractowner who meets one of the following criteria at the time of the contract purchase and who purchases the contract without the assistance of a sales representative under contract with us: 5 o Employees and registered representatives of any member of the selling group (broker-dealers who have selling agreements with us) and their spouses and minor children. o Officers, directors, trustees or bona-fide full-time employees and their spouses and minor children, of Lincoln Financial Group or any of the investment advisers of the funds currently being offered, or their affiliated or managed companies. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE is open for trading (valuation date) and ending at the close of such trading on the next valuation date. 6 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options and/or the fixed account. State premium taxes may also be deducted. Contractowner Transaction Expenses: o Surrender charge (as a percentage of purchase payments surrendered/withdrawn): 7.00%*
* The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. See Charges and Other Deductions - Surrender Charge. 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, cross-reinvestment, withdrawals up to the Maximum Annual Withdrawal amount 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 Enhancement Benefit Rider (EEB) ------------------------- o Mortality and expense risk charge 1.65% o Administrative charge 0.10% ---- o Total annual charge for each subaccount** 1.75% Enhanced Guaranteed Guarantee of Minimum Death Principal Death Benefit (EGMDB) Benefit Account Value Death Benefit --------------------- ---------------- ---------------------------- o 1.45% 1.20% 1.15% o 0.10% 0.10% 0.10% ---- ---- ---- o 1.55% 1.30% 1.25%
*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 1.65%; EGMDB 1.45%; Guarantee of Principal 1.35%; 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 IncomeSM Advantage:
Lincoln Lifetime IncomeSM Advantage Single or Joint Life Option ---------------------------- o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.90% 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. 7 Lincoln SmartSecurity (Reg. TM) Advantage:
Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-Up option+ ** --------------------------------- o Guaranteed maximum annual percentage charge* 0.95% o Current annual percentage charge* 0.65% Lincoln SmartSecurity (Reg. TM) Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Advantage - 1 Year Automatic Step-Up option Step-Up option - Single Life (and prior version) - Joint Life ----------------------------------- -------------------------------- o 1.50% 1.50% o 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. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount. +As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM)Advantage - 5 Year Elective Step-up option is no longer available for purchase. 4LATER (Reg. TM) Advantage: o Guaranteed maximum annual percentage charge* 1.50% o Current annual percentage charge* ** 0.65%
*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) Advantage charge is deducted from the subaccounts on a quarterly basis. **For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. 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* 1.95% 1.70% 1.65%
*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%*
4LATER (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 0.65%* ***
For example, if you purchase the i4LIFE (Reg. TM) Advantage EGMDB for 1.95% with the 4LATER (Reg. TM) Advantage Guaranteed Income Benefit at a maximum charge of 1.50%, your total annual charge is 3.45% (as a daily percentage of average account value). *The percentage charge will change to the current charge in effect upon election of a new step-up period, not to exceed the guaranteed maximum charge. **Purchasers of Lincoln Lifetime IncomeSM Advantage with the Guaranteed Income Benefit may purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase the Lincoln Lifetime IncomeSM Advantage. ***For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset the Income Base. The next table describes the separate account annual expenses (as a percentage of average daily net assets in the subaccounts) you pay on and after the Annuity Commencement Date: o Mortality and expense risk charge and Administrative charge 1.40%
8 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, 2008. 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): 4.15% 0.53% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.81% 0.53%
* 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, 2010. The following table shows the expenses charged by each fund for the year ended December 31, 2008: (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)(2)(3)(4) 0.61 % 0.25 % 0.30 % AIM V.I. Core Equity Fund (Series II)(2)(3)(4)(5) 0.61 0.25 0.29 AIM V.I. International Growth Fund (Series II)(2)(3)(4)(5) 0.71 0.25 0.35 AllianceBernstein VPS Global Thematic Growth Portfolio (Class B) 0.75 0.25 0.18 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.55 0.25 0.07 AllianceBernstein VPS International Value Portfolio (Class B) 0.74 0.25 0.07 AllianceBernstein VPS Large Cap Growth Portfolio (Class B) 0.75 0.25 0.09 AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B) 0.75 0.25 0.11 American Century VP Inflation Protection Fund (Class II)(6)(7) 0.48 0.25 0.01 American Funds Global Growth Fund (Class 2)(1) 0.53 0.25 0.02 American Funds Global Small Capitalization Fund (Class 2)(1) 0.71 0.25 0.03 American Funds Growth Fund (Class 2)(1) 0.32 0.25 0.01 American Funds Growth-Income Fund (Class 2)(1) 0.27 0.25 0.01 American Funds International Fund (Class 2)(1) 0.49 0.25 0.03 BlackRock Global Allocation V.I. Fund (Class III) 0.65 0.25 0.13 Delaware VIP Diversified Income Series (Service Class)(8) 0.62 0.30 0.11 Delaware VIP Emerging Markets Series (Service Class)(8) 1.24 0.30 0.17 Delaware VIP High Yield Series (Service Class)(8) 0.65 0.30 0.12 Delaware VIP Limited-Term Diversified Income Series (Service Class)(8) 0.50 0.30 0.17 Delaware VIP REIT Series (Service Class)(8) 0.75 0.30 0.12 Delaware VIP Small Cap Value Series (Service Class)(8) 0.73 0.30 0.12 Delaware VIP Trend Series (Service Class)(8 0.75 0.30 0.12 Delaware VIP U.S. Growth Series (Service Class)(8 0.65 0.30 0.11 Delaware VIP Value Series (Service Class)(8) 0.65 0.30 0.11 DWS Alternative Asset Allocation Plus VIP Portfolio (Class B)(9)(10)(11)(12)(13) 0.20 0.25 0.33 DWS Equity 500 Index VIP (Class B)(14)(15) 0.20 0.25 0.13 DWS Small Cap Index VIP (Class B)(14) 0.35 0.25 0.19 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(16) 0.56 0.25 0.10 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)(2)(3)(4) 0.01 % 1.17 % AIM V.I. Core Equity Fund (Series II)(2)(3)(4)(5) 0.01 1.16 -0.01 % 1.15 % AIM V.I. International Growth Fund (Series II)(2)(3)(4)(5) 0.02 1.33 -0.01 1.32 AllianceBernstein VPS Global Thematic Growth Portfolio (Class B) 0.00 1.18 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.00 0.87 AllianceBernstein VPS International Value Portfolio (Class B) 0.00 1.06 AllianceBernstein VPS Large Cap Growth Portfolio (Class B) 0.00 1.09 AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B) 0.00 1.11 American Century VP Inflation Protection Fund (Class II)(6)(7) 0.00 0.74 American Funds Global Growth Fund (Class 2)(1) 0.00 0.80 American Funds Global Small Capitalization Fund (Class 2)(1) 0.00 0.99 American Funds Growth Fund (Class 2)(1) 0.00 0.58 American Funds Growth-Income Fund (Class 2)(1) 0.00 0.53 American Funds International Fund (Class 2)(1) 0.00 0.77 BlackRock Global Allocation V.I. Fund (Class III) 0.00 1.03 Delaware VIP Diversified Income Series (Service Class)(8) 0.00 1.03 -0.05 0.98 Delaware VIP Emerging Markets Series (Service Class)(8) 0.00 1.71 -0.05 1.66 Delaware VIP High Yield Series (Service Class)(8) 0.00 1.07 -0.05 1.02 Delaware VIP Limited-Term Diversified Income Series (Service Class)(8) 0.00 0.97 -0.05 0.92 Delaware VIP REIT Series (Service Class)(8) 0.00 1.17 -0.05 1.12 Delaware VIP Small Cap Value Series (Service Class)(8) 0.00 1.15 -0.05 1.10 Delaware VIP Trend Series (Service Class)(8 0.00 1.17 -0.05 1.12 Delaware VIP U.S. Growth Series (Service Class)(8 0.00 1.06 -0.05 1.01 Delaware VIP Value Series (Service Class)(8) 0.00 1.06 -0.05 1.01 DWS Alternative Asset Allocation Plus VIP Portfolio (Class B)(9)(10)(11)(12)(13) 1.35 2.13 -0.32 1.81 DWS Equity 500 Index VIP (Class B)(14)(15) 0.00 0.58 DWS Small Cap Index VIP (Class B)(14) 0.00 0.79 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(16) 0.00 0.91
9
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + Fidelity VIP Equity-Income Portfolio (Service Class 2) 0.46 % 0.25 % 0.11 % Fidelity (Reg. TM) VIP Growth Portfolio (Service Class 2)(17) 0.56 0.25 0.12 Fidelity (Reg. TM) VIP Mid Cap Portfolio (Service Class 2)(18) 0.56 0.25 0.12 Fidelity (Reg. TM) VIP Overseas Portfolio (Service Class 2)(19) 0.71 0.25 0.16 FTVIPT Franklin Income Securities Fund (Class 2)(20) 0.45 0.25 0.02 FTVIPT Franklin Small-Mid Cap Growth Securities Fund (Class 2)(21) 0.50 0.25 0.28 FTVIPT Mutual Shares Securities Fund (Class 2) 0.60 0.25 0.13 FTVIPT Templeton Global Bond Securities Fund (Class 2)(22) 0.47 0.25 0.11 FTVIPT Templeton Growth Securities Fund (Class 2)(20) 0.74 0.25 0.04 Janus Aspen Balanced Portfolio (Service Class)(23)(24)(25)(26) 0.55 0.25 0.02 Janus Aspen Enterprise Portfolio (Service Class)(23)(24)(25)(26)(27) 0.64 0.25 0.03 Janus Aspen Worldwide Portfolio (Service Class)(23)(24)(25)(26)(28)(29) 0.50 0.25 0.03 LVIP Baron Growth Opportunities Fund (Service Class)(30) 1.00 0.25 0.09 LVIP Capital Growth Fund (Service Class)(31) 0.72 0.25 0.09 LVIP Cohen & Steers Global Real Estate Fund (Service Class)(32)(33) 0.95 0.25 0.18 LVIP Columbia Value Opportunities Fund (Service Class)(34) 1.05 0.25 0.20 LVIP Delaware Bond Fund (Service Class) 0.33 0.35 0.07 LVIP Delaware Foundation Aggressive Allocation Fund (Service Class)(78)(79) 0.75 0.25 0.11 LVIP Delaware Growth and Income Fund (Service Class) 0.34 0.35 0.07 LVIP Delaware Social Awareness Fund (Service Class) 0.37 0.35 0.07 LVIP Delaware Special Opportunities Fund (Service Class) 0.40 0.35 0.07 LVIP FI Equity-Income Fund (Service Class)(35) 0.75 0.25 0.07 LVIP Global Income Fund (Service Class)(36)(37) 0.65 0.25 0.19 LVIP Janus Capital Appreciation Fund (Service Class)(38) 0.75 0.25 0.10 LVIP Marsico International Growth Fund (Service Class)(39) 0.92 0.25 0.13 LVIP MFS Value Fund (Service Class)(40) 0.66 0.25 0.08 LVIP Mid-Cap Value Fund (Service Class)(41) 0.89 0.25 0.10 LVIP Mondrian International Value Fund (Service Class) 0.70 0.25 0.10 LVIP Money Market Fund (Service Class)(42) 0.35 0.25 0.08 LVIP SSgA Bond Index Fund (Service Class)(43)(44) 0.40 0.25 0.13 LVIP SSgA Developed International 150 Fund (Service Class)(45)(46) 0.75 0.25 2.04 LVIP SSgA Emerging Markets 100 Fund (Service Class)(47)(48) 1.09 0.25 2.81 LVIP SSgA International Index Fund (Service Class)(44)(49) 0.40 0.25 1.18 LVIP SSgA Large Cap 100 Fund (Service Class)(50)(51) 0.52 0.25 0.43 LVIP SSgA Small/Mid Cap 200 Fund (Service Class)(53)(54)(55) 0.69 0.25 0.66 LVIP SSgA S&P 500 Index Fund (Service Class)(52) 0.24 0.25 0.09 LVIP SSgA Small-Cap Index Fund (Service Class)(56) 0.32 0.25 0.15 LVIP T. Rowe Price Growth Stock Fund (Service Class)(57) 0.73 0.25 0.09 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class) 0.74 0.25 0.10 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) Fidelity VIP Equity-Income Portfolio (Service Class 2) 0.00 % 0.82 % Fidelity (Reg. TM) VIP Growth Portfolio (Service Class 2)(17) 0.00 0.93 Fidelity (Reg. TM) VIP Mid Cap Portfolio (Service Class 2)(18) 0.00 0.93 Fidelity (Reg. TM) VIP Overseas Portfolio (Service Class 2)(19) 0.00 1.12 FTVIPT Franklin Income Securities Fund (Class 2)(20) 0.00 0.72 FTVIPT Franklin Small-Mid Cap Growth Securities Fund (Class 2)(21) 0.02 1.05 -0.02 % 1.03 % FTVIPT Mutual Shares Securities Fund (Class 2) 0.00 0.98 FTVIPT Templeton Global Bond Securities Fund (Class 2)(22) 0.00 0.83 FTVIPT Templeton Growth Securities Fund (Class 2)(20) 0.00 1.03 Janus Aspen Balanced Portfolio (Service Class)(23)(24)(25)(26) 0.00 0.82 Janus Aspen Enterprise Portfolio (Service Class)(23)(24)(25)(26)(27) 0.00 0.92 Janus Aspen Worldwide Portfolio (Service Class)(23)(24)(25)(26)(28)(29) 0.00 0.78 LVIP Baron Growth Opportunities Fund (Service Class)(30) 0.00 1.34 -0.05 1.29 LVIP Capital Growth Fund (Service Class)(31) 0.00 1.06 -0.03 1.03 LVIP Cohen & Steers Global Real Estate Fund (Service Class)(32)(33) 0.00 1.38 -0.22 1.16 LVIP Columbia Value Opportunities Fund (Service Class)(34) 0.00 1.50 LVIP Delaware Bond Fund (Service Class) 0.00 0.75 LVIP Delaware Foundation Aggressive Allocation Fund (Service Class)(78)(79) 0.03 1.14 -0.13 1.01 LVIP Delaware Growth and Income Fund (Service Class) 0.00 0.76 LVIP Delaware Social Awareness Fund (Service Class) 0.00 0.79 LVIP Delaware Special Opportunities Fund (Service Class) 0.00 0.82 LVIP FI Equity-Income Fund (Service Class)(35) 0.00 1.07 -0.05 1.02 LVIP Global Income Fund (Service Class)(36)(37) 0.00 1.09 -0.09 1.00 LVIP Janus Capital Appreciation Fund (Service Class)(38) 0.00 1.10 -0.07 1.03 LVIP Marsico International Growth Fund (Service Class)(39) 0.00 1.30 -0.01 1.29 LVIP MFS Value Fund (Service Class)(40) 0.00 0.99 LVIP Mid-Cap Value Fund (Service Class)(41) 0.00 1.24 LVIP Mondrian International Value Fund (Service Class) 0.00 1.05 LVIP Money Market Fund (Service Class)(42) 0.00 0.68 LVIP SSgA Bond Index Fund (Service Class)(43)(44) 0.00 0.78 -0.10 0.68 LVIP SSgA Developed International 150 Fund (Service Class)(45)(46) 0.00 3.04 -2.28 0.76 LVIP SSgA Emerging Markets 100 Fund (Service Class)(47)(48) 0.00 4.15 -3.20 0.95 LVIP SSgA International Index Fund (Service Class)(44)(49) 0.00 1.83 -1.13 0.70 LVIP SSgA Large Cap 100 Fund (Service Class)(50)(51) 0.00 1.20 -0.49 0.71 LVIP SSgA Small/Mid Cap 200 Fund (Service Class)(53)(54)(55) 0.02 1.62 -0.89 0.73 LVIP SSgA S&P 500 Index Fund (Service Class)(52) 0.00 0.58 LVIP SSgA Small-Cap Index Fund (Service Class)(56) 0.00 0.72 LVIP T. Rowe Price Growth Stock Fund (Service Class)(57) 0.00 1.07 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Service Class) 0.00 1.09
10
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) + LVIP Templeton Growth Fund (Service Class)(58) 0.74 % 0.25 % 0.08 % LVIP Turner Mid-Cap Growth Fund (Service Class)(59)(60) 0.89 0.25 0.18 LVIP UBS Global Asset Allocation Fund (Service Class)(61) 0.74 0.25 0.11 LVIP Wilshire 2010 Profile Fund (Service Class)(62)(63)(64) 0.25 0.25 0.60 LVIP Wilshire 2020 Profile Fund (Service Class)(62)(63)(64) 0.25 0.25 0.31 LVIP Wilshire 2030 Profile Fund (Service Class)(62)(63)(64) 0.25 0.25 0.45 LVIP Wilshire 2040 Profile Fund (Service Class)(62)(63)(64) 0.25 0.25 0.76 LVIP Wilshire Aggressive Profile Fund (Service Class)(62)(63)(65) 0.25 0.25 0.08 LVIP Wilshire Conservative Profile Fund (Service Class)(62)(63)(65) 0.25 0.25 0.05 LVIP Wilshire Moderate Profile Fund (Service Class)(62)(63)(65) 0.25 0.25 0.03 LVIP Wilshire Moderately Aggressive Profile Fund (Service Class)(62)(63)(65) 0.25 0.25 0.03 MFS (Reg. TM) VIT Core Equity Series (Service Class)(66)(67)(68) 0.75 0.25 0.20 MFS (Reg. TM) VIT Growth Series (Service Class)(66)(68) 0.75 0.25 0.08 MFS (Reg. TM) VIT Total Return Series (Service Class)(66)(68) 0.74 0.25 0.07 MFS (Reg. TM) VIT Utilities Series (Service Class)(66)(68) 0.72 0.25 0.09 Neuberger Berman AMT Mid-Cap Growth Portfolio (I Class)(69) 0.83 0.00 0.09 Neuberger Berman AMT Regency Portfolio (I Class)(69) 0.85 0.00 0.12 PIMCO VIT Commodity Real Return Strategy Portfolio (Advisor Class)(70)(71)(72)(73)(74) 0.74 0.25 0.17 Putnam VT Global Health Care Fund (Class 1B)(75)(76) 0.70 0.25 0.16 Putnam VT Growth & Income Fund (Class 1B)(77) 0.53 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) LVIP Templeton Growth Fund (Service Class)(58) 0.00 % 1.07 % LVIP Turner Mid-Cap Growth Fund (Service Class)(59)(60) 0.00 1.32 -0.09 % 1.23 % LVIP UBS Global Asset Allocation Fund (Service Class)(61) 0.03 1.13 LVIP Wilshire 2010 Profile Fund (Service Class)(62)(63)(64) 0.51 1.61 -0.65 0.96 LVIP Wilshire 2020 Profile Fund (Service Class)(62)(63)(64) 0.52 1.33 -0.36 0.97 LVIP Wilshire 2030 Profile Fund (Service Class)(62)(63)(64) 0.53 1.48 -0.50 0.98 LVIP Wilshire 2040 Profile Fund (Service Class)(62)(63)(64) 0.54 1.80 -0.81 0.99 LVIP Wilshire Aggressive Profile Fund (Service Class)(62)(63)(65) 0.87 1.45 -0.13 1.32 LVIP Wilshire Conservative Profile Fund (Service Class)(62)(63)(65) 0.72 1.27 -0.10 1.17 LVIP Wilshire Moderate Profile Fund (Service Class)(62)(63)(65) 0.78 1.31 -0.08 1.23 LVIP Wilshire Moderately Aggressive Profile Fund (Service Class)(62)(63)(65) 0.81 1.34 -0.08 1.26 MFS (Reg. TM) VIT Core Equity Series (Service Class)(66)(67)(68) 0.00 1.20 -0.05 1.15 MFS (Reg. TM) VIT Growth Series (Service Class)(66)(68) 0.00 1.08 MFS (Reg. TM) VIT Total Return Series (Service Class)(66)(68) 0.00 1.06 MFS (Reg. TM) VIT Utilities Series (Service Class)(66)(68) 0.00 1.06 Neuberger Berman AMT Mid-Cap Growth Portfolio (I Class)(69) 0.00 0.92 Neuberger Berman AMT Regency Portfolio (I Class)(69) 0.00 0.97 PIMCO VIT Commodity Real Return Strategy Portfolio (Advisor Class)(70)(71)(72)(73)(74) 0.09 1.25 -0.09 1.16 Putnam VT Global Health Care Fund (Class 1B)(75)(76) 0.01 1.12 Putnam VT Growth & Income Fund (Class 1B)(77) 0.00 0.85
(1) The Series' investment adviser waived a portion of its management fee from September 1, 2004 (May 1, 2006 in the case of Global Growth and Income Fund and October 4, 2006 in the case of Global Bond Fund) through December 31, 2008. Management fees and total expenses in the table do not reflect any waivers. Information regarding the effect of any waiver on total annual fund operating expenses can be found in the Financial Highlights table in the prospectus and annual report. (2) Except as otherwise noted, figures shown in the table are for the year ended December 31, 2008 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. (3) 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. (4) The Fund's advisor has contractually agreed through April 30, 2010, to waive a portion of its advisory fees and or/or reimburse expenses of Series II shares to the extent necessary to limit Total Annual Operating Expenses of Series II shares to 1.45% of average daily net assets. (5) The Fund's advisor has contractually agreed through at least April 30, 2010, to waive the advisory fee payable by the Fund in an amount equal to 100% of the net advisory fees Invesco AIM receives from the affiliated money market funds on investments by the Fund of uninvested cash (excluding investments of cash collateral from securities lending) in such affiliated money market funds. Fee Waiver reflects this agreement. (6) 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. (7) Other expenses include the fees and expenses of the fund's independent directors and their legal counsel, interest, and, if applicable, acquired fund fees and expenses. (8) The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2009 through April 30, 2010, 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) Management fee has two components: (i) a fee on assets invested in other DWS funds; and (ii) a fee on assets not invested in other DWS funds ("Other Assets"). The Advisor currently intends to invest substantially all the assets of the portfolio in other DWS funds. However, in the future, the portfolio may invest a larger portion, or all, of its assets in Other Assets. If the portfolio's assets are entirely invested in Other Assets, the management fee would be 1.20% of average daily net assets. However, in such a situation, the Acquired Fund (Underlying Fund) Fees and Expenses are expected to decrease. The Advisor will waive 0.15% of the management fee until the portfolio reaches $50 million in assets and the Advisor's global tactical asset allocation overlay strategy is implemented. (10) The portfolio's shareholders bear indirectly the expenses of the shares of other DWS funds or ETF's in which the portfolio invests. Acquired Fund (Underlying Fund) Fees and Expenses for the initial fiscal year are based on the expected initial allocation of the portfolio assets. The Total Annual 11 Operating Expenses will vary with changes in allocations to, and operating expenses of, the other DWS funds or ETFs in which the portfolio invest. (11) "Acquired Funds (Underlying Funds) Fees and Expenses" includes impact of dividends on short sales for investments in DWS Market Neutral Fund. "Acquired Funds (Underlying Funds) Fees and Expenses" would be 1.20% excluding these dividends on short sales and the Total Annual Operating Expenses" would be 1.73% without these dividends on short sales. (12) "Other Expenses" are based on estimated amounts for the current fiscal year, including 0.05% organizational and offering expenses expected to be incurred over the next twelve months only. Actual expenses may be different. Includes 0.10% administration fee paid to the Advisor. (13) Through April 30, 2010, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses to the extent necessary to maintain the fund's operating expenses at 0.21% for Class B, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest and acquired funds (underlying funds) fees and expenses (estimated at 1.35%). (14) "Other Expenses" are based on estimated amounts for the current fiscal year. Actual expenses may be different. Includes 0.10% administration fee. (15) Through September 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 0.58% for Class B, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. (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 0.90% 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 0.92% 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 0.92% 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 1.09% for Service Class 2. These offsets may be discontinued at any time. (20) The Fund administration fee is paid indirectly through the management fee. (21) 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. (22) The Fund's name changed from Templeton Global Income Securities Fund effective as of May 1, 2009 (23) 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. (24) 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 over the performance measurement period.. (25) Because the 12b-1 fee is charged as an ongoing fee, over time the fee will increase the cost of your investment and may cost you more than paying other types of sales charges. (26) Annual Fund Operating Expenses are stated both with and without contractual expense waivers by Janus Capital. Janus Capital has contractually agreed to waive certain Portfolios' total operating expenses (excluding the distribution and shareholder servicing fee, the administrative services fee applicable to certain Portfolios, brokerage commissions, interest, dividends, taxes, and extraordinary expenses including, but not limited to, acquired fund fees and expenses) to certain limits until at least May 1, 2010. The expense waivers shown reflect the application of such limits. The expense limits are described in the "Management Expenses" section of the Portfolio's Prospectus. (27) Formerly known as Mid Cap Growth Portfolio. (28) Worldwide 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 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 Portfolio, and may increase or decrease the Management Fee. Refer to the "Management Expenses" section in the Portfolio's Prospectus for additional information with further description in the Statement of Additional Information. (29) Formerly known as Worldwide Growth Portfolio. (30) 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, 2010 and 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 1.03% of average daily net assets. The Agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (32) The information in the expense table has been restated to reflect that the expense reimbursement agreement with the advisor was terminated effective April 30, 2009. (33) 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, 2010, and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (34) 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (35) The adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2010. 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 12 will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (36) The advisor has contractually agreed to waive 0.05% of its advisory fee for the fund. The waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (37) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 1.00% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (38) Effective May 1, 2009, the adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2010. 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. The waiver will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. The fee table has been restated to reflect the new agreement. (39) 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, 2010 and renew automatically for one-year terms unless the advisor 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 1.05% of average daily net assets. The Agreement will continue at least through April 30, 2010 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 1.29% of average daily net assets. The Agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (42) The fund's distributor and fund's advisor have voluntarily agreed to waive fees and/or reimburse expenses to the extent necessary to prevent a negative yield for each class of shares of the fund. The voluntary waivers and reimbursements may be modified or terminated at any time, without notice, and are subject to future recapture by the fund's distributor and fund's advisor. There is no guarantee that the fund will be able to avoid a negative yield. (43) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.07% on the first $500 million of average daily net assets of the fund and 0.12% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (44) The adviser has contractually agreed to reimburse the fund 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (45) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.35% on the first $100 million of average daily net assets of the fund and 0.43% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (46) The adviser has contractually agreed to reimburse the fund 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (47) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.69% on the first $100 million of average daily net assets of the fund and 0.76% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (48) The adviser has contractually agreed to reimburse the fund 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (49) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.06% on the first $500 million of average daily net assets of the fund and 0.09% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (50) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.12% on the first $100 million of average daily net assets of the fund and 0.22% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (51) The adviser has contractually agreed to reimburse the fund 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (52) The information in the expense table has been restated to reflect that the expense reimbursement agreement with the adviser was terminated effective April 30, 2009. (53) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.71% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (54) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.29% on the first $100 million of average daily net assets of the fund and 0.39% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (55) The Acquired Fund Fees and Expenses (AFFE) in the fund's chart are based on the 2008 fees and expenses of the underlying funds owned by this fund during 2008 and are provided to show you an estimate of the underlying fees and expenses attributable to the fund. (56) The information in the expense table has been restated to reflect that the expense reimbursement agreement with the adviser was terminated effective April 30, 2009. (57) 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, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (58) The information in the expense table has been restated to reflect that the expense reimbursement agreement with the adviser and the distribution services waiver agreement with the distributor were terminated effective April 30, 2009. (59) The adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2010. 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. (60) 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 13 1.27% of average daily net assets. The Agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (61) Acquired Fund Fees and Expenses in the fund's fee chart are based on the 2008 fees and expenses of the UBS Relationship funds owned by the fund during 2008 and are provided to show you an estimate of the underlying fees and expenses attributable to the fund. (62) Effective January 1, 2009, the advisor contractually agreed to waive the following portion of the its advisory fee for the Funds': 0.05% of average daily net assets of the Fund. The Agreement will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination of the Fund. The fee table has been restated to reflect this agreement. (63) 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 0.45% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. The fee table has been restated to reflect the new agreement. (64) The "Acquired Fund Fees and Expenses (AFFE)" in the chart have been restated to reflect the expenses of the underlying funds in which the Profile Funds currently invest. Each funds' expense ratio will vary based on the actual allocations to the underlying funds that occurred through the year. (65) The "Acquired Fund Fees and Expenses (AFFE)" in the chart are based on the 2008 fees and expenses of the underlying funds that were owned by each Profile fund during 2008 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. (66) 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, "Total Annual Fund Operating Expenses" would be lower. (67) 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, 2010. (68) 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" of the fund's prospectus. (69) Neuberger Berman Management Inc. ("NBMI") has undertaken through December 31, 2012 to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI (except with respect to Balanced, 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, 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. (70) "Management Fees" reflect an advisory fees and a supervisory and administrative fees payable by the Fund to PIMCO. (71) "Other Expenses" reflect interest expense. Interest expense is based on the amounts incurred during the Portfolio's most recent fiscal year as a result of entering into certain investment, such as reverse repurchase agreements. This interest expense is required to be treated as an expense of the Portfolio for accounting purposes, but the amount of the interest expense (if any) will vary with the Portfolio's use of those investments (like reverse repurchase agreements) as an investment strategy. (72) The Total Annual Portfolio Operating Expenses do not match the Ratio of Expense to Average Net Assets of the Portfolio, as set forth in the Financial Highlights table of the shareholder report, because the Ratio of Expenses to Average Net Assets reflects the operating expenses of the Portfolio and does not include Underlying Fund Expenses. (73) The Subsidiary has entered into a separate contract with PIMCO for the management of the Subsidiary's portfolio pursuant to which the Subsidiary pays PIMCO management fee at the annual rates of 0.69% of its net assets. (74) PIMCO has contractually agreed to waive the management fee and administration fee it received from the Portfolio in an amount equal to the management fee paid to PIMCO by the Subsidiary as described. This waiver may not be terminated by PIMCO and will remain in effect as long as PIMCO's contract with the Subsidiary is in place. (75) In order to further limit expenses, Putnam Management had agreed to waive fees and reimburse expenses of the funds through June 30, 2008 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 each applicable period for the fund was applied to the fund for that period. During the year ended December 31, 2008 this limitation decreased expenses by 0.03%. (76) "Total Annual Fund Operating Expenses" includes the amount from "Acquired Fund Fees and Expenses" column, which is an estimate of expenses attributable to the fund's investments in other investment companies, based on the total annual fund operating expenses of such companies as reported in their most recent shareholder reports (net of any applicable expense limitations). These indirect expenses will vary from time to time depending on the fund's investments in other investment companies and their operating expenses. (77) Includes estimated expenses attributable to the fund's investments in other investment companies that the fund bears indirectly . (78) "Other Expenses, "Acquired Fund Fees and Expenses" and Annual Fund Operating Expenses" in connection with the fund and funds (Pro Forma) have been estimated since the fund has not yet commenced. The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (79) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.98% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase ("redemption fees") not reflected in the table above. As of the date of this prospectus, none have done so. See The Contracts - Market Timing for a discussion of redemption fees. For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. 14 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 ----------- --------- --------- --------- $1,441 $2,829 $4,228 $7,551
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 -------- --------- --------- --------- $741 $2,229 $3,728 $7,551
For more information, see Charges and Other Deductions in this prospectus, and the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. Different fees and expenses not reflected in the examples may be imposed during a period in which regular income payments or annuity payouts are made. See The Contracts - i4LIFE (Reg. TM) Advantage 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 Asset Allocation Models? Asset allocation models are designed to assist you in deciding how to allocate your purchase payments among the various subaccounts. Each model provides a diversified investment portfolio by combining different asset classes to help it reach its stated investment goal. See The Contracts - Asset Allocation Models. 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 will 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? If you withdraw purchase payments, you pay a surrender charge from 0% to 7.00% of the surrendered or withdrawn purchase payment, depending upon how long those payments have been invested in the contract. We may waive surrender charges in certain situations. See Charges and Other Deductions-Surrender Charge. 15 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. 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 increase in your contract value of 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 different types of minimum guarantees if you meet certain conditions. If you select a Living Benefit rider, excess withdrawals may have adverse effects on the benefit, and you will be subject to Investment Requirements. These riders are the Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage (both of which are withdrawal benefit riders) and 4LATER (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage (with or without the Guaranteed Income Benefit) (both of which are annuity payout riders). These riders are discussed in detail in this prospectus. In addition, there is an overview of these riders that is provided with 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. 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 16 charge, imposed only during the i4LIFE (Reg. TM) Advantage payout phase, based on the i4LIFE (Reg. TM) Advantage death benefit you choose and whether or not the Guaranteed Income Benefit is in effect. What is the Guaranteed Income Benefit? The Guaranteed Income Benefit provides a minimum payout floor for your i4LIFE (Reg. TM) regular income payments. The i4LIFE (Reg. TM) Guaranteed Income Benefit is purchased at the time you elect i4LIFE (Reg. TM) Advantage or any time during the Access Period subject to terms and conditions at that time. 4LATER (Reg. TM) Advantage, Lincoln Smart Security (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage have features that may be used to establish the amount of the Guaranteed Income Benefit. 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 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. You may use your Guaranteed Amount from Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to establish the Guaranteed Income Benefit at the time you terminate Lincoln Smart Security (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage to purchase i4LIFE (Reg. TM) Advantage. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit, 4LATER (Reg. TM) Advantage Guaranteed Income Benefit, and Lincoln Lifetime IncomeSM Advantage - i4LIFE (Reg. TM) Advantage option. What is 4LATER (Reg. TM) Advantage? 4LATER (Reg. TM) Advantage, which may be available for purchase at an additional charge, is a way to guarantee today a minimum payout floor (a Guaranteed Income Benefit) in the future for the i4LIFE (Reg. TM) Advantage regular income payments. 4LATER (Reg. TM) Advantage provides an initial Income Base that is guaranteed to increase at a specified percentage over the accumulation period of the annuity. By electing this benefit, you will be subject to Investment Requirements. See The Contracts - 4LATER (Reg. TM) Advantage. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See The Contracts - Surrenders and Withdrawals. If you surrender the contract or make a withdrawal, certain charges may apply. See Charges and Other Deductions. A portion of surrender or withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal Tax Matters. Do I get a free look at this contract? Yes. You can cancel the contract within ten days (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, with or without contingent deferred sales charges. Results calculated without contingent deferred sales charges will be higher. Total returns include the reinvestment of all distributions, which are reflected in changes in unit value. The money market subaccount's yield is based upon investment performance over a 7-day period, which is then annualized. Note that there can be no assurance that any money market fund will be able to maintain a stable net asset value per share. During extended periods of low interest rates, and due in part to the contract fees and expenses, the yields of any subaccount investing in a money market fund may also become extremely low and possibly negative. The money market yield figure and annual performance of the subaccounts are based on past performance and do not indicate or represent future performance. The Lincoln National Life Insurance Company The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905, is an Indiana-domiciled insurance company, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln Life is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, such as those associated with death benefit options and Living Benefit riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. 17 We issue other types of insurance policies and financial products as well, and we also pay our obligations under these products from our assets in the general account. Moreover, unlike assets held in the VAA, the assets of the general account are subject to the general liabilities of the Company and, therefore, to the Company's general creditors. In the event of an insolvency or receivership, payments we make from our general account to satisfy claims under the contract would generally receive the same priority as our other contractowner obligations. Our Financial Condition. Among the laws and regulations applicable to us as an insurance company are those which regulate the investments we can make with assets held in our general account. In general, those laws and regulations determine the amount and type of investments which we can make with general account assets. In addition, state insurance regulations require that insurance companies calculate and establish on their financial statements, a specified amount of reserves in order to meet the contractual obligations to pay the claims of our policyholders. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product. State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer's operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value. How to Obtain More Information. We encourage both existing and prospective policyholders to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would like a free copy of the SAI, please write to us at: PO Box 7866, Fort Wayne, IN 46801-7866 , or call 1-888-868-2583. In addition, the Statement of Additional Information is available on the SEC's website at http://www.sec.gov. You may obtain our audited statutory financial statements and any unaudited statutory financial statements that may be available by visiting our website at www.LincolnFinancial.com. You also will find on our website information on ratings assigned to us by one or more independent rating organizations. These ratings are opinions of an operating insurance company's financial capacity to meet the obligations of its insurance and annuity contracts based on its financial strength and/or claims-paying ability. Additional information about rating agencies is included in the Statement of Additional Information. Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. 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. Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 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. 18 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 0.50%, 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, BlackRock, Delaware, DWS, Fidelity, Franklin Templeton, Janus, Lincoln, MFS, PIMCO 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. AIM Variable Insurance Funds, advised by Invesco A I M 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. 19 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 VPS Global Thematic Growth Portfolio (Class B): Maximum capital appreciation. (formerly AllianceBernstein VPS Global Technology Portfolio) 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. This fund is not offered in contracts issued on or after June 6, 2005. o AllianceBernstein VPS Small/Mid Cap Value Portfolio (Class B): Long-term growth. American Century Investments Variable Products, advised by American Century Investment Management, Inc. 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. BlackRock Variable Series Funds, Inc.,advised by BlackRock Advisors, LLC and subadvised by BlackRock Investment Management, LLC o BlackRock Global Allocation V.I. Fund (Class III): High total return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Delaware VIP Trust, advised by Delaware Management Company 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 Limited-Term Diversified Income Series (Service Class): Total return. (formerly Capital Reserves Series) o REIT Series (Service Class): Total return. This fund is not available in contracts issued after June 4, 2007. This fund will be reopened and available in all contracts on or about June 30, 2009. Consult your financial advisor. 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 Investment Management Americas, 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 is not 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 is not offered in contracts issued on or after June 4, 2007. DWS Variable Series II, advised by Deutsche Investment Management Americas, Inc. and subadvised by RREEF America L.L.C. o DWS Alternative Asset Allocation Plus VIP Portfolio (Class B): Capital Appreciation This fund will be available on or about June 30, 2009. Consult your financial advisor. 20 Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company and subadvised by FMR CO., Inc. 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. Franklin Templeton Variable Insurance Products Trust, advised by Franklin Advisers, Inc. for the Franklin Income Securities Fund, the Franklin Small-Mid Cap Growth Securities Fund, and the Templeton Global Bond Securities Fund, and by Templeton Global Advisors Limited for the Templeton Growth Securities Fund, and by Franklin Mutual Advisers, 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 Bond Securities Fund (Class 2): High current income. This fund is not offered in contracts issued on or after June 30, 2009. (formerly Templeton Global Income Securities Fund) o Templeton Growth Securities Fund (Class 2): Long-term capital growth. (Subadvised by Templeton Asset Management Ltd.) This fund is not 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 Enterprise Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after June 6, 2005. (formerly Mid Cap Growth Portfolio) o Worldwide Portfolio (Service Class): Long-term growth. This fund is not offered in contracts issued on or after May 24, 2004. (formerly Worldwide Growth Portfolio) Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors Corporation. o LVIP Baron Growth Opportunities Fund (Service Class): Capital appreciation. (Subadvised by BAMCO, Inc.) o LVIP Capital Growth Fund (Service Class): Capital growth. (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 Foundation Aggressive Allocation Fund (Service Class): Long-term capital growth. (Subadvised by Delaware Management Company) This fund will not be available until the merger with the LVIP UBS Global Asset Allocation Fund is complete. This fund is not offered in contracts issued on or after June 30, 2009. 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) 21 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 Global Income Fund (Service Class): Current income consistent with preservation of capital. (Subadvised by Mondrian Investment Partners Limited and Templeton Investment Counsel, LLC) This fund will be available on or about June 30, 2009. Consult your financial advisor. 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 (Service Class): Long-term capital appreciation. (Subadvised by Mondrian Investment Partners Limited) o LVIP Money Market Fund (Service Class): Current income/Preservation of capital. (Subadvised by Delaware Management Company) o LVIP SSgA Bond Index Fund (Service Class): Replicate Barclays Aggregate Bond Index (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Developed International 150 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Emerging Markets 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA International Index Fund (Service Class): Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Large Cap 100 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small/Mid Cap 200 Fund (Service Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA S&P 500 Index Fund (Service Class): Replicate S&P 500 Index. (Sub-advised by SSgA Funds Management, Inc.) o LVIP SSgA Small-Cap Index Fund (Service Class): Replicate Russell 2000 Index. (Sub-advised 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 (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) o LVIP UBS Global Asset Allocation Fund (Service Class): Total return. (Subadvised by UBS Global Asset Management (Americas) Inc. (UBS Global AM) The Board of Trustees of the Lincoln Variable Insurance Products Trust has approved a reorganization pursuant to which the assets of the LVIP UBS Global Asset Allocation Fund would be acquired and the liabilities of such fund would be assumed by the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund in exchange for shares of the LVIP Delaware Foundation (Reg. TM) Aggressive Allocation Fund. This reorganization is subject to the approval of the LVIP UBS Global Asset Allocation Fund's shareholders. This reorganization is expected to occur in June 2009. This fund is not offered in contracts issued after June 30, 2009. o LVIP Wilshire 2010 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) This fund is not offered in contracts issued on or after June 30, 2009. 22 o LVIP Wilshire 2020 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) This fund is not offered in contracts issued on or after June 30, 2009. o LVIP Wilshire 2030 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) This fund is not offered in contracts issued on or after June 30, 2009. o LVIP Wilshire 2040 Profile Fund (Service Class): Total return; a fund of funds.* (Subadvised by Wilshire Associates Incorporated) This fund is not offered in contracts issued on or after June 30, 2009. o LVIP Wilshire Aggressive Profile Fund (Service Class): Long-term growth of capital; 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): Growth and income; 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. This fund is not offered in contracts issued on or after June 6, 2005. o Growth Series (Service Class): Capital appreciation. 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. and subadvised by Neuberger Berman, LLC o Mid-Cap Growth Portfolio (I Class): Capital appreciation. This fund is not offered in contracts issued on or after June 4, 2007. o Regency Portfolio (I Class): Long-term growth. This fund is not offered in contracts issued on or after June 4, 2007. PIMCO Variable Insurance Trust, advised by PIMCO o PIMCO VIT Commodity Real Return Strategy Portfolio (Advisor Class): Maximum real return. This fund will be available on or about June 30, 2009. Consult your financial advisor. Putnam Variable Trust, advised by Putnam Investment Management, LLC o Global Health Care Fund (Class IB): Capital appreciation. This fund is not offered in contracts issued on or after May 24, 2004. (formerly Health Sciences Fund) 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. 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. 23 When a fund sells any of its shares both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When a fund sells any of its shares to separate accounts of unaffiliated life insurance companies, it is said to engage in shared funding. The funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various contractowners participating in a fund could conflict. Each of the fund's Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. The funds do not foresee any disadvantage to contractowners arising out of mixed or shared funding. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a fund. This might force a fund to sell portfolio securities at disadvantageous prices. See the prospectuses for the funds. Reinvestment of Dividends and Capital Gain Distributions All dividends and capital gain distributions of the funds are automatically reinvested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as additional units, but are reflected as changes in unit values. Addition, Deletion or Substitution of Investments We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC. We also may: o remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; o transfer assets supporting the contracts from one subaccount to another or from the VAA to another separate account; o combine the VAA with other separate accounts and/or create new separate accounts; o deregister the VAA under the 1940 Act; and o operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law. We may modify the provisions of the contracts to reflect changes to the subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice. 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); 24 o the risk that death benefits paid will exceed the actual contract value; o the risk that more owners than expected will qualify for waivers of the surrender charge; o the risk that lifetime payments to individuals from Lincoln 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. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts. Deductions from the VAA We apply to the average daily net asset value of the subaccounts a charge which is equal to an annual rate of:
With Estate Enhancement Benefit Rider (EEB) ------------------------- o Mortality and expense risk charge 1.65% o Administrative charge 0.10% ---- o Total annual charge for each subaccount** 1.75% Enhanced Guaranteed Guarantee of Minimum Death Principal Death Benefit (EGMDB) Benefit Account Value Death Benefit --------------------- ---------------- ---------------------------- o 1.45% 1.20% 1.15% o 0.10% 0.10% 0.10% ---- ---- ---- o 1.55% 1.30% 1.25%
**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 1.65%; EGMDB 1.45%; Guarantee of Principal 1.35%; Account Value N/A. Surrender Charge A surrender charge applies (except as described below) to surrenders and withdrawals of purchase payments that have been invested for the periods indicated as follows:
Number of contract anniversaries since purchase payment was invested ---------------------------------------------- 0 1 2 3 4 5 6 7+ Surrender charge as a percentage of the surrendered or 7 % 7 % 6 % 6 % 5 % 4 % 3 % 0 withdrawn purchase payments
A surrender charge does not apply to: o A surrender or withdrawal of a purchase payment beyond the seventh anniversary since the purchase payment was invested; o Withdrawals of contract value during a contract year to the extent that the total contract value withdrawn during the current contract year does not exceed the free amount which is equal to 15% of the total purchase payments (this does not apply upon surrender of the contract); o When the surviving spouse assumes ownership of the contract as a result of the death of the original owner (however, the surrender charge schedule of the original contract will continue to apply to the spouse's contract); o A surrender or withdrawal of any purchase payments as a result of admittance of the contractowner into an accredited nursing home or equivalent health care facility, where the admittance into such facility occurs after the effective date of the contract and the owner has been confined for at least 90 consecutive days; o A surrender of the contract as a result of the death of the contractowner, joint owner or annuitant; o Purchase payments when used in the calculation of the initial periodic income payment and the initial Account Value under the i4LIFE (Reg. TM) Advantage option or the contract value applied to calculate the benefit amount under any annuity payout option made available by us; o Regular income payments made under i4LIFE (Reg. TM) Advantage, including any payments to provide the 4LATER (Reg. TM) or i4LIFE (Reg. TM) Guaranteed Income Benefits, or periodic payments made under any annuity payout option made available by us; o A surrender of a contract or withdrawal of a contract value from contracts issued to selling group individuals; 25 o A surrender or withdrawal of any purchase payments after the onset of a permanent and total disability of the contractowner as defined in Section 22(e)(3) of the tax code, if the disability occurred after the effective date of the contract and before the 65th birthday of the contractowner. For contracts issued in the State of New Jersey, a different definition of permanent and total disability applies; o A surrender or withdrawal of any purchase payments as a result of the diagnosis of a terminal illness that is after the effective date of the contract and results in a life expectancy of less than one year as determined by a qualified professional medical practitioner; o Withdrawals up to the Maximum Annual Withdrawal amount under the Lincoln SmartSecurity (Reg. TM) Advantage and Lincoln Lifetime IncomeSM Advantage, subject to certain conditions. For purposes of calculating the surrender charge on withdrawals, we assume that: 1. The free amount will be withdrawn from purchase payments on a "first in-first out (FIFO)" basis. 2. Prior to the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) until exhausted; then o from earnings until exhausted. 3. On or after the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: o from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then o from earnings until exhausted; then o from purchase payments (on a FIFO basis) to which a surrender charge still applies until exhausted. We apply the surrender charge as a percentage of purchase payments, which means that you would pay the same surrender charge at the time of surrender regardless of whether your contract value has increased or decreased. The surrender charge is calculated separately for each purchase payment. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. Account Fee During the accumulation period, we will deduct $35 from the contract value on each contract anniversary to compensate us for the administrative services provided to you; this $35 account fee will also be deducted from the contract value upon surrender. This fee may be lower in certain states, if required, and will be waived after the fifteenth contract year. The account fee will be waived for any contract with a contract value that is equal to or greater than $100,000 on the contract anniversary. There is no account fee on contracts issued to selling group individuals. 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 0.90% of the Guaranteed Amount (0.225% quarterly) for the Lincoln Lifetime IncomeSM Advantage Single Life or Joint Life option. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.75% to 0.90% upon the earlier of (a) the next Automatic Annual Step-up of the Guaranteed Amount or (b) the next Benefit Year anniversary if cumulative purchase payments received after the first Benefit Year anniversary equal or exceed $100,000. If the Lincoln Lifetime IncomeSM Advantage Plus is purchased, an additional 0.15% is added, for a total current cost of 1.05% of the Guaranteed Amount. See The Contracts - Lincoln Lifetime IncomeSM Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. 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. For riders purchased on or after March 2, 2009, the charge will also be deducted in proportion to the value in the fixed account used for dollar cost averaging purposes. 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. 26 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% of the Guaranteed Amount. 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% of the Guaranteed Amount will be added to the Lincoln Lifetime IncomeSM Advantage charge for a total current charge of 1.05% 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) 0.65% of the Guaranteed Amount (0.1625% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option (for riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.45% to 0.65% upon the next election of a step-up of the Guaranteed Amount); or 2) 0.65% of the Guaranteed Amount (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% of the Guaranteed Amount (0.2000% quarterly) for the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up, Joint Life option. See The Contracts - Lincoln SmartSecurity (Reg. TM) Advantage - Guaranteed Amount for a description of the calculation of the Guaranteed Amount. If you purchase this Rider in the future, the percentage charge will be the current charge in effect at the time of purchase. As of January 16, 2009, the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up Option is no longer available for 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. If you elect to step-up the Guaranteed Amount for another step-up period (including if we administer the step-up election for you or if you make a change from a Joint Life to a Single Life option after a death or divorce), a pro-rata deduction of the Rider charge based on the Guaranteed Amount immediately prior to the step-up will be made on the valuation date of the step-up. This deduction covers the cost of the Rider from the time of the previous deduction to the date of the step-up. After a contractowner's step-up, we will deduct the Rider charge for the stepped-up Guaranteed Amount on a quarterly basis, beginning on the valuation date on or next following the three-month anniversary of the step-up. At the time of the elected step-up, the Rider percentage charge will change to the 27 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% of the Guaranteed Amount for the Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option or 1.50% of the Guaranteed Amount 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 0.65% of the Income Base. For riders purchased before January 20, 2009, the current annual percentage charge will increase from 0.50% to 0.65% upon the next election to reset 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% of the Income Base. If you never elect to reset your Income Base, your 4LATER (Reg. TM) Rider percentage charge will never change, although the amount we deduct will change as your Income Base changes. Prior to the periodic income commencement date, a pro-rata amount of the 4LATER (Reg. TM) Rider charge will be deducted upon termination of the 4LATER (Reg. TM) Rider for any reason other than death. On the periodic income commencement date, a pro-rata deduction of the 4LATER (Reg. TM) Rider charge will be made to cover the cost of 4LATER (Reg. TM) since the previous deduction. i4LIFE (Reg. TM) Advantage Charge . i4LIFE (Reg. TM) Advantage is subject to a charge (imposed during the i4LIFE (Reg. TM) Advantage payout phase), computed daily of the Account Value. The annual rate of the i4LIFE (Reg. TM) Advantage charge is: 1.65% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 1.70% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 1.95% 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% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.20% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.45% for the i4LIFE (Reg. TM) Advantage EGMDB. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse 28 the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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 0.65% of the Account Value, which is added to the i4LIFE (Reg. TM) Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.30% for the i4LIFE (Reg. TM) Account Value death benefit; 2.35% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.60% for the EGMDB. (For riders purchased before January 20, 2009, the current annual percentage charge is 0.50%, but will increase to 0.65% upon the next election to reset the Income Base.) These charges apply only during the i4LIFE (Reg. TM) Advantage payout phase. On and after the periodic income commencement date, the 4LATER (Reg. TM) Guaranteed Income Benefit charge will be added to the i4LIFE (Reg. TM) charge as a daily percentage of 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) Guaranteed Income Benefit percentage charge will not change unless the contractowner elects additional 15 year step-up periods during which the 4LATER (Reg. TM) Guaranteed Income Benefit (described later) is stepped-up to 75% of the current regular income payment. At the time you elect a new 15 year period, the 4LATER (Reg. TM) Guaranteed Income Benefit percentage charge will change to the current charge in effect at that time (if the current charge has changed) up to the guaranteed maximum annual charge of 1.50% of Account Value. After the periodic income commencement date, if the 4LATER (Reg. TM) Guaranteed Income Benefit is terminated, the 4LATER (Reg. TM) Guaranteed Income Benefit annual charge will also terminate. Guaranteed Income Benefit Charge for Lincoln Lifetime IncomeSM Advantage purchasers. For purchasers of Lincoln Lifetime IncomeSM Advantage who terminate their rider and purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit, the Guaranteed Income Benefit which is purchased with i4LIFE (Reg. TM) Advantage is subject to a current annual charge of 0.50% of the Account Value, which is added to the i4LIFE (Reg. TM)Advantage charge for a total current percentage charge of the Account Value, computed daily as follows: 2.15% for the i4LIFE (Reg. TM) Advantage Account Value death benefit; 2.20% for the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit; and 2.45% for the i4LIFE (Reg. TM) Advantage EGMDB. Purchasers of Lincoln Lifetime IncomeSM Advantage are guaranteed that in the future the guaranteed maximum charge for the Guaranteed Income Benefit will be the guaranteed maximum charge then in effect at the time that they purchase the Lincoln Lifetime IncomeSM Advantage. The Guaranteed Income Benefit percentage charge will not change unless you elect an additional step-up period during which the Guaranteed Income Benefit is stepped-up to 75% of the current regular income payment (described later). At the time you elect a new step-up 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% of the Account Value. If we automatically administer the step-up period election for you and your percentage charge is increased, you may ask us to reverse the step-up period election by giving us notice within 30 days after the date on which the step-up period election occurred. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up period election occurred. Increased fees collected during the 30-day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period (described later in the i4LIFE (Reg. TM) Advantage section of this prospectus). 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%. 29 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% of the contract value will be assessed on all variable annuity payouts (except for the i4LIFE (Reg. TM) Advantage, which has a different charge), including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the services will exceed our revenues from contract charges. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. 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. 30 If you are purchasing the contract through a tax-favored arrangement, including traditional IRAs and Roth IRAs, you should consider carefully the costs and benefits of the contract (including annuity income benefits) before purchasing the contract, since the tax-favored arrangement itself provides tax-deferred growth. Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Surrender charges may be imposed on your existing contract and/or a new surrender charge period may be imposed with the purchase of, or transfer into, this contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Purchase Payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $10,000. The minimum for selling group individuals is $1500. 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 31 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. 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 may also transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract, except during periods when (if permitted by your contract) we have discontinued accepting transfers into the fixed side of the contract. The minimum amount which can be transferred to a fixed account is $2,000 or the total amount in the subaccount if less than $2,000. However, if a transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side of the contract. You may also transfer part of the contract value from a fixed account to the various subaccount(s) subject to the following restrictions: o the sum of the percentages of fixed value transferred is limited to 25% of the value of that fixed account in any twelve month period; and o the minimum amount which can be transferred is $300 or the amount in the fixed account. Transfers of all or a portion of a fixed account (other than automatic transfer programs and i4LIFE (Reg. TM) Advantage transfers) may be subject to interest adjustments, if applicable. 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 32 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 (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 33 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. 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 34 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. You may request that surrender proceeds be paid directly to you instead of deposited in a SecureLine (Reg. TM) account. There are charges associated with surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. If the charges are deducted from the remaining contract value, the amount of the total withdrawal will increase according to the impact of the applicable surrender charge percentage; consequently, the dollar amount of the surrender charge associated with the withdrawal will also increase. In other words, the dollar amount deducted to cover the surrender charge is also subject to a surrender charge. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal Tax Matters - Taxation of Withdrawals and Surrenders. Additional Services These are the additional services available to you under your contract: dollar-cost averaging (DCA), automatic withdrawal service (AWS), 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 or in accordance with other terms we make available. We reserve the right to discontinue or modify this program at any time. DCA does not assure a profit or protect against loss. The automatic withdrawal service (AWS) provides for an automatic periodic withdrawal of your contract value. 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 were designed and prepared by the Company, in consultation with SSgA Funds Management, Inc., 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 LVIP 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. 35 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. The election of 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. At this time, the available models are as follows: o The Lincoln 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 Lincoln 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 Lincoln SSgA Moderately Aggressive Equity Index Model (formerly known as the Lincoln 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. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Moderately Aggressive Index Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in three equity subaccounts and 30% 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. (Available on or after June 30, 2009) o The Lincoln 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 Lincoln 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 Lincoln 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 Lincoln SSgA Structured Moderately Aggressive Equity Model (formerly known as the Lincoln SSgA Structured Moderately Aggressive Model) is composed of specified underlying subaccounts representing a target allocation of approximately 80% in seven 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 a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Not available to contracts issued on or after June 30, 2009) o The Lincoln SSgA Structured Moderately Aggressive Model is composed of specified underlying subaccounts representing a target allocation of approximately 70% in seven equity subaccounts and 30% 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 36 utilizes a combination of index funds and rules-based strategies with an emphasis placed on value oriented stocks. (Available on or after June 30, 2009) o The Lincoln 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. Your registered representative will have more information on the specific investments of each model. 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. If you choose to follow this strategy you will invest 100% of your contract value according to the strategy. You may invest in any of the three funds without adopting the strategy. 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 in accordance with the strategy. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each allocation. You may terminate the strategy at any time and reallocate your contract value to other investment options. 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% of contract value o FTVIPT Mutual Shares Securities 33% of contract value o LVIP Templeton Growth Fund 33% of contract value
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. 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. 37 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. No additional death benefit is provided. Once you have selected this death benefit option, it cannot be changed. (Your contract may refer to this benefit as the Contract Value Death Benefit.) Guarantee of Principal Death Benefit. If you do not select a death benefit, the Guarantee of Principal Death Benefit will apply to your contract. If the Guarantee of Principal Death Benefit is in effect, the death benefit will be equal to the greater of: o The current contract value as of the valuation date we approve the payment of the claim; or o The sum of all purchase payments decreased by withdrawals in the same proportion that withdrawals reduced the contract value (withdrawals less than or equal to the 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 any applicable charges associated with those withdrawals (surrender charges 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 any applicable charges associated with that withdrawal (surrender charges for example) and premium taxes, if any. The EGMDB is not available under contracts issued to a contractowner, or joint owner or annuitant, who is age 80 or older at the time of issuance. You may discontinue the EGMDB at any time by completing the Death Benefit Discontinuance form and sending it to our Home office. The benefit will be discontinued as of the valuation date we receive the request, and the Guarantee of Principal Death Benefit will 38 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) (determined before the allocation of any purchase payments on that contract anniversary) 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 any applicable charges associated with that withdrawal (surrender charges for example) 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 any contractual basis that has previously been withdrawn, which is 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 previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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 any contractual basis that has previously been withdrawn, which is 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. 39 The previously withdrawn contractual basis is an amount equal to the greater of $0 and (A), where (A) is the amount of the withdrawal minus the greater of $0 and (B); where (B) is the result of [(i) - (ii)]; where (i) is the contract value immediately prior to the withdrawal; and (ii) is the amount of purchase payments made into the contract 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. 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 1.55% or 1.60% for contracts issued before June 6, 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. 40 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. The recipient of death benefit proceeds may request to receive the proceeds in the form of a check rather than a deposit into the SecureLine (Reg. TM) account. Investment Requirements If you purchase a Living Benefit rider (Lincoln Lifetime IncomeSM Advantage, 4LATER (Reg. TM) Advantage, Lincoln SmartSecuritySM Advantage, or the Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage), you will be subject to Investment Requirements, and you will be limited in how much you can invest in certain subaccounts of your contract. The Living Benefit rider you purchase and the date of purchase will determine which Investment Requirements Option will apply to your contract. See Option 1, Option 2, and Option 3 below. Under each Option, we have divided the subaccounts of your contract into groups and have specified the minimum or maximum percentages of contract value that must be in each group at the time you purchase the rider (or when the rider Investment Requirements are enforced, if later). 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 subaccounts are not available to you if you purchase certain Riders. The Investment Requirements may not be consistent with an aggressive investment strategy. You should consult with your registered representative to determine if the Investment Requirements are consistent with your investment objectives. The chart below is provided to help you determine which Option of Investment Requirements, if any, applies to the Living Benefit rider you purchase. If you do not elect a Living Benefit rider, the Investment Requirements will not apply to your contract. Different Investment Requirements may apply if you drop one rider and elect another rider.
YOU WILL BE SUBJECT TO IF YOU ELECT... AND THE DATE OF ELECTION IS... INVESTMENT REQUIREMENTS Lincoln Lifetime IncomeSM Advantage Between February 19, 2008 and January 20, 2009 Option 2 On or after January 20, 2009 Option 3 Lincoln SmartSecurity (Reg. TM) Advantage Prior to April 10, 2006 N/A Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 4LATER (Reg. TM) Advantage Between April 10, 2006 and January 20, 2009 Option 1 On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Prior to April 10, 2006 N/A Benefit (v.1) On or after April 10, 2006 Option 1 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between April 10, 2006 and January 20, 2009 Option 1 Benefit (v.2) On or after January 20, 2009 Option 3 i4LIFE (Reg. TM) Advantage with Guaranteed Income Between October 6, 2008 and January 20, 2009 Option 2 Benefit (v.3) On or after January 20, 2009 Option 3
Investment Requirements - Option 1 We intend to enforce these Investment Requirements on June 30, 2009 for contracts purchased with Investment Requirements Option 1. 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 VPS Global Thematic Growth Portfolio o AllianceBernstein VPS International Value Portfolio o AllianceBernstein VPS Small/Mid Cap Value Portfolio o American Funds Global Growth Fund o American Funds Global Small Capitalization Fund 41 o American Funds International Fund o Delaware VIP Emerging Markets Series o Delaware VIP High Yield 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 Mid-Cap Portfolio o Fidelity (Reg. TM) VIP Overseas Portfolio o FTVIPT Franklin Income Securities Fund o FTVIPT Franklin Small-Mid Cap Growth Securities Fund o FTVIPT Mutual Shares Securities Fund o FTVIPT Templeton Growth Securities Fund o Janus Aspen Enterprise Portfolio o Janus Aspen Worldwide Portfolio o LVIP Baron Growth Opportunities Fund o LVIP Cohen & Steers Global Real Estate Fund o LVIP Columbia Value Opportunities Fund o LVIP Delaware Foundation Aggressive Allocation Fund o LVIP Delaware Special Opportunities Fund o LVIP Marsico International Growth Fund o LVIP Mid-Cap Value 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 LVIP UBS Global Asset Allocation Fund o LVIP Wilshire 2040 Profile o LVIP Wilshire Aggressive Profile o MFS VIT Growth Series o MFS VIT Utilities Series o Neuberger Berman AMT Mid-Cap Growth Portfolio o Neuberger Berman AMT Regency Portfolio o Putnam VT Global Health Care Fund All other variable subaccounts will be referred to as "Non-Limited Subaccounts" except DWS Alternative Asset Allocation Plus VIP Portfolio and PIMCO VIT Commodity Real Return Strategy Portfolio, which are unavailable to any contract holder with a Living Benefit rider. The Founding Investment Strategy is also unavailable for investment. 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 reserve the right to designate a different investment option other than the LVIP Money Market subaccount as the default investment option should there be no contract value in the Non-Limited Subaccounts. We will provide you with notice of such change. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We may move subaccounts on or off the Limited Subaccount list, exclude Subaccounts and asset allocation models from being available for investment, change the number of Limited Subaccount groups, 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. 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 42 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 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts in a group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. We reserve the right to change the rebalancing frequency, at any time, in our sole discretion. 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. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group or change the investment options that are or are not available to you, at any time, in our sole discretion. 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 purchase payments 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 purchase payment or a contract transfer, in excess of the new percentage applicable to a subaccount or subaccount group. This does not apply to subaccounts added to Investment Requirements on or after June 30, 2009. 4. for subaccounts added to Investment Requirements on or after June 30, 2009, you may be subject to rebalancing as described above. If this results in a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 25% of contract value Investments cannot exceed 75% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. American Century VP Inflation Protection Fund All other investment options except as discussed below. 2. Delaware VIP High Yield Series 3. LVIP Delaware Bond Fund 4. Delaware VIP Limited-Term Diversified Income Series 5. Delaware VIP Diversified Income Series
43 6. FTVIPT Templeton Global Bond Securities Fund 7. LVIP SSgA Bond Index Fund 8. LVIP Global Income Fund Group 3 Investments cannot exceed 10% of contract value or -- Account Value ---------------------------------------------------- 1. Delaware VIP REIT Series 2. LVIP SSgA Emerging Markets 100 Fund
To satisfy the Investment Requirements, you may allocate 100% of your contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the available 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% of contract value to or among the MFS VIT Total Return Series, the FTVIPT Franklin Income Securities Fund, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile 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 DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Structured Moderately Aggressive Equity Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index Model, Lincoln SSgA Moderately Aggressive Index Model and Lincoln SSgA Moderately Aggressive Equity Index Model. You may only choose one asset allocation model at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described above. 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. You may also allocate 100% of your contract value to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. Investment Requirements - Option 3 You can select the percentages of contract value (includes Account Value if i4LIFE (Reg. TM) Advantage is in effect) to allocate to individual subaccounts within each group, but the total investment for all subaccounts within the group must comply with the specified minimum or maximum percentages for that group. In accordance with these Investment Requirements, you agree to be automatically enrolled in the portfolio rebalancing option under your contract and thereby authorize us to automatically rebalance your contract value on a periodic basis. On each quarterly anniversary of the effective date of the Rider, we will rebalance your contract value, on a pro-rata basis, based on your allocation instructions in effect at the time of the rebalancing. Confirmation of the rebalancing will appear on your quarterly statement and you will not receive an individual confirmation after each reallocation. If we rebalance contract value from the subaccounts and your allocation instructions do not contain any subaccounts that meet the Investment Requirements then that portion of the rebalanced contract value that does not meet the Investment Requirements will be allocated to the LVIP Money Market Fund as the default investment option or any other subaccount that we may designate for that purpose. These investments will become your allocation instructions until you tell us otherwise. We may change the list of subaccounts in a group, change the number of groups, change the minimum or maximum percentages of contract value allowed in a group, change the investment options that are or are not available to you, or change the rebalancing frequency at any time in our sole discretion. You will be notified at least 30 days prior to the date of any change. We may make such modifications at any time when we believe the modifications are necessary to protect our ability to provide the guarantees under these Riders. Our decision to make modifications will be based on several factors including the general market conditions and the style and investment objectives of the subaccount investments. At the time you receive notice of a change to the Investment Requirements, you may: 1. drop the applicable rider immediately, without waiting for a termination event if you do not wish to be subject to these Investment Requirements; or 44 2. submit your own reallocation instructions for the contract value, before the effective date specified in the notice, so that the Investment Requirements are satisfied; or 3. take no action and be subject to the quarterly rebalancing as described above. If this results is a change to your allocation instructions, then these will be your new allocation instructions until you tell us otherwise. At this time, the subaccount groups are as follows: Group 1 Group 2 Investments must be at least 30% of contract value Investments cannot exceed 70% of contract value or Account Value ----------------------------------------------------------------- or Account Value ---------------------------------------------------- 1. American Century VP Inflation Protection Fund All other funds except as described below. 2. LVIP Delaware Bond Fund 3. Delaware VIP Limited-Term Diversified Income Series 4. Delaware VIP Diversified Income Series 5. FTVIPT Templeton Global Bond Securities Fund 6. LVIP SSgA Bond Index Fund 7. LVIP Global Income Fund
Group 3 Investments cannot exceed 10% of contract value or Account Value --------------------------------------------------- 1. Delware VIP Emerging Markets Series 2. LVIP SSgA Emerging Markets 100 Fund 3. Delaware VIP REIT Series 4. LVIP Cohen & Steers Global Real Estate Fund 5. MFS VIT Utilities Series 6. AllianceBernstein VPS Global Thematic Growth Portfolio
To satisfy these Investment Requirements, you may allocate 100% of your contract value among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund, or the LVIP Wilshire Profile Funds that are available in your contract except not more than 70% may be allocated to the LVIP Wilshire Aggressive Profile Fund, LVIP Wilshire 2030 Profile Fund and LVIP Wilshire 2040 Profile Fund. If you allocate less than 100% of contract value to or among the MFS VIT Total Return Series, the BlackRock Global Allocation VI Fund or the available LVIP Wilshire Profile Funds, then these funds will be considered as part of Group 2 above and you will be subject to the Group 2 restrictions. The DWS Alternative Asset Allocation Plus VIP Portfolio, the PIMCO VIT Commodity Real Return Strategy Portfolio and the fixed accounts are not available with these riders. The fixed account is only available for dollar cost averaging. To satisfy these Investment Requirements, contract value can be allocated in accordance with certain asset allocation models, made available to you by your broker dealer. 100% of the contract value can be allocated to one of the following models: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Structured Moderately Aggressive Model, Lincoln SSgA Conservative Index Model, Lincoln SSgA Moderate Index Model and Lincoln SSgA Moderately Aggressive Index Model. You may only choose one asset allocation at a time, though you may change to a different asset allocation model available in your contract that meets the Investment Requirements or reallocate contract value among Group 1, Group 2 or Group 3 subaccounts as described in your prospectus. If you purchase Lincoln Lifetime IncomeSM Advantage Plus rider on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. Living Benefit Riders The optional Living Benefit Riders offered under this variable annuity contract - Lincoln Lifetime IncomeSM Advantage, Lincoln SmartSecurity (Reg. TM) Advantage, i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit and 4LATER (Reg. TM) Advantage - are described in the following sections. The riders offer either a minimum withdrawal benefit (Lincoln Lifetime IncomeSM Advantage and Lincoln SmartSecurity (Reg. TM) Advantage) or a minimum annuity payout (i4LIFE (Reg. TM) Advantage and 4LATER (Reg. TM) Advantage). You may not elect more than one Living Benefit rider at a time. Upon election of a Living Benefit rider, you will be subject to Investment Requirements. The overview chart provided with this prospectus provides a brief description and comparison of each Living Benefit rider. Terms and conditions may change after the contract is purchased. 45 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 $25,000. This Rider provides minimum, guaranteed, periodic withdrawals for your life as contractowner/annuitant (Single Life Option) or for the lives of you as contractowner/annuitant and your spouse as joint owner 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 3 if you purchased the Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009. See The Contracts - Investment Requirements - Option 2 if you purchased Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option before January 20, 2009, your only investment options until the seventh Benefit Year anniversary are: 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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. 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 (see Lincoln Lifetime IncomeSM Advantage - Compare to Lincoln SmartSecurity (Reg. TM) Advantage and i4LIFE (Reg. TM) Advantage option). 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. 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. 46 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 and the Rider is within the 10 year period described below. 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 10 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 10-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. For riders purchased prior to January 20, 2009, the 5% Enhancement will be in effect for 15 years from the effective date of the Rider, and a new 15-year period will begin following each Automatic Annual Step-up. Any withdrawal from the contract value limits the 5% Enhancement as follows: 47 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 10-year period as long as the contract owner/ annuitant (Single Life Option) is 591/2 or 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 10-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 10 1st Benefit Year Anniversary......... $54,000 $54,000 Yes 10 2nd Benefit Year Anniversary......... $53,900 $56,700 No 9 3rd Benefit Year Anniversary......... $57,000 $59,535 No 8 4th Benefit Year Anniversary......... $64,000 $64,000 Yes 10
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. For contractowners who purchase Lincoln Lifetime IncomeSM Advantage on or after January 20, 2009, on the Benefit Year anniversary after you (Single Life) or the younger of you and your spouse (Joint Life) reach age 65, 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: 48 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). If you purchased the Lincoln Lifetime IncomeSM Advantage prior to January 20, 2009, you will not be eligible to receive the 200% Step-up of the Guaranteed Amount until 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. 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 (RMDs) 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 Amount 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 55 = $200,000; Guaranteed Amount =$200,000; Maximum Annual Withdrawal amount = $10,000. After 10 years, at age 65, 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 Joint Life Option) 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 60 months or more after the effective date of the Rider (36 months or more for contractowners who purchased this Rider prior to January 20, 2009), 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 49 include an assisted living or similar facility. For riders purchased on or after January 20, 2009, the admittance to a nursing home must be pursuant to a plan of care provided by a licensed health care practitioner, and the nursing home must be located in the United States. The remaining references to the 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 within the Maximum Annual Withdrawal amount are not subject to surrender charges. 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 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 and will not be subject to surrender charges. If a withdrawal, other than an RMD is made during the Benefit Year, then all amounts withdrawn in excess of the Maximum Annual Withdrawal amount, including amounts attributed to RMDs, will be treated as Excess Withdrawals (see below). 50 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 - $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. Excess Withdrawals will be subject to surrender charges unless one of the waiver of surrender charge provisions set forth in your prospectus is applicable. Continuing with the prior example of the $12,000 withdrawal: the $5,000 Maximum Annual Withdrawal amount is not subject to surrender charges; the $7,000 Excess Withdrawal may be subject to surrender charges. See Charges and Other Deductions - Surrender Charge. 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). Surrender charges will apply unless one of the waiver of surrender charge provisions is applicable. See Charges and Other Deductions - Surrender Charge. 51 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. If you choose to surrender your contract at this time, any applicable surrender charges will apply. You may not elect to receive an increase in contract value if any withdrawal is made, including Maximum Annual Withdrawal amounts or required minimum distributions, 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 purchased the Lincoln Lifetime IncomeSM Advantage Plus option on or after January 20, 2009, your only investment options until the seventh Benefit Year anniversary are to allocate 100% of your contract value to the LVIP Wilshire Conservative Profile Fund (a fund of funds) or to one of the following models: Lincoln SSgA Structured Conservative Model and Lincoln SSgA Conservative Index Model. If you purchased the Lincoln Lifetime IncomeSM Advantage Plus Option prior to January 20, 2009, 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: Lincoln SSgA Structured Conservative Model, Lincoln SSgA Structured Moderate Model, Lincoln SSgA Conservative Index Model and Lincoln SSgA Moderate Index Model. You may not transfer contract value out of these subaccounts/models to any other subaccounts/models 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 exercise of 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. 52 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. 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 53 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 Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage. Owners of the Lincoln Lifetime IncomeSM Advantage rider are guaranteed the ability to purchase i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit in the future even if it is no longer generally available for purchase. Owners of Lincoln Lifetime IncomeSM Advantage are also guaranteed that the annuity factors that are used to calculate the initial Guaranteed Income Benefit under i4LIFE (Reg. TM) Advantage will be the annuity factors in effect as of the day they purchased Lincoln Lifetime IncomeSM Advantage. In addition, owners of Lincoln Lifetime IncomeSM Advantage may in the future purchase the Guaranteed Income Benefit at or below the guaranteed maximum charge that is in effect on the date that they purchase Lincoln Lifetime IncomeSM Advantage. i4LIFE (Reg. TM)Advantage with the Guaranteed Income Benefit for Lincoln Lifetime IncomeSM Advantage purchasers 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 charge for new purchasers in effect for the i4LIFE (Reg. TM) Advantage and the current Guaranteed Income Benefit charge in effect for prior purchasers of Lincoln Lifetime IncomeSM Advantage at the time of election of these benefits. If you use 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. 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 = $150,000 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 = $7,537.50 per year = Guaranteed Amount divided by Guaranteed Income Benefit Table factor applicable to owners of the Lincoln Lifetime IncomeSMAdvantage 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 The Contracts - Death Benefits. 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: 54 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. 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. 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 beneficiary. 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. There are two options that step-up the Guaranteed Amount to a higher level (the contract value at the time of the step-up): Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up or Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase after January 16, 2009. 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 will be limited in how much you can invest in certain subaccounts. See The Contracts - Investment Requirements. We offer other optional riders available for purchase with 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 55 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 SmartSecurity (Reg. TM) 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 surrender charges and 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): 56
Contract Value Guaranteed Amount o Initial purchase payment $50,000 $50,000 $50,000 o 1st Benefit Year Anniversary $54,000 $54,000 o 2nd Benefit Year Anniversary $53,900 $54,000 o 3rd Benefit Year Anniversary $57,000 $57,000
Annual step-ups, if the conditions are met, will continue until (and including) the 10th Benefit Year Anniversary. If you had elected to have the next ten-year period of step-ups begin automatically after the prior ten-year period, annual step-ups, if conditions are met, will continue beginning on the 11th Benefit Year Anniversary. 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: 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 surrender charges or the interest adjustment on the amount withdrawn from the fixed account, if applicable. See The Contracts - Fixed Side of the Contract. If the Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up 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 57 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 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 surrender charges (to the extent that total withdrawals exceed the free amount of withdrawals allowed during a contract year) and an interest adjustment on the amount withdrawn from the fixed account. Refer to the Statement of Additional Information for an example of the interest adjustment calculation. Lifetime Withdrawals. (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: 58 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 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 59 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. 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. 60 i4LIFE (Reg. TM) Advantage Option. Contractowners with an active Lincoln SmartSecurity (Reg. TM) Advantage who decide to terminate the Lincoln SmartSecurity (Reg. TM) Advantage rider and purchase i4LIFE (Reg. TM) Advantage can use any remaining Guaranteed Amount to establish the Guaranteed Income Benefit under the i4LIFE (Reg. TM) Advantage terms and charge in effect at the time of the i4LIFE (Reg. TM) Advantage election. Contractowners may consider this if i4LIFE (Reg. TM) Advantage will provide a higher payout amount. There are many factors to consider when making this decision, including the cost of the riders, the payout amounts and applicable guarantees. You should discuss this decision with your registered representative. See i4LIFE (Reg. TM) Advantage. Availability. The Lincoln SmartSecurity (Reg. TM) Advantage - 1 Year Automatic Step-up option 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 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. The Lincoln SmartSecurity (Reg. TM) Advantage - 5 Year Elective Step-up option is no longer available for purchase. 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 (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 a Guaranteed Income Benefit has been elected. Additional purchase payments will not be accepted once i4LIFE (Reg. TM) Advantage becomes effective for a non-qualified annuity contract. If i4LIFE (Reg. TM) Advantage is selected, the applicable transfer provisions among subaccounts and the fixed account will continue to be those specified in your annuity contract for transfers on or before the annuity commencement date. However, once i4LIFE (Reg. TM) Advantage begins, any automatic withdrawal service will terminate. See The Contracts - Transfers on or Before the Annuity Commencement Date. When you elect i4LIFE (Reg. TM) Advantage 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 61 of your life (or the Secondary Life if applicable) and you will no longer be able to make withdrawals or surrenders or receive a death benefit. If your Account Value is reduced to zero because of withdrawals or market loss, your Access Period ends. We will establish the minimum (currently 5 years) and maximum (currently to age 115 for non-qualified contracts; to age 100 for qualified contracts) Access Periods at the time you elect i4LIFE (Reg. TM) Advantage. Generally, shorter Access Periods will produce a higher initial regular income payment than longer Access Periods. At any time during the Access Period, and subject to the rules in effect at that time, you may extend or shorten the Access Period by sending us notice. Additional restrictions may apply if you are under age 591/2 when you request a change to the Access Period. Currently, if you extend the Access Period, it must be extended at least 5 years. If you change the Access Period, subsequent regular income payments will be adjusted accordingly, and the Account Value remaining at the end of the new Access Period will be applied to continue regular income payments for your life. Additional limitations on issue ages and features may be necessary to comply with the IRC provisions for required minimum distributions. We may reduce or terminate the Access Period for IRA i4LIFE (Reg. TM) Advantage contracts in order to keep the regular income payments in compliance with IRC provisions for required minimum distributions. The minimum Access Period requirements for Guaranteed Income Benefits are longer than the requirements for i4LIFE (Reg. TM) Advantage without a Guaranteed Income Benefit. Shortening the Access Period will terminate the Guaranteed Income Benefit. See The Contracts - Guaranteed Income Benefit with i4LIFE (Reg. TM) Advantage. 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 and Guaranteed Income Benefit payments made as well as any withdrawals taken. After the Access Period ends, the remaining Account Value will be applied to continue regular income payments for your life and the Account Value will be reduced to zero. Regular income payments during the Access Period. i4LIFE (Reg. TM) Advantage provides for variable, periodic regular income payments for as long as an annuitant (or secondary life, if applicable) is living and access to your Account Value during the Access Period. When you elect i4LIFE (Reg. TM) Advantage, you will have to choose the date you will receive the initial regular income payment, the frequency of the payments (monthly, quarterly, semi-annually or annually), how often the payment is recalculated, the length of the Access Period and the assumed investment return. These choices will influence the amount of your regular income payments. Regular income payments must begin within one year of the date you elect i4LIFE (Reg. TM) Advantage. If you do not choose a payment frequency, the default is a monthly frequency. In most states, you may also elect to have regular income payments from non-qualified contracts recalculated only once each year rather than recalculated at the time of each payment. This results in level regular income payments between recalculation dates. Qualified contracts are only recalculated once per year, at the beginning of each calendar year. You also choose the assumed investment return. Return rates of 3%, 4%, 5%, or 6% may be available. The higher the assumed investment return you choose, the higher your initial regular income payment will be and the higher the return must be to increase subsequent regular income payments. You also choose the length of the Access Period. At this time, changes can only be made on periodic income commencement date anniversaries. Regular income payments are not subject to any surrender charges or applicable interest adjustments. See Charges and Other Deductions. For information regarding income tax consequences of regular income payments, see Federal Tax Matters. The amount of the initial regular income payment is determined on the periodic income commencement date by dividing the contract value (or purchase payment if elected at contract issue), less applicable premium taxes by 1000 and multiplying the result by an annuity factor. The annuity factor is based upon: o the age and sex of the annuitant and secondary life, if applicable; o the length of the Access Period selected; o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The annuity factor used to determine the regular income payments reflects the fact that, during the Access Period, you have the ability to withdraw the entire Account Value and that a death benefit of the entire Account Value will be paid to your beneficiary upon your death. These benefits during the Access Period result in a slightly lower regular income payment, during both the Access Period and the Lifetime Income Period, than would be payable if this access was not permitted and no lump-sum death benefit of the full Account Value was payable (The contractowner must elect an Access Period of no less than the minimum Access Period which is currently set at 5 years.) The annuity factor also reflects the requirement that there be sufficient Account Value at the end of the Access Period to continue your regular income payments for the remainder of your life (and/or the secondary life if applicable), during the Lifetime Income Period, with no further access or death benefit. The Account Value will vary with the actual net investment return of the subaccounts selected and the interest credited on the fixed account, which then determines the subsequent regular income payments during the Access Period. Each subsequent regular income payment (unless the levelized option is selected) is determined by dividing the Account Value on the applicable valuation date by 1000 62 and multiplying this result by an annuity factor revised to reflect the declining length of the Access Period. As a result of this calculation, the actual net returns in the Account Value are measured against the assumed investment return to determine subsequent regular income payments. If the actual net investment return (annualized) for the contract exceeds the assumed investment return, the regular income payment will increase at a rate approximately equal to the amount of such excess. Conversely, if the actual net investment return for the contract is less than the assumed investment return, the regular income payment will decrease. For example, if net investment return is 3% higher (annualized) than the assumed investment return, the regular income payment for the next year will increase by approximately 3%. Conversely, if actual net investment return is 3% lower than the assumed investment return, the regular income payment will decrease by approximately 3%. Withdrawals made during the Access Period will also reduce the Account Value that is available for regular income payments, and subsequent regular income payments will be reduced in the same proportion that withdrawals reduce the Account Value. For a joint life option, if either the annuitant or secondary life dies during the Access Period, regular income payments will be recalculated using a revised annuity factor based on the single surviving life, if doing so provides a higher regular income payment. For nonqualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, the Guaranteed Income Benefit (if any) will terminate and the annuity factor will be revised for a non-life contingent regular income payment and regular income payments will continue until the Account Value is fully paid out and the Access Period ends. For qualified contracts, if the annuitant and secondary life, if applicable, both die during the Access Period, i4LIFE (Reg. TM) Advantage (and any Guaranteed Income Benefit if applicable) will terminate. Regular income payments during the Lifetime Income Period. The Lifetime Income Period begins at the end of the Access Period if either the annuitant or secondary life is living. Your earlier elections regarding the frequency of regular income payments, assumed investment return and the frequency of the recalculation do not change. The initial regular income payment during the Lifetime Income Period is determined by dividing the Account Value on the last valuation date of the Access Period by 1000 and multiplying the result by an annuity factor revised to reflect that the Access Period has ended. The annuity factor is based upon: o the age and sex of the annuitant and secondary life (if living); o the frequency of the regular income payments; o the assumed investment return you selected; and o the Individual Annuity Mortality table specified in your contract. The impact of the length of the Access Period and any withdrawals made during the Access Period will continue to be reflected in the regular income payments during the Lifetime Income Period. To determine subsequent regular income payments, the contract is credited with a fixed number of annuity units equal to the initial regular income payment (during the Lifetime Income Period) divided by the annuity unit value (by subaccount). Subsequent regular income payments are determined by multiplying the number of annuity 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. 63 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 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. 64 General Death Benefit Provisions. For all death benefit options, following the Access Period, there is no death benefit. The death benefits also terminate when the Account Value equals zero, because the Access Period terminates. If there is a change in the contractowner, joint owner or annuitant during the life of the contract, for any reason other than death, the only death benefit payable for the new person will be the i4LIFE (Reg. TM) Advantage Account Value death benefit. For non-qualified contracts, upon the death of the contractowner, joint owner or annuitant, the contractowner (or beneficiary) may elect to terminate the contract and receive full payment of the death benefit or may elect to continue the contract and receive regular income payments. Upon the death of the secondary life, who is not also an owner, only the surrender value is paid. If you are the owner of an IRA annuity contract, and there is no secondary life, and you die during the Access Period, the i4LIFE (Reg. TM) Advantage will terminate. A spouse beneficiary may start a new i4LIFE (Reg. TM) Advantage program. If a death occurs during the Access Period, the value of the death benefit will be determined as of the valuation date we approve the payment of the claim. Approval of payment will occur upon our receipt of all the following: 1. proof (e.g. an original certified death certificate), or any other proof of death satisfactory to us; and 2. written authorization for payment; and 3. all required claim forms, fully completed (including selection of a settlement option). Notwithstanding any provision of this contract to the contrary, the payment of death benefits provided under this contract must be made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. Death benefits may be taxable. See Federal Tax Matters. Upon notification to us of the death, regular income payments may be suspended until the death claim is approved. Upon approval, a lump sum payment for the value of any suspended payments will be made as of the date the death claim is approved, and regular income payments will continue, if applicable. The excess, if any, of the death benefit over the Account Value will be credited into the contract at that time. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by us of the claim subject to the laws, regulations and tax code governing payment of death benefits. This payment may be postponed as permitted by the Investment Company Act of 1940. 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. 65 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 A Guaranteed Income Benefit is available for purchase when you elect i4LIFE (Reg. TM) Advantage which ensures that your regular income payments will never be less than a minimum payout floor, regardless of the actual investment performance of your contract. See Charges and Other Deductions for a discussion of the Guaranteed Income Benefit charges. As discussed below, certain features of the Guaranteed Income Benefit may be impacted if you purchased Lincoln SmartSecurity (Reg. TM) Advantage or Lincoln Lifetime IncomeSM Advantage (withdrawal benefit riders) prior to electing i4LIFE (Reg. TM) Advantage with the Guaranteed Income Benefit (annuity payout rider). Refer to the 4LATER (Reg. TM)Advantage section of this prospectus for a discussion of the 4LATER (Reg. TM) Guaranteed Income Benefit. Once the Guaranteed Income Benefit is elected, additional purchase payments cannot be made to the contract. Election of this rider will limit how much you can invest in certain subaccounts. See the Contracts - Investment Requirements. The version of the Guaranteed Income Benefit, the date that you purchased it, and/or whether you previously owned Lincoln Lifetime IncomeSM Advantage will determine which Investment Requirement option applies to you. 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 Account Value as defined in the i4LIFE (Reg. TM) Advantage rider section) 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 (In other words, Guaranteed Income Benefit payments reduce the Account Value by the entire amount of the Guaranteed Income Benefit payment.) (Regular income payments also reduce the Account Value). This 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. Additional amounts withdrawn from the Account Value to provide the Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled, and will reduce your death benefit. If your Account Value equals zero, no 66 death benefit will be paid. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living. 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: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
The contractowner receives an amount equal to the Guaranteed Income Benefit. The entire amount of the Guaranteed Income Benefit is deducted from the Account Value. If you purchased the Guaranteed Income Benefit (version 3) on or after January 20, 2009, the Guaranteed Income Benefit will automatically step-up every year to 75% of the current regular income payment, if that result is greater than the immediately prior Guaranteed Income Benefit. If you purchased the Guaranteed Income Benefit (version 2) prior to January 20, 2009, the Guaranteed Income Benefit will automatically step-up every three years on the periodic income commencement date anniversary to 75% of the current regular income payment, if the result is greater than the immediately prior Guaranteed Income Benefit. The step-up will occur on every periodic income commencement date anniversary during either a 5-year step-up period (version 3) or every third periodic income commencement date anniversary for a 15 year step-up period (version 2). At the end of a step-up period, you may elect a new 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. Step-ups for qualified contracts, including IRAs, will occur on a calendar year basis. At the time of a reset of the step-up period the i4LIFE (Reg. TM) Guaranteed Income Benefit percentage charge may increase subject to the maximum guaranteed charge of 1.50%. This means that your charge may change every five years for version 3 of the Guaranteed Income Benefit or every 15 years for version 2 of the Guaranteed Income Benefit. If we automatically administer a new step-up period for you and if your percentage charge is increased, you may ask us to reverse the step-up by giving us notice within 30 days after the periodic income commencement anniversary. If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. You will have no more step-ups unless you notify us that you wish to start a new step-up period. i4LIFE (Reg. TM) Advantage charges are in addition to the Guaranteed Income Benefit Charges. 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 below in 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. We may change this Access Period requirement prior to election of the Guaranteed Income Benefit. 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 regular income payment frequency; or o upon written notice to us; or 67 o assignment of the contract. A termination due to a decrease in the Access Period, a change in the regular income payment frequency, or upon written notice from the contractowner will be effective as of the valuation date on the next periodic income commencement date anniversary. Termination will be only for the i4LIFE (Reg. TM) Advantage Guaranteed Income Benefit and not the i4LIFE (Reg. TM)Advantage election, unless otherwise specified. 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. 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. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. The following example demonstrates the impact of a withdrawal on the regular income payments and the Guaranteed Income Benefit payments: o i4LIFE (Reg. TM) Regular Income Payment before Withdrawal $ 1,200 o Guaranteed Income Benefit before Withdrawal $ 900 o Account Value at time of Additional Withdrawal $150,000 o Additional Withdrawal $ 15,000 (a 10% withdrawal)
Reduction in i4LIFE (Reg. TM) Regular Income payment for Withdrawal = $1,200 X 10 % = $120 i4LIFE (Reg. TM) Regular Income payment after Withdrawal = $1,200 - $120 = $1,080 Reduction in Guaranteed Income Benefit for Withdrawal = $900 X 10% = $90 Guaranteed Income Benefit after Withdrawal = $900 - $90 = $810 Surrender. At any time prior to or during the Access Period, you may surrender the contract by withdrawing the surrender value. If the contract is surrendered, the contract terminates and no further regular income payments will be made. Withdrawals are subject to any applicable surrender charges except when amounts may be withdrawn free of surrender charges. See Charges and Other Deductions. The interest adjustment may apply. Termination. For IRA annuity contracts, you may terminate i4LIFE (Reg. TM) Advantage prior to the end of the Access Period by notifying us in writing. The termination will be effective on the next valuation date after we receive the notice and your contract will return to the accumulation phase. Your i4LIFE (Reg. TM) Advantage death benefit will terminate and you may choose the Guarantee of Principal (if you had the i4LIFE (Reg. TM) Advantage Guarantee of Principal death benefit) or Account Value death benefit options. Upon termination, we will stop assessing the charge for i4LIFE (Reg. TM) Advantage and begin assessing the mortality and expense risk charge and administrative charge associated with the new death benefit option. Your contract value upon termination will be equal to the Account Value on the valuation date we terminate i4LIFE (Reg. TM) Advantage. For non-qualified contracts, you may not terminate i4LIFE (Reg. TM) Advantage once you have elected it. 4LATER (Reg. TM) Advantage 4LATER (Reg. TM) Advantage is a rider that is available to protect against market loss by providing you with a method to receive a minimum payout from your annuity. The rider provides an Income Base (described below) prior to the time you begin taking payouts from your annuity. If you elect 4LATER (Reg. TM) Advantage, you must elect i4LIFE (Reg. TM) 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 68 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. 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 69 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. 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. 70 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: o i4LIFE (Reg. TM) Account Value before market decline $135,000 o i4LIFE (Reg. TM) Account Value after market decline $100,000 o Guaranteed Income Benefit $ 810 o Regular Income Payment after market decline $ 769 o Account Value after market decline and Guaranteed $ 99,190 Income Benefit payment
If your Account Value reaches zero as a result of withdrawals to provide the 4LATER (Reg. TM) Guaranteed Income Benefit, we will continue to pay you an amount equal to the 4LATER (Reg. TM) Guaranteed Income Benefit. When your Account Value reaches zero, your i4LIFE (Reg. TM) Advantage Access Period will end and the i4LIFE (Reg. TM) Advantage Lifetime Income Period will begin. Additional amounts withdrawn from the Account Value to provide the 4LATER (Reg. TM) Guaranteed Income Benefit may terminate your Access Period earlier than originally scheduled and will reduce your death benefit. See i4LIFE (Reg. TM) Advantage Death Benefits. After the Access Period ends, we will continue to pay the 4LATER (Reg. TM) Guaranteed Income Benefit for as long as the annuitant (or the secondary life, if applicable) is living (i.e., the i4LIFE (Reg. TM) Advantage Lifetime Income Period). If your Account Value equals zero, no death benefit will be paid. If the market performance in your contract is sufficient to provide regular income payments at a level that exceeds the 4LATER (Reg. TM) Guaranteed Income Benefit, the 4LATER (Reg. TM) Guaranteed Income Benefit will never come into effect. The 4LATER (Reg. TM) Advantage Guaranteed Income Benefit will automatically step-up every three years to 75% of the then current regular income payment, if that result is greater than the immediately prior 4LATER (Reg. TM) Guaranteed Income Benefit. The step-up will occur on every third periodic income commencement date anniversary for 15 years. At the end of a 15-year step-up period, the contractowner may elect a new 15-year step-up period by submitting a written request to the 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). If we receive this notice, we will decrease the percentage charge to the amounts they were before the step-up occurred. Increased fees collected during the 30 day period will be refunded into your contract. 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 71 regular income payment and higher Guaranteed Income Benefit payments than longer Access Periods. The minimum Access Period required with the 4LATER (Reg. TM) Guaranteed Income Benefit currently is the longer of 15 years or the difference between your current age (nearest birthday) and age 85. We reserve the right to increase this minimum prior to election of 4LATER (Reg. TM) Advantage, subject to the terms in your rider. (Note: i4LIFE (Reg. TM) Advantage may allow a shorter Access Period if a Guaranteed Income Benefit is not provided.) If you choose to lengthen your Access Period at a later date, thereby recalculating and reducing your regular income payment, your 4LATER (Reg. TM) Guaranteed Income Benefit will also be recalculated and reduced. The 4LATER (Reg. TM) Guaranteed Income Benefit will be adjusted in proportion to the reduction in the regular income payment. If you choose to shorten your Access Period, the 4LATER (Reg. TM) Rider will terminate. 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 - $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. 72 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. 73 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. 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. 74 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. 75 The interest adjustment is calculated by multiplying the transaction amount by: (1+A)n -1 ------------- (1+B +K )n
where: A = yield rate for a U.S. Treasury security with time to maturity equal to the subaccount's guaranteed period, determined at the beginning of the guaranteed period. B = yield rate for a U.S. Treasury security with time to maturity equal to the time remaining in the subaccount's guaranteed period if greater than one year, determined at the time of surrender, withdrawal or transfer. For remaining periods of one year or less, the yield rate for a one year U.S. Treasury security is used. K = a 0.25% adjustment (unless otherwise limited by applicable state law). This adjustment builds into the formula a factor representing direct and indirect costs to us associated with liquidating general account assets in order to satisfy surrender requests. This adjustment of 0.25% has been added to the denominator of the formula because it is anticipated that a substantial portion of applicable general account portfolio assets will be in relatively illiquid securities. Thus, in addition to direct transaction costs, if such securities must be sold (e.g., because of surrenders), the market price may be lower. Accordingly, even if interest rates decline, there will not be a positive adjustment until this factor is overcome, and then any adjustment will be lower than otherwise, to compensate for this factor. Similarly, if interest rates rise, any negative adjustment will be greater than otherwise, to compensate for this factor. If interest rates stay the same, there will be no interest adjustment. n = The number of years remaining in the guaranteed period (e.g., 1 year and 73 days = 1 + (73 divided by 365) = 1.2 years) Straight-Line interpolation is used for periods to maturity not quoted. See the SAI for examples of the application of the interest adjustment. Small Contract Surrenders We may surrender your contract, in accordance with the laws of your state if: o your contract value drops below certain state specified minimum amounts ($1,000 or less) for any reason, including if your contract value decreases due to the performance of the subaccounts you selected; o no purchase payments have been received for two (2) full, consecutive contract years; and o the paid up annuity benefit at maturity would be less than $20.00 per month (these requirements may differ in some states). At least 60 days before we surrender your contract, we will send you a letter at your last address we have on file, to inform you that your contract will be surrendered. You will have the opportunity to make additional purchase payments to bring your contract value above the minimum level to avoid surrender. If we surrender your contract, we will not assess any surrender charge. 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, (including previously credited bonus credits), and we will recredit that portion of the surrender/withdrawal charges attributable to the amount returned. This election must be made by your written authorization to us on an approved Lincoln reinvestment form and received in our 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 76 office. You may utilize the reinvestment privilege only once. For tax reporting purposes, we will treat a surrender/withdrawal and a subsequent reinvestment purchase as separate transactions (and a Form 1099 may be issued, if applicable). You should consult a tax adviser before you request a surrender/withdrawal or subsequent reinvestment purchase. Amendment of Contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Any changes are subject to prior approval of your state's insurance department (if required). Distribution of the Contracts Lincoln Financial Distributors, Inc. ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln Life and is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a member of FINRA. The Principal Underwriter has entered into selling agreements with Lincoln Financial Advisors Corporation ("LFA"), also an affiliate of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us ("Selling Firms"). While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. 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 7.50% of purchase payments. 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 7.50% 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 7.50% 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 7.50% 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 2008 is contained in the SAI. 77 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 decedent; o Certain qualified contracts; o Contracts purchased by employers upon the termination of certain qualified plans; and o Certain contracts used in connection with structured settlement agreements. Investments In The VAA Must Be Diversified For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be "adequately diversified." IRS regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the 78 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 subject to an exclusion ratio that is determined based on the amount of the payment. Taxation Of Death Benefits We may distribute amounts from your contract because of the death of a contractowner or an annuitant. The tax treatment of these amounts depends on whether you or the annuitant dies before or after the annuity commencement date. Death prior to the annuity commencement date: o If the beneficiary receives death benefits under an annuity payout option, they are taxed in the same manner as annuity payouts. o If the beneficiary does not receive death benefits under an annuity payout option, they are taxed in the same manner as a withdrawal. Death after the annuity commencement date: o If death benefits are received in accordance with the existing annuity payout option, they are excludible from income if they do not exceed the purchase payments not yet distributed from the contract. All annuity payouts in excess of the purchase payments not previously received are includible in income. o If death benefits are received in a lump sum, the tax law imposes tax on the amount of death benefits which exceeds the amount of purchase payments not previously received. 79 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. 80 We will amend contracts to be used with a qualified plan as generally necessary to conform to the tax law requirements for the type of plan. However, the rights of a person to any qualified plan benefits may be subject to the plan's terms and conditions, regardless of the contract's terms and conditions. In addition, we are not bound by the terms and conditions of qualified plans to the extent such terms and conditions contradict the contract, unless we consent. Pursuant to new tax regulations, starting September 24, 2007, the contract is not available for purchase under a 403(b) plan and since July 31, 2008, we do not accept additional premiums or transfers to existing 403(b) contracts. Also, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that surrenders, loans or transfers you request comply with applicable tax requirements and to decline requests that are not in compliance. We will defer processing payments you request until all information required under the tax law has been received. By requesting a surrender, loan or transfer, you consent to the sharing of confidential information about you, your contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified plans and qualified contracts vary with the type of plan and contract. For example: o Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified plan and the plan participant's specific circumstances, e.g., the participant's compensation. o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, as described below. o Loans are allowed under certain types of qualified plans, but Federal income tax rules prohibit loans under other types of qualified plans. For example, Federal income tax rules permit loans under some section 403(b) plans, but prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject to a variety of limitations, including restrictions as to the loan amount, the loan's duration, the rate of interest, and the manner of repayment. Your contract or plan may not permit loans. Tax Treatment of Payments The Federal income tax rules generally include distributions from a qualified contract in the participant's income as ordinary income. These taxable distributions will include purchase payments that were deductible or excludible from income. Thus, under many qualified contracts, the total amount received is included in income since a deduction or exclusion from income was taken for purchase payments. There are exceptions. For example, you do not include amounts received from a Roth IRA in income if certain conditions are satisfied. Required Minimum Distributions Under most qualified plans, you must begin receiving payments from the contract in certain minimum amounts by the later of age 701/2 or retirement. You are required to take distributions from your traditional IRAs beginning in the year you reach age 701/2. If you own a Roth IRA, you are not required to receive minimum distributions from your Roth IRA during your life. Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan. The IRS 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. Congress enacted The Worker, Retiree, and Employer recovery Act of 2008 (the Act) in December, 2008. The Act includes a number of relief provisions, including the suspension of the RMD requirement for IRAs and certain qualified plans in 2009. You should consult your tax advisor to determine whether the RMD relief applies to your annuity contract. If your RMD is currently paid automatically each year, Lincoln will not make any changes to your payments for 2009 unless you specifically request that a change be made. 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 81 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. Federal Income Tax Withholding We will withhold and remit to the IRS a part of the taxable portion of each distribution made under a contract unless you notify us prior to the distribution that tax is not to be withheld. In certain circumstances, Federal income tax rules may require us to withhold tax. At the time a withdrawal, surrender, or annuity payout is requested, we will give you an explanation of the withholding requirements. Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans. Our Tax Status Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes. Changes in the Law The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by applying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a "quorum"), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the 82 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 surrender charges or interest adjustment will apply. A purchaser who participates in the VAA is subject to the risk of a market loss on the contract value during the free-look period. For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return the greater of the purchase payment(s) or contract value as of the valuation date we receive the cancellation request, plus any premium taxes that had been deducted. IRA purchasers will also receive the greater of purchase payments or contract value as of the valuation date. State Regulation As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Department of Insurance at all times. A full examination of our operations is conducted by that Department at least every five years. Records and Reports As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Home office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Other Information 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.LincolnFinancial.com, select service centers and continue on through the Internet Service Center. Special Arrangements At times, we may offer variations of the contracts described in this prospectus to existing owners as part of an exchange program. Contracts purchased through this exchange offer may impose different fees and expenses and provide certain additional benefits from those described in this prospectus. 83 Legal Proceedings In the ordinary course of its business, Lincoln Life, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of Lincoln Life, the financial position of the VAA, or the principal underwriter. 84 Contents of the Statement of Additional Information (SAI) for Lincoln Life Variable Annuity Account N
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Interest Adjustment Example Annuity Payouts Examples of Regular Income Payment Calculations Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below: Statement of Additional Information Request Card Lincoln ChoicePlus AssuranceSM (B 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 Lincoln ChoicePlus AssuranceSM (B Share). (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- 85 Mail to The Lincoln National Life Insurance Company, PO Box 7866, Fort Wayne, Indiana 46801. 86 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 . 12.095 11.906 2 14.629 14.420 3 14.673 14.473 15 2007 . 11.906 13.086 2 14.420 15.880 3 14.473 15.955 14 2008 . 13.086 7.385 2 15.880 8.980 2 15.955 9.031 12 --------- ------ ------ - ------ ------ - ------ ------ -- AIM V.I. Core Equity 2006 . 10.725 11.560 1 13.332 14.389 3 13.371 14.442 58 2007 . 11.560 12.267 1 14.389 15.300 3 14.442 15.371 57 2008 . 12.267 8.408 1 15.300 10.507 2 15.371 10.566 56 --------- ------ ------ - ------ ------ - ------ ------ -- AIM V.I. International Growth Fund 2003 . N/A N/A N/A 10.728 12.485 3,260 10.612 12.492 9,072 2004 . N/A N/A N/A 12.485 15.222 9 12.492 15.246 25 2005 . N/A N/A N/A 15.222 17.659 9 15.246 17.704 29 2006 . N/A N/A N/A 17.659 22.258 8 17.704 22.337 30 2007 . N/A N/A N/A 22.258 25.107 9 22.337 25.221 30 2008 . N/A N/A N/A 25.107 14.712 8 25.221 14.794 25 --------- ------ ------ ----- ------ ------ ----- ------ ------ ----- AllianceBernstein VPS Global Technology 2003 . 2.788 3.944 96 10.996 13.000 2,557 11.495 13.009 23,491 2004 . N/A N/A N/A 3.944 4.076 1* 13.009 13.487 55 2005 . 4.076 4.156 2 13.465 13.757 14 13.487 13.791 50 2006 . 4.156 4.431 18 13.757 14.695 13 13.791 14.747 44 2007 . 4.431 5.226 8 14.695 17.365 14 14.747 17.443 35 2008 . 5.226 2.700 9 17.365 8.991 20 17.443 9.041 29 --------- ------ ------ ----- ------ ------ ----- ------ ------ ------ AllianceBernstein VPS Growth and Income 2003 . 7.889 10.257 27,102 10.886 12.021 144,888 10.979 12.029 145,258 2004 . 10.257 11.221 53 12.021 13.178 429 12.029 13.199 804 2005 . 11.221 11.545 81 13.178 13.585 656 13.199 13.621 1,146 2006 . 11.545 13.285 80 13.585 15.664 591 13.621 15.721 1,048 2007 . 13.285 13.703 75 15.664 16.188 511 15.721 16.263 937 2008 . 13.703 7.993 51 16.188 9.462 462 16.263 9.516 816 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- AllianceBernstein VPS International Value 2006 . 10.950 11.842 5 10.298 11.857 21 9.652 11.864 94 2007 . 11.842 12.297 7 11.857 12.337 89 11.864 12.357 166 2008 . 12.297 5.651 5 12.337 5.680 98 12.357 5.695 106 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- AllianceBernstein VPS Large Cap Growth 2003 . N/A N/A N/A 10.498 11.502 3,830 10.400 11.509 4,335 2004 . 5.186 5.527 1 11.502 12.282 38 11.509 12.302 55 2005 . 5.527 6.243 10 12.282 13.902 61 12.302 13.939 69 2006 . 6.243 6.101 2 13.902 13.614 49 13.939 13.664 63 2007 . 6.101 6.819 2 13.614 15.247 49 13.664 15.318 50 2008 . 6.819 4.036 1 15.247 9.043 44 15.318 9.095 40 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- AllianceBernstein VPS Small/Mid Cap Value 2003 . 10.936 15.156 158 11.038 13.135 17,359 10.968 13.143 22,549 2004 . 15.156 17.751 4 13.135 15.415 84 13.143 15.440 180 2005 . 17.751 18.619 4 15.415 16.201 166 15.440 16.243 264 2006 . 18.619 20.915 2 16.201 18.235 182 16.243 18.301 266 2007 . 20.915 20.887 3 18.235 18.247 163 18.301 18.331 247 2008 . 20.887 13.201 3 18.247 11.556 144 18.331 11.620 246 --------- ------ ------ ------ ------ ------ ------- ------ ------ -------
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 Century Investments VP Inflation Protection Fund 2003 . 2004 . 9.905 10.404 5 9.949 10.417 145 10.000 10.423 350 2005 . 10.404 10.393 21 10.417 10.427 638 10.423 10.443 1,052 2006 . 10.393 10.384 32 10.427 10.439 687 10.443 10.466 1,048 2007 . 10.384 11.185 32 10.439 11.267 524 10.466 11.307 931 2008 . 11.185 10.826 44 11.267 10.927 508 11.307 10.977 1,049 --------- ------ ------ -- ------ ------ --- ------ ------ ----- American Funds Global Growth Fund 2003 . 2004 . 10.216 11.266 4 10.199 11.280 99 10.000 11.286 179 2005 . 11.266 12.641 15 11.280 12.682 321 11.286 12.702 413 2006 . 12.641 14.975 17 12.682 15.053 344 12.702 15.092 425 2007 . 14.975 16.917 15 15.053 17.039 371 15.092 17.101 449 2008 . 16.917 10.252 17 17.039 10.347 351 17.101 10.394 432 --------- ------ ------ -- ------ ------ --- ------ ------ ----- American Funds Global Small Capitalization Fund 2003 . 5.627 8.497 5,265 11.232 14.143 41,776 10.747 14.152 38,793 2004 . 8.497 10.104 18 14.143 16.850 208 14.152 16.878 287 2005 . 10.104 12.458 23 16.850 20.818 309 16.878 20.873 446 2006 . 12.458 15.201 26 20.818 25.454 313 20.873 25.546 454 2007 . 15.201 18.157 20 25.454 30.464 293 25.546 30.605 432 2008 . 18.157 8.301 19 30.464 13.955 251 30.605 14.034 365 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ American Funds Growth Fund 2003 . 5.368 7.224 63,366 10.899 12.326 428,135 10.694 12.333 578,843 2004 . 7.224 7.993 148 12.326 13.666 1,680 12.333 13.689 3,051 2005 . 7.993 9.136 240 13.666 15.651 2,816 13.689 15.692 4,322 2006 . 9.136 9.904 235 15.651 17.001 2,656 15.692 17.063 4,020 2007 . 9.904 10.945 223 17.001 18.826 2,488 17.063 18.913 3,738 2008 . 10.945 6.032 166 18.826 10.396 2,235 18.913 10.455 3,396 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- American Funds Growth-Income Fund 2003 . 8.456 11.015 31,468 10.816 12.300 521,408 10.609 12.308 710,289 2004 . 11.015 11.959 106 12.300 13.381 2,087 12.308 13.403 3,755 2005 . 11.959 12.449 166 13.381 13.957 3,277 13.403 13.994 5,239 2006 . 12.449 14.107 192 13.957 15.848 3,178 13.994 15.905 4,799 2007 . 14.107 14.576 191 15.848 16.407 2,930 15.905 16.483 4,378 2008 . 14.576 8.911 145 16.407 10.051 2,527 16.483 10.107 3,790 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- American Funds International Fund 2003 . 5.168 6.855 26,676 10.747 13.207 96,534 10.621 13.215 152,661 2004 . 6.855 8.045 65 13.207 15.532 600 13.215 15.557 1,009 2005 . 8.045 9.615 94 15.532 18.600 897 15.557 18.649 1,515 2006 . 9.615 11.253 90 18.600 21.812 896 18.649 21.890 1,517 2007 . 11.253 13.285 81 21.812 25.802 835 21.890 25.921 1,435 2008 . 13.285 7.563 69 25.802 14.718 747 25.921 14.801 1,294 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Delaware VIP Capital Reserves 2005 . N/A N/A N/A 10.001 9.933 4 9.904 9.939 4 2006 . N/A N/A N/A 9.933 10.214 11 9.939 10.230 49 2007 . N/A N/A N/A 10.214 10.493 13 10.230 10.520 41 2008 . 10.207 10.202 15 10.493 10.275 37 10.520 10.311 90 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Delaware VIP Diversified Income Series 2003 . 2004 . 10.207 10.872 4 10.031 10.885 238 10.081 10.891 407 2005 . 10.872 10.631 29 10.885 10.665 592 10.891 10.682 1,114 2006 . 10.631 11.248 28 10.665 11.307 613 10.682 11.336 1,130 2007 . 11.248 11.884 34 11.307 11.970 808 11.336 12.013 1,290 2008 . 11.884 11.117 42 11.970 11.220 728 12.013 11.272 1,406 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Delaware VIP Emerging Markets Series(4) 2003 . 2004 . 14.457 19.360 1* 10.279 13.580 26 10.258 13.588 51 2005 . 19.360 24.206 2 13.580 17.013 177 13.588 17.041 255 2006 . 24.206 30.194 2 17.013 21.265 166 17.041 21.320 289 2007 . 30.194 41.137 3 21.265 29.029 163 21.320 29.134 287 2008 . 41.137 19.550 4 29.029 13.824 138 29.134 13.888 258 --------- ------ ------ ------ ------ ------ ------- ------ ------ -------
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 High Yield Series 2003 . 8.425 10.658 7,097 10.207 11.081 127,137 10.169 11.088 219,400 2004 . 10.658 11.953 28 11.081 12.453 374 11.088 12.473 788 2005 . 11.953 12.151 30 12.453 12.684 529 12.473 12.718 1,049 2006 . 12.151 13.409 28 12.684 14.026 501 12.718 14.077 1,020 2007 . 13.409 13.526 29 14.026 14.176 472 14.077 14.242 907 2008 . 13.526 10.054 13 14.176 10.559 390 14.242 10.619 805 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- Delaware VIP REIT Series 2003 . 11.748 15.453 4,172 10.208 12.201 83,809 10.623 12.209 124,330 2004 . 15.453 19.926 11 12.201 15.764 354 12.209 15.789 622 2005 . 19.926 20.944 17 15.764 16.602 459 15.789 16.646 888 2006 . 20.944 27.260 19 16.602 21.653 434 16.646 21.731 811 2007 . 27.260 23.012 17 21.653 18.315 364 21.731 18.400 646 2008 . 23.012 14.648 11 18.315 11.682 315 18.400 11.747 512 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- Delaware VIP Small Cap Value Series 2003 . 12.061 16.806 6,379 11.155 13.172 98,937 10.703 13.180 111,701 2004 . 16.806 20.029 12 13.172 15.729 345 13.180 15.755 555 2005 . 20.029 21.504 18 15.729 16.921 509 15.755 16.965 864 2006 . 21.504 24.512 20 16.921 19.327 524 16.965 19.397 854 2007 . 24.512 22.462 20 19.327 17.746 437 19.397 17.828 765 2008 . 22.462 15.451 16 17.746 12.231 379 17.828 12.300 643 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- Delaware VIP Trend Series 2003 . 5.075 6.729 16,177 11.055 12.554 123,911 10.668 12.562 135,197 2004 . 6.729 7.434 44 12.554 13.897 380 12.562 13.920 657 2005 . 7.434 7.723 53 13.897 14.466 461 13.920 14.504 741 2006 . 7.723 8.154 48 14.466 15.304 365 14.504 15.359 695 2007 . 8.154 8.859 46 15.304 16.661 283 15.359 16.738 584 2008 . 8.859 4.630 33 16.661 8.726 240 16.738 8.775 473 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Delaware VIP US Growth Series 2003 . 8.101 9.830 16,463 10.533 11.473 51,438 10.619 11.480 86,721 2004 . 9.830 9.962 38 11.473 11.650 186 11.480 11.669 447 2005 . 9.962 11.211 38 11.650 13.137 177 11.669 13.171 483 2006 . 11.211 11.254 24 13.137 13.214 148 13.171 13.262 479 2007 . 11.254 12.440 26 13.214 14.636 129 13.262 14.703 417 2008 . 12.440 6.992 18 14.636 8.243 112 14.703 8.289 322 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Delaware VIP Value Series 2003 . 8.712 10.978 2,552 11.075 12.053 12,322 10.704 12.060 63,785 2004 . 10.978 12.373 7 12.053 13.612 67 12.060 13.634 290 2005 . 12.373 12.876 13 13.612 14.193 193 13.634 14.230 508 2006 . 12.876 15.678 12 14.193 17.317 238 14.230 17.380 604 2007 . 15.678 14.960 12 17.317 16.557 217 17.380 16.633 566 2008 . 14.960 9.775 8 16.557 10.840 175 16.633 10.901 458 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- DWS VIP Equity 500 Index 2003 . 10.870 12.029 5,922 10.775 12.044 62,101 10.931 12.052 79,533 2004 . 12.029 13.053 14 12.044 13.095 158 12.052 13.117 322 2005 . 13.053 13.406 31 13.095 13.477 228 13.117 13.512 410 2006 . 13.406 15.197 30 13.477 15.308 215 13.512 15.363 377 2007 . 15.197 15.701 30 15.308 15.847 185 15.363 15.920 319 2008 . 15.701 9.677 25 15.847 9.787 148 15.920 9.842 304 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- DWS VIP Small Cap Index 2003 . 11.470 13.527 1,879 11.221 13.543 16,399 11.588 13.552 31,979 2004 . 13.527 15.631 2 13.543 15.681 56 13.552 15.707 149 2005 . 15.631 15.989 2 15.681 16.073 106 15.707 16.115 221 2006 . 15.989 18.431 4 16.073 18.565 106 16.115 18.632 227 2007 . 18.431 17.738 4 18.565 17.902 91 18.632 17.985 213 2008 . 17.738 11.458 1 17.902 11.588 53 17.985 11.653 172 --------- ------ ------ ------ ------ ------ ------- ------ ------ -------
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.) Fidelity VIP Contrafund Portfolio 2003 . 9.726 12.264 7,863 10.656 12.264 40,036 10.434 12.272 56,255 2004 . 12.264 13.892 23 12.264 13.920 322 12.272 13.942 601 2005 . 13.892 15.941 35 13.920 16.008 660 13.942 16.049 1,109 2006 . 15.941 17.473 43 16.008 17.581 791 16.049 17.644 1,196 2007 . 17.473 20.161 36 17.581 20.326 673 17.644 20.420 1,144 2008 . 20.161 11.365 40 20.326 11.481 607 20.420 11.545 997 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Fidelity VIP Equity-Income Portfolio 2003 . 8.250 10.552 1,323 10.728 12.407 30,223 10.627 12.415 69,948 2004 . 10.552 11.545 7 12.407 13.602 143 12.415 13.624 361 2005 . 11.545 11.989 18 13.602 14.153 367 13.624 14.190 618 2006 . 11.989 14.143 18 14.153 16.730 364 14.190 16.790 589 2007 . 14.143 14.088 16 16.730 16.699 300 16.790 16.776 527 2008 . 14.088 7.925 15 16.699 9.412 283 16.776 9.465 468 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Fidelity VIP Growth Portfolio 2003 . 4.630 6.037 2,306 11.147 12.297 6,669 10.614 12.305 22,673 2004 . 6.037 6.123 10 12.297 12.498 72 12.305 12.519 177 2005 . 6.123 6.355 23 12.498 12.996 180 12.519 13.031 316 2006 . 6.355 6.661 32 12.996 13.651 164 13.031 13.701 307 2007 . 6.661 8.299 23 13.651 17.042 135 13.701 17.121 284 2008 . 8.299 4.301 16 17.042 8.850 130 17.121 8.900 242 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Fidelity VIP Mid Cap 2005 . 10.237 11.564 1* 10.465 11.577 68 10.114 11.584 59 2006 . 11.564 12.786 5 11.577 12.826 188 11.584 12.846 173 2007 . 12.786 14.506 7 12.826 14.580 163 12.846 14.618 224 2008 . 14.506 8.617 9 14.580 8.679 164 14.618 8.710 268 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Fidelity VIP Overseas Portfolio 2003 . 5.218 7.342 16,838 11.237 14.198 40,179 10.974 14.206 76,691 2004 . 7.342 8.184 40 14.198 15.856 200 14.206 15.882 450 2005 . 8.184 9.562 74 15.856 18.563 361 15.882 18.612 667 2006 . 9.562 11.077 59 18.563 21.548 305 18.612 21.626 597 2007 . 11.077 12.754 55 21.548 24.859 239 21.626 24.974 520 2008 . 12.754 7.030 42 24.859 13.730 215 24.974 13.808 428 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------ FTVIPT Franklin Income Securities 2006 . 10.525 11.222 9 10.189 11.236 47 10.184 11.243 122 2007 . 11.222 11.453 16 11.236 11.490 111 11.243 11.509 271 2008 . 11.453 7.925 17 11.490 7.966 115 11.509 7.987 256 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------ FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2003 . 4.702 6.348 10,500 10.812 12.960 17,276 10.734 12.968 22,352 2004 . 6.348 6.961 25 12.960 14.239 80 12.968 14.262 185 2005 . 6.961 7.175 24 14.239 14.706 133 14.262 14.744 216 2006 . 7.175 7.671 25 14.706 15.754 124 14.744 15.811 214 2007 . 7.671 8.394 19 15.754 17.273 107 15.811 17.353 180 2008 . 8.394 4.748 16 17.273 9.789 115 17.353 9.845 143 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------ FTVIPT Mutual Shares Securities 2006 . 10.451 11.267 4 10.202 11.280 44 10.234 11.287 86 2007 . 11.267 11.467 6 11.280 11.502 154 11.287 11.520 190 2008 . 11.467 7.093 16 11.502 7.129 180 11.520 7.148 204 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------ FTVIPT Templeton Global Income Securities 2005 . N/A N/A N/A 10.009 9.884 4 9.810 9.890 5 2006 . N/A N/A N/A 9.884 10.986 53 9.890 11.003 21 2007 . 11.526 11.958 6 10.986 12.019 111 11.003 12.050 90 2008 . 11.958 12.492 8 12.019 12.581 213 12.050 12.626 380 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------ FTVIPT Templeton Growth Securities Fund 2003 . N/A N/A N/A 10.908 12.697 25,088 10.947 12.705 38,371 2004 . 10.322 11.780 2 12.697 14.520 108 12.705 14.544 213 2005 . 11.780 12.614 10 14.520 15.580 236 14.544 15.620 350 2006 . 12.614 15.114 14 15.580 18.704 250 15.620 18.772 371 2007 . 15.114 15.215 16 18.704 18.868 246 18.772 18.955 350 2008 . 15.215 8.632 8 18.868 10.725 178 18.955 10.786 277 --------- ------ ------ ------ ------ ------ ------ ------ ------ ------
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.) Janus Aspen Balanced Portfolio 2003 . 9.786 10.947 5,918 10.056 10.853 58,774 10.311 10.860 47,831 2004 . 10.947 11.660 1 10.853 11.584 111 10.860 11.603 156 2005 . 11.660 12.348 1 11.584 12.292 140 11.603 12.324 191 2006 . 12.348 13.411 1 12.292 13.377 168 12.324 13.425 174 2007 . 13.411 14.549 1 13.377 14.541 168 13.425 14.608 146 2008 . 14.549 12.012 1* 14.541 12.030 157 14.608 12.097 119 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Janus Aspen Mid-Cap Growth Portfolio 2003 . N/A N/A N/A 10.825 12.411 4,426 11.055 12.419 14,502 2004 . 10.668 12.642 1 12.411 14.737 28 12.419 14.761 57 2005 . 12.642 13.930 2 14.737 16.272 51 14.761 16.314 79 2006 . 13.930 15.525 2 16.272 18.171 46 16.314 18.237 73 2007 . 15.525 18.592 2 18.171 21.804 62 18.237 21.904 60 2008 . 18.592 10.267 2 21.804 12.065 33 21.904 12.133 45 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Janus Aspen Worldwide Growth Portfolio 2003 . 8.412 10.234 1,162 10.857 12.217 6,805 10.586 12.225 8,229 2004 . 10.234 10.522 2 12.217 12.587 11 12.225 12.607 20 2005 . 10.522 10.926 1 12.587 13.096 10 12.607 13.130 16 2006 . 10.926 12.675 1 13.096 15.223 8 13.130 15.278 16 2007 . 12.675 13.635 1 15.223 16.408 6 15.278 16.484 15 2008 . N/A N/A N/A 16.408 8.926 7 16.484 8.976 4 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Baron Growth Opportunities(4) 2006 . N/A N/A N/A 9.284 10.629 2 10.172 10.636 5 2007 . 11.349 10.800 10 10.629 10.835 33 10.636 10.853 35 2008 . 10.800 6.465 7 10.835 6.499 44 10.853 6.517 123 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Capital Growth 2007 . N/A N/A N/A 9.772 10.714 2 9.772 10.721 4 2008 . N/A N/A N/A 10.714 6.153 1 10.721 6.163 4 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Cohen & Steers Global Real Estate 2007 . 8.693 8.218 8 9.558 8.228 90 10.087 8.233 59 2008 . 8.218 4.674 3 8.228 4.689 84 8.233 4.697 156 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Columbia Value Opportunities 2007 . N/A N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 8.238 6.081 1* 8.344 6.091 16 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Core Fund(1) 2005 . N/A N/A N/A 10.045 10.257 1 9.977 10.263 2 2006 . N/A N/A N/A 10.257 11.490 5 10.263 11.508 3 --------- ------ ------ ----- ------ ------ ------ ------ ------ ------ Lincoln VIP Delaware Bond 2003 . 9.965 10.014 52,492 10.166 10.026 498,436 10.107 10.033 1,042,567 2004 . 10.014 10.347 152 10.026 10.381 1,805 10.033 10.398 3,914 2005 . 10.347 10.421 221 10.381 10.475 2,951 10.398 10.503 5,210 2006 . 10.421 10.706 217 10.475 10.784 2,808 10.503 10.823 4,889 2007 . 10.706 11.076 208 10.784 11.178 2,561 10.823 11.230 4,605 2008 . 11.076 10.539 122 11.178 10.658 1,988 11.230 10.718 3,729 --------- ------ ------ ------ ------ ------ ------- ------ ------ --------- Lincoln VIP Delaware Growth and Income 2005 . N/A N/A N/A N/A N/A N/A 10.079 10.382 1 2006 . N/A N/A N/A 10.753 11.462 7 10.382 11.481 18 2007 . N/A N/A N/A 11.462 11.958 51 11.481 11.989 53 2008 . N/A N/A N/A 11.958 7.544 53 11.989 7.571 104 --------- ------ ------ ------ ------ ------ ------- ------ ------ --------- Lincoln VIP Delaware Social Awareness 2003 . 11.029 12.260 19,777 10.888 12.275 64,861 10.996 12.282 122,171 2004 . 12.260 13.557 45 12.275 13.601 302 12.282 13.623 607 2005 . 13.557 14.902 59 13.601 14.980 465 13.623 15.020 829 2006 . 14.902 16.421 49 14.980 16.540 399 15.020 16.600 752 2007 . 16.421 16.590 41 16.540 16.744 348 16.600 16.821 669 2008 . 16.590 10.666 32 16.744 10.786 304 16.821 10.847 522 --------- ------ ------ ------ ------ ------ ------- ------ ------ --------- Lincoln VIP Delaware Special Opportunities 2007 . N/A N/A N/A 9.204 9.151 6 9.800 9.156 5 2008 . N/A N/A N/A 9.151 5.695 15 9.156 5.704 26 --------- ------ ------ ------ ------ ------ ------- ------ ------ ---------
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 VIP FI Equity-Income 2005 . N/A N/A N/A 9.986 10.484 7 10.035 10.490 3 2006 . N/A N/A N/A 10.484 11.469 6 10.490 11.487 2 2007 . N/A N/A N/A 11.469 11.766 5 11.487 11.797 3 2008 . N/A N/A N/A 11.766 7.134 3 11.797 7.160 3 --------- -- -- - ------ ------ - ------ ------ - Lincoln VIP Growth Fund(2) 2005 . N/A N/A N/A 10.007 10.831 2 10.012 10.837 5 2006 . N/A N/A N/A 10.831 11.306 1 10.837 11.324 5 --------- -- -- - ------ ------ - ------ ------ - Lincoln VIP Growth Opportunities(3) 2005 . N/A N/A N/A 11.468 11.452 2 11.148 11.459 4 2006 . N/A N/A N/A 11.452 12.404 2 11.459 12.424 5 --------- -- -- - ------ ------ - ------ ------ - Lincoln VIP Janus Capital Appreciation 2003 . 11.419 12.186 88 10.833 12.203 1,011 10.487 12.211 10,769 2004 . 12.186 12.587 1 12.203 12.630 27 12.211 12.651 60 2005 . 12.587 12.869 5 12.630 12.939 83 12.651 12.974 127 2006 . 12.869 13.849 5 12.939 13.952 79 12.974 14.003 109 2007 . 13.849 16.362 4 13.952 16.517 66 14.003 16.594 102 2008 . 16.362 9.501 6 16.517 9.610 64 16.594 9.664 86 --------- ------ ------ ----- ------ ------ ----- ------ ------ ------ Lincoln VIP Marsico International Growth 2007 . 11.465 11.146 10 9.717 11.159 36 9.718 11.166 11 2008 . 11.146 5.584 4 11.159 5.602 21 11.166 5.611 37 --------- ------ ------ ----- ------ ------ ----- ------ ------ ------ Lincoln VIP MFS Value 2007 . N/A N/A N/A 9.709 9.718 3 9.710 9.724 5 2008 . 6.383 6.449 3 9.718 6.469 70 9.724 6.480 230 --------- ------ ------ ----- ------ ------ ----- ------ ------ ------ Lincoln VIP Mid-Cap Value 2007 . N/A N/A N/A 9.785 8.646 6 9.785 8.651 13 2008 . N/A N/A N/A 8.646 5.040 53 8.651 5.048 10 --------- ------ ------ ----- ------ ------ ----- ------ ------ ------ Lincoln VIP Mondrian International Value 2003 . 10.919 13.129 28,404 10.999 13.145 102,569 10.713 13.153 158,565 2004 . 13.129 15.580 55 13.145 15.630 366 13.153 15.655 759 2005 . 15.580 17.203 63 15.630 17.294 592 15.655 17.339 1,123 2006 . 17.203 21.945 57 17.294 22.105 538 17.339 22.185 1,046 2007 . 21.945 24.005 50 22.105 24.228 467 22.185 24.340 935 2008 . 24.005 14.920 35 24.228 15.089 398 24.340 15.174 763 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP Money Market Fund 2003 . 9.982 9.919 23,059 9.994 9.931 83,571 9.993 9.937 215,198 2004 . 9.919 9.818 33 9.931 9.849 379 9.937 9.865 864 2005 . 9.818 9.902 39 9.849 9.954 634 9.865 9.980 1,447 2006 . 9.902 10.170 57 9.954 10.244 557 9.980 10.281 1,335 2007 . 10.170 10.474 36 10.244 10.571 815 10.281 10.620 1,568 2008 . 10.474 10.518 88 10.571 10.637 1,118 10.620 10.697 2,410 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA Bond Index 2008 . N/A N/A N/A 10.074 10.467 194 10.062 10.473 91 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA Developed International 150 2008 . N/A N/A N/A 9.486 6.265 29 9.554 6.268 16 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA Emerging Markets 100 2008 . N/A N/A N/A 9.735 6.057 24 9.473 6.060 17 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA International Index 2008 . N/A N/A N/A 9.605 6.402 46 9.691 6.405 33 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA Large Cap 100 2008 . N/A N/A N/A 9.502 6.978 56 9.490 6.982 30 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA S&P 500 Index 2007 . N/A N/A N/A 11.486 11.379 9 11.508 11.408 32 2008 . N/A N/A N/A 11.379 7.027 157 11.408 7.052 72 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Lincoln VIP SSgA Small Cap Index 2007 . N/A N/A N/A 9.913 9.156 42 9.914 9.161 8 2008 . N/A N/A N/A 9.156 5.943 16 9.161 5.953 40 --------- ------ ------ ------ ------ ------ ------- ------ ------ -------
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.) Lincoln VIP SSgA Small/Mid Cap 200 2008 . N/A N/A N/A 9.957 7.229 21 9.170 7.233 14 --------- -- -- --- ----- ----- -- ----- ----- -- Lincoln VIP T. Rowe Price Growth Stock 2007 . N/A N/A N/A 9.841 9.933 3 9.841 9.939 4 2008 . N/A N/A N/A 9.933 5.679 12 9.939 5.688 12 --------- -- -- --- ----- ----- -- ----- ----- -- Lincoln VIP T. Rowe Price Structured Mid-Cap Growth 2003 . N/A N/A N/A 11.098 12.336 9,123 10.989 12.343 2,985 2004 . 12.722 13.739 24 12.336 13.784 11 12.343 13.806 12 2005 . 13.739 14.805 24 13.784 14.882 52 13.806 14.921 21 2006 . 14.805 15.873 24 14.882 15.988 49 14.921 16.046 23 2007 . 15.873 17.690 24 15.988 17.854 22 16.046 17.937 26 2008 . 17.690 9.932 24 17.854 10.044 18 17.937 10.101 21 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Templeton Growth 2007 . N/A N/A N/A 9.811 9.804 2 9.811 9.810 6 2008 . 5.866 5.981 7 9.804 6.001 24 9.810 6.010 64 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Turner Mid-Cap Growth 2007 . 10.944 10.836 5 9.906 10.936 11 9.907 10.856 6 2008 . 10.836 5.390 4 10.936 5.450 8 10.856 5.416 27 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP UBS Global Asset Allocation 2003 . N/A N/A N/A 10.332 11.357 7,325 10.406 11.364 7,333 2004 . 11.342 12.637 1* 11.357 12.678 29 11.364 12.699 54 2005 . 12.637 13.242 1* 12.678 13.312 81 12.699 13.347 98 2006 . 13.242 14.878 1* 13.312 14.986 81 13.347 15.041 105 2007 . 14.878 15.529 1* 14.986 15.674 65 15.041 15.746 102 2008 . 15.529 10.175 1* 15.674 10.290 58 15.746 10.348 119 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire 2010 Profile 2007 . N/A N/A N/A N/A N/A N/A 9.883 10.453 3 2008 . N/A N/A N/A 10.384 7.815 19 10.453 7.828 5 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire 2020 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 9.022 7.399 14 9.871 7.411 3 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire 2030 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 8.846 7.077 3 N/A N/A N/A --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire 2040 Profile 2007 . N/A N/A N/A N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 8.378 6.479 1* N/A N/A N/A --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire Aggressive Profile 2005 . 10.000 10.881 1 10.578 10.894 9 10.046 10.900 24 2006 . 10.881 12.443 1 10.894 12.482 42 10.900 12.502 255 2007 . 12.443 13.555 3 12.482 13.625 73 12.502 13.660 285 2008 . 13.555 7.917 3 13.625 7.974 52 13.660 8.003 274 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire Conservative Profile 2005 . 10.074 10.252 10 10.154 10.263 1 9.984 10.269 117 2006 . 10.252 10.998 7 10.263 11.033 10 10.269 11.050 131 2007 . 10.998 11.630 5 11.033 11.690 73 11.050 11.720 237 2008 . 11.630 9.306 17 11.690 9.373 127 11.720 9.406 318 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire Moderate Profile 2005 . 10.008 10.469 20 9.991 10.481 144 9.994 10.487 134 2006 . 10.469 11.510 29 10.481 11.546 353 10.487 11.564 284 2007 . 11.510 12.340 28 11.546 12.404 333 11.564 12.436 426 2008 . 12.340 8.884 29 12.404 8.948 442 12.436 8.980 534 --------- ------ ------ --- ------ ------ ----- ------ ------ ----- Lincoln VIP Wilshire Moderately Aggressive Profile 2005 . N/A N/A N/A 10.009 10.658 77 10.349 10.664 77 2006 . N/A N/A N/A 10.658 11.960 183 10.664 11.979 319 2007 . N/A N/A N/A 11.960 12.913 186 11.979 12.946 358 2008 . N/A N/A N/A 12.913 8.453 240 12.946 8.483 381 --------- ------ ------ --- ------ ------ ----- ------ ------ -----
A-7
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.) MFS VIT Core Equity 2003 . N/A N/A N/A 11.081 11.919 2,685 10.621 11.927 3,741 2004 . 10.263 11.315 1* 11.919 13.167 14 11.927 13.189 14 2005 . 11.315 11.293 1 13.167 13.168 29 13.189 13.203 25 2006 . 11.293 12.608 1 13.168 14.730 30 13.203 14.785 22 2007 . 12.608 13.750 1 14.730 16.097 25 14.785 16.172 22 2008 . 13.750 8.207 1 16.097 9.627 17 16.172 9.681 20 --------- ------ ------ ---- ------ ------ ----- ------ ------ ----- MFS VIT Growth Series 2003 . 3.471 4.436 4,182 10.849 11.867 3,364 10.883 11.875 4,904 2004 . 4.436 4.918 11 11.867 13.184 29 11.875 13.205 29 2005 . 4.918 5.269 11 13.184 14.154 37 13.205 14.191 42 2006 . 5.269 5.578 3 14.154 15.012 27 14.191 15.066 38 2007 . 5.578 6.632 3 15.012 17.885 22 15.066 17.967 42 2008 . 6.632 4.074 3 17.885 11.009 16 17.967 11.070 36 --------- ------ ------ ----- ------ ------ ----- ------ ------ ----- MFS VIT Total Return Series 2003 . 10.193 11.631 7,381 10.529 11.105 109,436 10.406 11.112 157,682 2004 . 11.631 12.702 18 11.105 12.152 326 11.112 12.171 613 2005 . 12.702 12.819 18 12.152 12.288 612 12.171 12.320 945 2006 . 12.819 14.075 17 12.288 13.519 630 12.320 13.568 986 2007 . 14.075 14.389 14 13.519 13.848 598 13.568 13.913 892 2008 . 14.389 10.994 18 13.848 10.602 510 13.913 10.662 724 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- MFS VIT Utilities Series 2003 . 5.579 7.439 3,430 10.752 11.943 13,977 10.744 11.950 17,245 2004 . 7.439 9.502 14 11.943 15.284 62 11.950 15.309 125 2005 . 9.502 10.895 23 15.284 17.560 144 15.309 17.606 280 2006 . 10.895 14.035 28 17.560 22.666 138 17.606 22.748 285 2007 . 14.035 17.610 25 22.666 28.496 174 22.748 28.628 304 2008 . 17.610 10.772 26 28.496 17.467 158 28.628 17.565 234 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- Neuberger Berman AMT Mid-Cap Growth Portfolio 2003 . 8.343 10.510 5,575 10.964 12.155 23,891 10.536 12.163 48,850 2004 . 10.510 12.024 18 12.155 13.934 105 12.163 13.956 189 2005 . 12.024 13.453 19 13.934 15.620 169 13.956 15.661 304 2006 . 13.453 15.177 19 15.620 17.658 163 15.661 17.722 299 2007 . 15.177 18.292 17 17.658 21.324 146 17.722 21.423 295 2008 . 18.292 10.189 14 21.324 11.902 128 21.423 11.969 265 --------- ------ ------ ----- ------ ------ ------- ------ ------ ------- Neuberger Berman AMT Regency Portfolio 2003 . 9.809 13.107 11,037 10.792 12.815 56,235 10.580 12.823 105,781 2004 . 13.107 15.776 19 12.815 15.455 226 12.823 15.480 521 2005 . 15.776 17.380 29 15.455 17.060 376 15.480 17.105 799 2006 . 17.380 19.005 26 17.060 18.692 352 17.105 18.760 732 2007 . 19.005 19.311 23 18.692 19.032 323 18.760 19.120 601 2008 . 19.311 10.291 13 19.032 10.163 252 19.120 10.220 439 --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Putnam VT Growth and Income Fund 2003 . N/A N/A N/A 10.904 12.152 1,467 10.901 12.160 65 2004 . 10.844 11.851 1 12.152 13.308 2 12.160 13.333 1* 2005 . 11.851 12.267 1 13.308 13.802 2 13.333 13.842 4 2006 . 12.267 13.986 1* 13.802 15.768 3 13.842 15.829 4 2007 . N/A N/A N/A 15.768 14.602 2 15.829 14.673 1* 2008 . 9.107 7.794 1 14.602 8.823 2 14.673 8.874 1* --------- ------ ------ ------ ------ ------ ------- ------ ------ ------- Putnam VT Health Sciences Fund 2003 . N/A N/A N/A 10.568 10.993 5,923 10.626 11.000 18,836 2004 . N/A N/A N/A 10.993 11.607 6 11.000 11.625 45 2005 . N/A N/A N/A 11.607 12.949 6 11.625 12.983 37 2006 . N/A N/A N/A 12.949 13.119 7 12.983 13.167 24 2007 . N/A N/A N/A 13.119 12.853 5 13.167 12.912 9 2008 . N/A N/A N/A 12.853 10.505 8 12.912 10.564 6 --------- ------ ------ ------ ------ ------ ------- ------ ------ -------
* 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. A-8 (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-9 [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 . 4.058 4.133 3 10.810 11.032 6 2006 . N/A 4.402 13 11.032 11.773 17 2007 . 4.402 5.187 33 11.773 13.898 66 2008 . 5.187 2.677 7 13.898 7.189 77 --------- ----- ----- -- ------ ------ -- AllianceBernstein VPS Growth and Income 2005 . 11.173 11.483 2 12.354 12.723 85 2006 . 11.483 13.201 26 12.723 14.655 213 2007 . 13.201 13.603 26 14.655 15.130 275 2008 . 13.603 7.927 26 15.130 8.835 310 --------- ------ ------ -- ------ ------ --- AllianceBernstein VPS International Value 2006 . 10.249 11.836 3 10.038 11.850 94 2007 . 11.836 12.279 37 11.850 12.318 461 2008 . 12.279 5.637 38 12.318 5.666 627 --------- ------ ------ -- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 2005 . 17.694 18.540 1 17.811 18.700 47 2006 . 18.540 20.806 8 18.700 21.027 179 2007 . 20.806 20.758 16 21.027 21.020 215 2008 . 20.758 13.106 18 21.020 13.298 230 --------- ------ ------ -- ------ ------ --- American Century Investments VP Inflation Protection Fund 2005 . 10.398 10.377 3 10.410 10.410 72 2006 . 10.377 10.357 63 10.410 10.411 217 2007 . 10.357 11.145 45 10.411 11.226 251 2008 . 11.145 10.776 56 11.226 10.876 596 --------- ------ ------ -- ------ ------ --- American Funds Global Growth Fund 2005 . 11.039 12.621 3 11.273 12.662 184 2006 . 12.621 14.935 39 12.662 15.014 572 2007 . 14.935 16.856 53 15.014 16.978 1,125 2008 . 16.856 10.204 51 16.978 10.299 1,341 --------- ------ ------ -- ------ ------ ----- American Funds Global Small Capitalization Fund 2005 . 10.059 12.390 7 17.937 22.139 42 2006 . 12.390 15.104 28 22.139 27.042 220 2007 . 15.104 18.022 38 27.042 32.332 448 2008 . 18.022 8.231 48 32.332 14.796 500 --------- ------ ------ -- ------ ------ ----- American Funds Growth Fund 2005 . 7.958 9.087 51 13.673 15.643 775 2006 . 9.087 9.841 162 15.643 16.976 2,101 2007 . 9.841 10.865 243 16.976 18.779 3,402 2008 . 10.865 5.982 300 18.779 10.360 4,036 --------- ------ ------ --- ------ ------ ----- American Funds Growth-Income Fund 2005 . 11.906 12.382 53 12.897 13.439 943 2006 . 12.382 14.017 188 13.439 15.244 2,618 2007 . 14.017 14.469 206 15.244 15.767 4,316 2008 . 14.469 8.836 229 15.767 9.648 4,881 --------- ------ ------ --- ------ ------ ----- American Funds International Fund 2005 . 8.009 9.563 12 14.186 16.972 250 2006 . 9.563 11.180 75 16.972 19.882 788 2007 . 11.180 13.186 109 19.882 23.496 1,400 2008 . 13.186 7.499 108 23.496 13.389 1,605 --------- ------ ------ --- ------ ------ ----- 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 . 10.070 10.714 11 10.199 10.718 2 2006 . 10.714 11.462 39 10.718 11.472 8 2007 . 11.462 13.440 127 11.472 13.459 25 2008 . 13.440 6.969 260 13.459 6.982 28 --------- ------ ------ --- ------ ------ -- AllianceBernstein VPS Growth and Income 2005 . 10.005 10.346 225 10.032 10.349 7 2006 . 10.346 11.946 554 10.349 11.956 56 2007 . 11.946 12.365 873 11.956 12.381 88 2008 . 12.365 7.238 997 12.381 7.251 90 --------- ------ ------ --- ------ ------ -- AllianceBernstein VPS International Value 2006 . 9.565 11.868 301 10.302 11.871 14 2007 . 11.868 12.367 1,310 11.871 12.382 105 2008 . 12.367 5.703 1,631 12.382 5.713 128 --------- ------ ------ ----- ------ ------ --- AllianceBernstein VPS Small/Mid Cap Value 2005 . 10.090 10.657 140 10.803 10.657 17 2006 . 10.657 12.013 439 10.657 12.020 50 2007 . 12.013 12.038 921 12.020 12.050 114 2008 . 12.038 7.635 1,317 12.050 7.646 135 --------- ------ ------ ----- ------ ------ --- American Century Investments VP Inflation Protection Fund 2005 . 9.944 9.898 408 9.985 9.901 33 2006 . 9.898 9.924 1,061 9.901 9.932 61 2007 . 9.924 10.728 1,373 9.932 10.741 75 2008 . 10.728 10.420 2,740 10.741 10.438 175 --------- ------ ------ ----- ------ ------ --- American Funds Global Growth Fund 2005 . 10.027 11.429 204 10.240 11.433 19 2006 . 11.429 13.586 915 11.433 13.598 94 2007 . 13.586 15.402 1,830 13.598 15.423 189 2008 . 15.402 9.367 2,635 15.423 9.384 259 --------- ------ ------ ----- ------ ------ --- American Funds Global Small Capitalization Fund 2005 . 10.027 12.033 182 10.451 12.036 14 2006 . 12.033 14.734 978 12.036 14.746 90 2007 . 14.734 17.660 1,656 14.746 17.683 139 2008 . 17.660 8.102 2,158 17.683 8.117 175 --------- ------ ------ ----- ------ ------ --- American Funds Growth Fund 2005 . 10.049 11.245 1,600 10.049 11.248 135 2006 . 11.245 12.234 5,589 11.248 12.244 564 2007 . 12.234 13.567 9,468 12.244 13.585 907 2008 . 13.567 7.503 13,330 13.585 7.517 1,147 --------- ------ ------ ------ ------ ------ ----- American Funds Growth-Income Fund 2005 . 10.011 10.583 1,833 10.029 10.586 154 2006 . 10.583 12.035 5,841 10.586 12.044 670 2007 . 12.035 12.478 9,421 12.044 12.494 953 2008 . 12.478 7.655 12,548 12.494 7.668 1,171 --------- ------ ------ ------ ------ ------ ----- American Funds International Fund 2005 . 10.025 12.045 629 10.005 12.049 22 2006 . 12.045 14.146 2,709 12.049 14.157 219 2007 . 14.146 16.760 4,640 14.157 16.781 380 2008 . 16.760 9.574 6,129 16.781 9.591 514 --------- ------ ------ ------ ------ ------ -----
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 Capital Reserves 2005 . 9.906 9.916 20 9.971 9.927 2 2006 . 9.916 10.166 2 9.927 10.197 46 2007 . 10.166 10.412 4 10.197 10.466 79 2008 . 10.412 10.165 8 10.466 10.238 178 --------- ------ ------ -- ------ ------ --- Delaware VIP Diversified Income Series 2005 . 10.865 10.614 8 10.878 10.648 183 2006 . 10.614 11.219 26 10.648 11.277 502 2007 . 11.219 11.842 42 11.277 11.927 834 2008 . 11.842 11.066 49 11.927 11.168 1,149 --------- ------ ------ -- ------ ------ ----- Delaware VIP Emerging Markets Series(4) 2005 . 11.029 12.027 10 10.037 12.040 71 2006 . 12.027 14.987 21 12.040 15.034 297 2007 . 14.987 20.398 34 15.034 20.503 455 2008 . 20.398 9.684 35 20.503 9.754 574 --------- ------ ------ -- ------ ------ ----- Delaware VIP High Yield Series 2005 . 11.899 12.083 9 14.675 14.932 54 2006 . 12.083 13.321 20 14.932 16.495 186 2007 . 13.321 13.424 32 16.495 16.655 305 2008 . 13.424 9.968 29 16.655 12.393 390 --------- ------ ------ -- ------ ------ ----- Delaware VIP REIT Series 2005 . 19.839 20.832 1 18.704 19.679 64 2006 . 20.832 27.088 5 19.679 25.640 181 2007 . 27.088 22.844 8 25.640 21.666 197 2008 . 22.844 14.526 5 21.666 13.805 177 --------- ------ ------ -- ------ ------ ----- Delaware VIP Small Cap Value Series 2005 . 19.944 21.390 9 18.229 19.590 106 2006 . 21.390 24.358 22 19.590 22.353 387 2007 . 24.358 22.299 30 22.353 20.504 594 2008 . 22.299 15.323 27 20.504 14.118 615 --------- ------ ------ -- ------ ------ ----- Delaware VIP Trend Series 2005 . 7.401 7.681 1* 14.780 15.370 37 2006 . 7.681 8.101 14 15.370 16.244 117 2007 . 8.101 8.793 14 16.244 17.666 112 2008 . 8.793 4.591 15 17.666 9.243 106 --------- ------ ------ -- ------ ------ ----- Delaware VIP US Growth Series 2006 . 10.937 11.194 2 10.443 11.313 6 2007 . 11.194 12.360 2 11.313 12.517 12 2008 . N/A N/A N/A 12.517 7.042 12 --------- ------ ------ --- ------ ------ ----- Delaware VIP Value Series 2005 . 12.320 12.808 7 12.631 13.157 29 2006 . 12.808 15.580 14 13.157 16.037 151 2007 . 15.580 14.851 17 16.037 15.317 298 2008 . 14.851 9.694 20 15.317 10.018 287 --------- ------ ------ --- ------ ------ ----- DWS VIP Equity 500 Index 2005 . 10.190 10.401 7 13.074 13.442 44 2006 . 10.401 11.779 10 13.442 15.252 78 2007 . 11.779 12.157 12 15.252 15.774 85 2008 . 12.157 7.485 12 15.774 9.732 77 --------- ------ ------ --- ------ ------ ----- DWS VIP Small Cap Index 2005 . 10.918 10.761 1 10.103 10.773 54 2006 . 10.761 12.392 1 10.773 12.431 146 2007 . 12.392 11.914 1 12.431 11.975 161 2008 . 11.914 7.688 1 11.975 7.743 89 --------- ------ ------ --- ------ ------ ----- Fidelity VIP Contrafund Portfolio 2005 . 13.849 15.876 24 13.937 16.008 384 2006 . 15.876 17.384 51 16.008 17.564 1,124 2007 . 17.384 20.038 94 17.564 20.286 1,595 2008 . 20.038 11.284 94 20.286 11.447 1,866 --------- ------ ------ --- ------ ------ ----- 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 Capital Reserves 2005 . 10.015 9.940 33 9.908 9.944 1 2006 . 9.940 10.237 195 9.944 10.246 21 2007 . 10.237 10.532 218 10.246 10.547 84 2008 . 10.532 10.329 683 10.547 10.349 87 --------- ------ ------ --- ------ ------ -- Delaware VIP Diversified Income Series 2005 . 9.933 9.841 442 9.947 9.843 9 2006 . 9.841 10.449 1,429 9.843 10.457 75 2007 . 10.449 11.079 2,952 10.457 11.092 223 2008 . 11.079 10.400 4,246 11.092 10.418 316 --------- ------ ------ ----- ------ ------ --- Delaware VIP Emerging Markets Series(4) 2005 . 10.038 12.058 294 10.130 12.061 19 2006 . 12.058 15.093 818 12.061 15.105 55 2007 . 15.093 20.635 1,329 15.105 20.662 93 2008 . 20.635 9.841 1,927 20.662 9.859 133 --------- ------ ------ ----- ------ ------ --- Delaware VIP High Yield Series 2005 . 9.981 10.256 236 9.981 10.259 10 2006 . 10.256 11.358 778 10.259 11.367 95 2007 . 11.358 11.497 1,433 11.367 11.511 89 2008 . 11.497 8.577 1,903 11.511 8.591 124 --------- ------ ------ ----- ------ ------ --- Delaware VIP REIT Series 2005 . 10.143 10.427 285 10.973 10.430 27 2006 . 10.427 13.619 1,108 10.430 13.630 102 2007 . 13.619 11.537 1,174 13.630 11.552 106 2008 . 11.537 7.370 1,047 11.552 7.383 99 --------- ------ ------ ----- ------ ------ --- Delaware VIP Small Cap Value Series 2005 . 10.034 10.789 447 10.302 10.792 45 2006 . 10.789 12.342 1,589 10.792 12.351 178 2007 . 12.342 11.349 2,599 12.351 11.364 243 2008 . 11.349 7.834 3,090 11.364 7.848 236 --------- ------ ------ ----- ------ ------ --- Delaware VIP Trend Series 2005 . 10.092 11.260 133 10.742 11.263 5 2006 . 11.260 11.930 398 11.263 11.939 19 2007 . 11.930 13.007 493 11.939 13.024 35 2008 . 13.007 6.823 500 13.024 6.835 36 --------- ------ ------ ----- ------ ------ --- Delaware VIP US Growth Series 2006 . 12.117 13.287 20 9.929 10.508 3 2007 . 13.287 14.738 63 10.508 11.661 4 2008 . 14.738 8.313 111 11.661 6.581 7 --------- ------ ------ ----- ------ ------ --- Delaware VIP Value Series 2005 . 10.230 10.375 238 9.999 10.378 10 2006 . 10.375 12.677 954 10.378 12.687 54 2007 . 12.677 12.139 1,404 12.687 12.154 144 2008 . 12.139 7.960 1,579 12.154 7.974 124 --------- ------ ------ ----- ------ ------ --- DWS VIP Equity 500 Index 2005 . 10.077 10.428 136 10.203 10.431 4 2006 . 10.428 11.862 299 10.431 11.871 12 2007 . 11.862 12.298 415 11.871 12.314 36 2008 . 12.298 7.607 374 12.314 7.620 31 --------- ------ ------ ----- ------ ------ --- DWS VIP Small Cap Index 2005 . 10.343 10.788 75 10.151 10.791 5 2006 . 10.788 12.480 272 10.791 12.489 17 2007 . 12.480 12.052 380 12.489 12.068 21 2008 . 12.052 7.813 325 12.068 7.827 15 --------- ------ ------ ----- ------ ------ --- Fidelity VIP Contrafund Portfolio 2005 . 10.045 11.254 824 10.161 11.257 96 2006 . 11.254 12.378 3,150 11.257 12.388 318 2007 . 12.378 14.332 5,254 12.388 14.351 478 2008 . 14.332 8.108 6,924 14.351 8.122 597 --------- ------ ------ ----- ------ ------ ---
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) Fidelity VIP Growth Portfolio 2005 . 6.096 6.320 8 10.711 11.126 24 2006 . 6.320 6.619 23 11.126 11.675 77 2007 . 6.619 8.238 23 11.675 14.560 196 2008 . 8.238 4.265 26 14.560 7.554 184 --------- ----- ----- -- ------ ------ --- Fidelity VIP Mid Cap 2005 . 10.991 11.558 3 10.182 11.571 147 2006 . 11.558 12.766 24 11.571 12.806 531 2007 . 12.766 14.468 44 12.806 14.543 886 2008 . 14.468 8.586 57 14.543 8.648 1,114 --------- ------ ------ -- ------ ------ ----- Fidelity VIP Overseas Portfolio 2005 . 8.147 9.510 7 13.419 15.695 15 2006 . 9.510 11.005 14 15.695 18.200 65 2007 . 11.005 12.659 25 18.200 20.976 106 2008 . 12.659 6.971 15 20.976 11.575 130 --------- ------ ------ -- ------ ------ ----- FTVIPT Franklin Income Securities 2006 . 9.986 11.215 27 10.004 11.229 288 2007 . 11.215 11.435 103 11.229 11.471 1,209 2008 . 11.435 7.904 118 11.471 7.945 1,624 --------- ------ ------ --- ------ ------ ----- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2005 . 6.930 7.136 2 12.811 13.218 19 2006 . 7.136 7.622 17 13.218 14.146 94 2007 . 7.622 8.331 40 14.146 15.494 166 2008 . 8.331 4.708 43 15.494 8.773 214 --------- ------ ------ --- ------ ------ ----- FTVIPT Mutual Shares Securities 2006 . 9.896 11.260 26 9.923 11.274 169 2007 . 11.260 11.450 70 11.274 11.486 835 2008 . 11.450 7.076 71 11.486 7.112 1,102 --------- ------ ------ --- ------ ------ ----- FTVIPT Templeton Global Income Securities 2005 . 9.886 9.867 1 9.763 9.879 40 2006 . 9.867 10.934 15 9.879 10.969 242 2007 . 10.934 11.927 29 10.969 11.988 646 2008 . 11.927 12.448 52 11.988 12.537 1,042 --------- ------ ------ --- ------ ------ ----- FTVIPT Templeton Growth Securities Fund 2005 . 11.728 12.547 2 13.332 14.290 72 2006 . 12.547 15.018 6 14.290 17.139 300 2007 . 15.018 15.104 11 17.139 17.271 404 2008 . 15.104 8.560 9 17.271 9.808 362 --------- ------ ------ --- ------ ------ ----- Goldman Sachs VIT Growth & Income 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ ----- Lincoln VIP Baron Growth Opportunities(4) 2006 . 9.251 10.610 1 9.950 10.623 18 2007 . 10.610 10.782 4 10.623 10.817 135 2008 . 10.782 6.448 13 10.817 6.482 266 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Capital Growth 2007 . N/A N/A N/A 10.097 10.708 9 2008 . 9.357 6.123 1* 10.708 6.143 29 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Cohen & Steers Global Real Estate 2007 . 9.237 8.213 18 10.062 8.223 126 2008 . 8.213 4.667 16 8.223 4.682 327 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Columbia Value Opportunities 2007 . N/A N/A N/A 10.206 9.361 5 2008 . 8.690 6.051 1* 9.361 6.071 34 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Core Fund(1) 2005 . 10.030 10.239 7 10.077 10.251 2 2006 . 10.239 11.436 7 10.251 11.472 16 --------- ------ ------ --- ------ ------ ----- 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) Fidelity VIP Growth Portfolio 2005 . 9.982 10.639 78 10.025 10.642 7 2006 . 10.639 11.192 160 10.642 11.200 10 2007 . 11.192 13.992 405 11.200 14.010 29 2008 . 13.992 7.278 597 14.010 7.290 36 --------- ------ ------ --- ------ ------ -- Fidelity VIP Mid Cap 2005 . 10.145 11.587 223 10.340 11.592 46 2006 . 11.587 12.856 1,179 11.592 12.868 109 2007 . 12.856 14.637 2,162 12.868 14.657 221 2008 . 14.637 8.725 3,146 14.657 8.742 270 --------- ------ ------ ----- ------ ------ --- Fidelity VIP Overseas Portfolio 2005 . 10.004 12.006 131 10.034 12.009 10 2006 . 12.006 13.957 307 12.009 13.968 21 2007 . 13.957 16.126 496 13.968 16.147 43 2008 . 16.126 8.920 646 16.147 8.936 50 --------- ------ ------ ----- ------ ------ --- FTVIPT Franklin Income Securities 2006 . 10.184 11.246 699 10.184 11.249 57 2007 . 11.246 11.518 3,478 11.249 11.527 300 2008 . 11.518 7.997 4,951 11.527 8.008 379 --------- ------ ------ ----- ------ ------ --- FTVIPT Franklin Small-Mid Cap Growth Securities Fund 2005 . 10.068 10.960 61 10.413 10.963 13 2006 . 10.960 11.759 269 10.963 11.768 26 2007 . 11.759 12.912 518 11.768 12.928 42 2008 . 12.912 7.329 719 12.928 7.342 62 --------- ------ ------ ----- ------ ------ --- FTVIPT Mutual Shares Securities 2006 . 10.234 11.291 505 10.234 11.294 56 2007 . 11.291 11.532 2,431 11.294 11.542 194 2008 . 11.532 7.159 3,595 11.542 7.169 292 --------- ------ ------ ----- ------ ------ --- FTVIPT Templeton Global Income Securities 2005 . 9.912 9.893 93 9.760 9.895 12 2006 . 9.893 11.012 553 9.895 11.020 59 2007 . 11.012 12.066 1,560 11.020 12.081 179 2008 . 12.066 12.649 3,695 12.081 12.671 282 --------- ------ ------ ----- ------ ------ --- FTVIPT Templeton Growth Securities Fund 2005 . 9.991 10.840 145 10.172 10.843 43 2006 . 10.840 13.033 736 10.843 13.044 98 2007 . 13.033 13.167 1,032 13.044 13.184 134 2008 . 13.167 7.496 831 13.184 7.509 119 --------- ------ ------ ----- ------ ------ --- Goldman Sachs VIT Growth & Income 2008 . 9.937 10.389 1* N/A N/A N/A --------- ------ ------ ----- ------ ------ --- Lincoln VIP Baron Growth Opportunities(4) 2006 . 9.643 10.639 88 9.134 10.642 17 2007 . 10.639 10.861 465 10.642 10.869 63 2008 . 10.861 6.525 881 10.869 6.533 94 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Capital Growth 2007 . 9.965 10.724 30 10.245 10.730 1* 2008 . 10.724 6.168 84 10.730 6.174 1 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Cohen & Steers Global Real Estate 2007 . 9.955 8.236 489 9.552 8.239 49 2008 . 8.236 4.701 1,327 8.239 4.705 103 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Columbia Value Opportuni 2007 . 10.083 9.375 13 N/A N/A N/A 2008 . 9.375 6.095 90 8.298 6.101 1 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Core Fund(1) 2005 . 10.149 10.266 4 10.137 10.269 1 2006 . 10.266 11.517 30 10.269 11.526 2 --------- ------ ------ ----- ------ ------ ---
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 VIP Delaware Bond 2005 . 9.830 9.875 17 9.948 9.886 405 2006 . 9.875 10.135 75 9.886 10.167 1,071 2007 . 10.135 10.475 109 10.167 10.529 1,543 2008 . 10.475 9.957 117 10.529 10.029 1,657 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Delaware Growth and Income 2005 . N/A N/A N/A 10.305 10.370 29 2006 . N/A N/A N/A 10.370 11.444 74 2007 . 12.084 11.867 1 11.444 11.928 119 2008 . 11.867 7.463 2 11.928 7.517 138 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Delaware Social Awareness 2005 . N/A N/A N/A 10.120 10.773 81 2006 . 10.496 11.845 1 10.773 11.883 138 2007 . 11.845 11.955 2 11.883 12.017 172 2008 . 11.955 7.678 2 12.017 7.734 166 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Delaware Special Opportunities 2007 . 9.215 9.134 9 9.919 9.145 18 2008 . 9.134 5.667 8 9.145 5.686 88 --------- ------ ------ --- ------ ------ ----- Lincoln VIP FI Equity-Income 2005 . 10.277 10.466 3 10.009 10.478 18 2006 . 10.466 11.415 7 10.478 11.451 96 2007 . 11.415 11.676 8 11.451 11.736 124 2008 . 11.676 7.058 8 11.736 7.109 132 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Growth Fund(2) 2005 . N/A N/A N/A 10.198 10.825 2 2006 . 11.314 11.253 1 10.825 11.288 13 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Growth Opportunities(3) 2005 . N/A N/A N/A 11.161 11.446 5 2006 . 13.112 12.346 1 11.446 12.385 21 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Janus Capital Appreciation 2005 . 12.363 12.838 6 9.914 10.468 13 2006 . 12.838 13.802 1 10.468 11.276 19 2007 . 13.802 16.290 3 11.276 13.335 72 2008 . 16.290 9.449 4 13.335 7.751 97 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Marsico International Growth 2007 . 10.340 11.139 8 9.731 11.153 52 2008 . 11.139 5.575 15 11.153 5.593 124 --------- ------ ------ --- ------ ------ ----- Lincoln VIP MFS Value 2007 . 9.906 9.701 1 9.935 9.713 38 2008 . 9.701 6.438 12 9.713 6.459 197 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Mid-Cap Value 2007 . 9.607 8.630 6 9.870 8.641 61 2008 . 8.630 5.016 11 8.641 5.032 148 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Mondrian International Value 2005 . 10.755 11.091 13 10.086 11.103 72 2006 . 11.091 14.134 16 11.103 14.178 265 2007 . 14.134 15.445 16 14.178 15.524 307 2008 . 15.445 9.590 20 15.524 9.659 311 --------- ------ ------ --- ------ ------ ----- Lincoln VIP Money Market Fund 2005 . 10.011 10.067 15 10.002 10.080 44 2006 . 10.067 10.329 51 10.080 10.363 485 2007 . 10.329 10.628 47 10.363 10.684 824 2008 . 10.628 10.662 169 10.684 10.739 1,822 --------- ------ ------ --- ------ ------ ----- Lincoln VIPT SSGA Bond Index 2008 . 10.118 10.451 5 10.143 10.462 349 --------- ------ ------ --- ------ ------ ----- Lincoln VIPT SSGA Developed International 150 2008 . 5.644 6.255 1 9.374 6.262 88 --------- ------ ------ --- ------ ------ ----- 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) Lincoln VIP Delaware Bond 2005 . 9.988 9.900 1,116 9.988 9.903 57 2006 . 9.900 10.207 3,117 9.903 10.216 292 2007 . 10.207 10.596 4,751 10.216 10.610 397 2008 . 10.596 10.118 6,128 10.610 10.137 480 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Delaware Growth and Income 2005 . 10.287 10.385 34 10.155 10.388 2 2006 . 10.385 11.489 156 10.388 11.498 31 2007 . 11.489 12.005 350 11.498 12.020 55 2008 . 12.005 7.584 534 12.020 7.598 67 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Delaware Social Awareness 2005 . 9.999 10.788 120 10.044 10.791 7 2006 . 10.788 11.929 226 10.791 11.939 19 2007 . 11.929 12.094 322 11.939 12.110 29 2008 . 12.094 7.803 412 12.110 7.817 26 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Delaware Special Opportuni 2007 . 10.023 9.159 62 10.137 9.162 2 2008 . 9.159 5.709 227 9.162 5.714 12 --------- ------ ------ ----- ------ ------ --- Lincoln VIP FI Equity-Income 2005 . 10.040 10.493 66 10.075 10.496 16 2006 . 10.493 11.496 194 10.496 11.505 37 2007 . 11.496 11.812 318 11.505 11.827 64 2008 . 11.812 7.173 438 11.827 7.185 70 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Growth Fund(2) 2005 . 10.124 10.840 17 10.230 10.843 1 2006 . 10.840 11.333 100 10.843 11.342 11 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Growth Opportunities(3) 2005 . 10.243 11.462 11 10.790 11.465 1 2006 . 11.462 12.434 46 11.465 12.443 5 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Janus Capital Appreciation 2005 . 9.958 10.482 34 10.004 10.486 3 2006 . 10.482 11.320 52 10.486 11.329 7 2007 . 11.320 13.421 243 11.329 13.439 10 2008 . 13.421 7.820 286 13.439 7.835 20 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Marsico Internati Growth 2007 . 10.038 11.170 210 10.343 11.173 10 2008 . 11.170 5.615 559 11.173 5.620 68 --------- ------ ------ ----- ------ ------ --- Lincoln VIP MFS Value 2007 . 9.710 9.727 93 9.920 9.731 7 2008 . 9.727 6.485 948 9.731 6.490 40 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Mid-Cap Value 2007 . 10.085 8.654 163 9.998 8.657 13 2008 . 8.654 5.052 396 8.657 5.057 21 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Mondrian International Value 2005 . 10.031 11.119 352 10.032 11.123 19 2006 . 11.119 14.234 909 11.123 14.245 95 2007 . 14.234 15.624 1,172 14.245 15.645 118 2008 . 15.624 9.745 1,442 15.645 9.763 120 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Money Market Fund 2005 . 10.002 10.094 454 10.020 10.097 13 2006 . 10.094 10.404 672 10.097 10.412 130 2007 . 10.404 10.753 1,522 10.412 10.767 244 2008 . 10.753 10.836 6,370 10.767 10.855 551 --------- ------ ------ ----- ------ ------ --- Lincoln VIPT SSGA Bond Index 2008 . 10.024 10.476 1,684 10.138 10.478 123 --------- ------ ------ ----- ------ ------ --- Lincoln VIPT SSGA Developed Internati 150 2008 . 9.187 6.270 391 9.171 6.272 24 --------- ------ ------ ----- ------ ------ ---
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) Lincoln VIPT SSGA Emerging Markets 100 2008 . 9.739 6.047 1* 9.395 6.053 76 --------- ----- ----- - ----- ----- -- Lincoln VIPT SSGA International Index 2008 . 6.777 6.392 1 9.572 6.398 178 --------- ----- ----- - ----- ----- --- Lincoln VIPT SSGA Large Cap 100 2008 . 6.341 6.967 1 9.368 6.975 142 --------- ----- ----- - ----- ----- --- Lincoln VIP SSgA S&P 500 Index 2007 . 11.421 11.292 7 11.464 11.350 48 2008 . 11.292 6.952 26 11.350 7.001 328 --------- ------ ------ -- ------ ------ --- Lincoln VIP SSgA Small Cap Index 2007 . 9.535 9.139 3 10.169 9.150 13 2008 . 9.139 5.915 10 9.150 5.934 149 --------- ------ ------ -- ------ ------ --- Lincoln VIPT SSGA Small/Mid Cap 200 2008 . 6.442 7.217 1* 9.725 7.225 43 --------- ------ ------ -- ------ ------ --- Lincoln VIP T. Rowe Price Growth Stock 2007 . 10.112 9.914 1* 9.980 9.927 26 2008 . 9.914 5.652 2 9.927 5.670 55 --------- ------ ------ -- ------ ------ --- Lincoln VIP T. Rowe Price Structured Mid-Cap Growth 2005 . N/A N/A N/A 10.362 10.985 67 2006 . 15.536 15.816 1 10.985 11.789 103 2007 . 15.816 17.608 1 11.789 13.152 127 2008 . 17.608 9.876 2 13.152 7.391 98 --------- ------ ------ --- ------ ------ --- Lincoln VIP Templeton Growth 2007 . 9.801 9.786 4 9.902 9.798 199 2008 . 9.786 5.972 11 9.798 5.991 418 --------- ------ ------ --- ------ ------ --- Lincoln VIP UBS Global Asset Allocation 2005 . N/A N/A N/A 10.226 10.584 12 2006 . 13.465 14.825 13 10.584 11.904 67 2007 . 14.825 15.458 12 11.904 12.437 187 2008 . 15.458 10.118 13 12.437 8.157 157 --------- ------ ------ --- ------ ------ --- Lincoln VIP Turner Mid-Cap Growth 2007 . 10.148 10.939 1* 10.092 10.843 65 2008 . 10.939 5.435 11 10.843 5.398 128 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2010 Profile 2007 . N/A N/A N/A N/A N/A N/A 2008 . 8.493 7.778 3 9.981 7.802 13 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2020 Profile 2007 . N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 9.987 7.387 27 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2030 Profile 2007 . N/A N/A N/A 10.599 10.393 2 2008 . N/A N/A N/A 10.393 7.066 58 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire 2040 Profile 2007 . N/A N/A N/A N/A N/A N/A 2008 . N/A N/A N/A 9.738 6.468 3 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire Aggressive Profile 2005 . 10.569 10.875 19 10.155 10.888 94 2006 . 10.875 12.424 39 10.888 12.463 137 2007 . 12.424 13.520 47 12.463 13.590 323 2008 . 13.520 7.889 31 13.590 7.946 409 --------- ------ ------ --- ------ ------ --- Lincoln VIP Wilshire Conservative Profile 2005 . N/A N/A N/A 10.012 10.257 136 2006 . 10.452 10.981 26 10.257 11.015 294 2007 . 10.981 11.600 37 11.015 11.660 464 2008 . 11.600 9.273 45 11.660 9.340 687 --------- ------ ------ --- ------ ------ --- 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) Lincoln VIPT SSGA Emerging Markets 100 2008 . 9.560 6.061 337 9.500 6.063 21 --------- ----- ----- --- ----- ----- -- Lincoln VIPT SSGA Internati Index 2008 . 9.643 6.407 553 9.456 6.408 59 --------- ----- ----- --- ----- ----- -- Lincoln VIPT SSGA Large Cap 100 2008 . 9.235 6.984 708 9.119 6.985 45 --------- ----- ----- --- ----- ----- -- Lincoln VIP SSgA S&P 500 Index 2007 . 11.519 11.426 202 11.530 11.438 51 2008 . 11.426 7.066 1,422 11.438 7.077 158 --------- ------ ------ ----- ------ ------ --- Lincoln VIP SSgA Small Cap Index 2007 . 9.914 9.164 138 9.193 9.167 32 2008 . 9.164 5.958 651 9.167 5.962 77 --------- ------ ------ ----- ------ ------ --- Lincoln VIPT SSGA Small/Mid Cap 200 2008 . 9.253 7.235 202 9.073 7.237 14 --------- ------ ------ ----- ------ ------ --- Lincoln VIP T. Rowe Price Growth Stock 2007 . 9.964 9.942 62 10.206 9.945 11 2008 . 9.942 5.693 267 9.945 5.697 21 --------- ------ ------ ----- ------ ------ --- Lincoln VIP T. Rowe Price Structured Mid-Cap Growth 2005 . 10.386 11.000 18 10.473 11.004 1* 2006 . 11.000 11.836 76 11.004 11.845 8 2007 . 11.836 13.236 137 11.845 13.254 10 2008 . 13.236 7.458 263 13.254 7.471 22 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Templeton Growth 2007 . 10.006 9.813 797 9.974 9.816 41 2008 . 9.813 6.015 1,692 9.816 6.020 106 --------- ------ ------ ----- ------ ------ --- Lincoln VIP UBS Global Asset Allocation 2005 . 9.983 10.599 59 N/A N/A N/A 2006 . 10.599 11.951 185 10.915 11.960 125 2007 . 11.951 12.517 339 11.960 12.533 80 2008 . 12.517 8.230 491 12.533 8.245 100 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Turner Mid-Cap Growth 2007 . 10.218 10.969 112 10.613 10.973 14 2008 . 10.969 5.475 284 10.973 5.479 24 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire 2010 Profile 2007 . 9.918 10.457 7 N/A N/A N/A 2008 . 10.457 7.834 135 8.552 7.841 1 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire 2020 Profile 2007 . 10.016 10.302 91 10.279 10.306 1* 2008 . 10.302 7.416 311 10.306 7.422 3 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire 2030 Profile 2007 . 10.279 10.409 31 N/A N/A N/A 2008 . 10.409 7.094 138 10.124 7.100 11 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire 2040 Profile 2007 . 10.188 10.234 2 N/A N/A N/A 2008 . 10.234 6.494 57 N/A N/A N/A --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire Aggressive Profile 2005 . 10.294 10.903 82 10.114 10.906 14 2006 . 10.903 12.512 458 10.906 12.522 65 2007 . 12.512 13.677 898 12.522 13.695 82 2008 . 13.677 8.017 1,014 13.695 8.031 85 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire Conservative Profile 2005 . 10.030 10.272 412 10.163 10.275 1 2006 . 10.272 11.059 655 10.275 11.067 37 2007 . 11.059 11.735 1,251 11.067 11.750 58 2008 . 11.735 9.423 2,085 11.750 9.440 174 --------- ------ ------ ----- ------ ------ ---
B-5
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 VIP Wilshire Moderate Profile 2005 . 10.225 10.463 7 10.000 10.475 605 2006 . 10.463 11.492 26 10.475 11.528 1,315 2007 . 11.492 12.308 79 11.528 12.372 1,926 2008 . 12.308 8.852 82 12.372 8.916 2,680 --------- ------ ------ -- ------ ------ ----- Lincoln VIP Wilshire Moderately Aggressive Profile 2005 . 10.484 10.640 9 10.122 10.652 287 2006 . 10.640 11.904 99 10.652 11.941 1,404 2007 . 11.904 12.814 222 11.941 12.880 1,973 2008 . 12.814 8.363 211 12.880 8.423 2,508 --------- ------ ------ --- ------ ------ ----- Lord Abbett All Value 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ ----- MFS VIT Growth Series 2008 . N/A N/A N/A 9.081 9.334 2 --------- ------ ------ --- ------ ------ ----- MFS VIT Total Return Series 2005 . 12.647 12.751 6 12.384 12.510 183 2006 . 12.751 13.986 29 12.510 13.750 556 2007 . 13.986 14.284 32 13.750 14.071 790 2008 . 14.284 10.903 28 14.071 10.762 895 --------- ------ ------ --- ------ ------ ----- MFS VIT Utilities Series 2005 . 9.460 10.836 11 12.763 14.649 62 2006 . 10.836 13.945 32 14.649 18.890 243 2007 . 13.945 17.479 55 18.890 23.725 476 2008 . 17.479 10.682 59 23.725 14.528 514 --------- ------ ------ --- ------ ------ ----- Neuberger Berman AMT Mid-Cap Growth Portfolio 2005 . 11.983 13.394 2 12.063 13.510 40 2006 . 13.394 15.095 4 13.510 15.256 103 2007 . 15.095 18.175 3 15.256 18.406 145 2008 . 18.175 10.114 2 18.406 10.263 114 --------- ------ ------ --- ------ ------ ----- Neuberger Berman AMT Regency Portfolio 2005 . 15.728 17.310 1 15.830 17.457 32 2006 . 17.310 18.909 1 17.457 19.108 82 2007 . 18.909 19.194 1 19.108 19.435 93 2008 . 19.194 10.219 1 19.435 10.368 79 --------- ------ ------ --- ------ ------ ----- Oppenheimer Global Securities 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ ----- Van Kampen Capital Growth 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ --- ------ ------ ----- 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) Lincoln VIP Wilshire Moderate Profile 2005 . 9.991 10.490 899 10.346 10.493 205 2006 . 10.490 11.573 3,142 10.493 11.582 342 2007 . 11.573 12.452 6,102 11.582 12.468 521 2008 . 12.452 8.996 9,472 12.468 9.012 737 --------- ------ ------ ----- ------ ------ --- Lincoln VIP Wilshire Moderately Aggressive Profile 2005 . 9.989 10.667 390 10.394 10.671 78 2006 . 10.667 11.988 2,369 10.671 11.998 191 2007 . 11.988 12.963 4,640 11.998 12.979 426 2008 . 12.963 8.498 7,465 12.979 8.513 733 --------- ------ ------ ----- ------ ------ --- Lord Abbett All Value 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ ----- ------ ------ --- MFS VIT Growth Series 2008 . 9.090 6.332 49 6.720 6.333 2 --------- ------ ------ ----- ------ ------ --- MFS VIT Total Return Series 2005 . 10.015 10.144 386 10.050 10.146 22 2006 . 10.144 11.177 1,287 10.146 11.185 68 2007 . 11.177 11.467 1,803 11.185 11.481 129 2008 . 11.467 8.792 1,921 11.481 8.807 168 --------- ------ ------ ----- ------ ------ --- MFS VIT Utilities Series 2005 . 10.074 11.078 183 10.416 11.082 12 2006 . 11.078 14.321 724 11.082 14.332 39 2007 . 14.321 18.032 1,510 14.332 18.055 88 2008 . 18.032 11.069 2,013 18.055 11.089 105 --------- ------ ------ ----- ------ ------ --- Neuberger Berman AMT Mid-Cap Growth Portfolio 2005 . 9.965 11.215 90 9.965 11.218 10 2006 . 11.215 12.697 308 11.218 12.706 33 2007 . 12.697 15.356 408 12.706 15.375 47 2008 . 15.356 8.584 347 15.375 8.599 35 --------- ------ ------ ----- ------ ------ --- Neuberger Berman AMT Regency Portfolio 2005 . 10.098 11.035 222 10.059 11.038 14 2006 . 11.035 12.109 426 11.038 12.118 34 2007 . 12.109 12.347 471 12.118 12.363 36 2008 . 12.347 6.603 407 12.363 6.615 23 --------- ------ ------ ----- ------ ------ --- Oppenheimer Global Securities 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ ----- ------ ------ --- Van Kampen Capital Growth 2008 . N/A N/A N/A N/A N/A N/A --------- ------ ------ ----- ------ ------ ---
* 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-6 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. Prior versions of these riders may have different features.
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to guarantee that Designed to guarantee that Designed to guarantee that at least the entire amount if you make your first if you make your first of your purchase payments withdrawal on or after the withdrawal on or after the will be returned to you date you reach age 65, you date you reach age 59 1/2 (age through periodic are guaranteed income for 65 under Joint Life), you withdrawals, regardless of your life (and your are guaranteed income for the investment performance spouse's, under Joint Life your life (and your of the contract. (no version), spouse's, under Joint Life longer available for even after the entire version). purchase on or after amount of purchase payments January 16, 2009) has been returned to you LINCOLN LIFETIME INCOME(SM) through periodic Advantage Plus is designed withdrawals. If lifetime to guarantee that contract withdrawals are not in value will not be less than effect, you may make the initial purchase periodic withdrawals of the payment (or contract value Guaranteed Amount. on rider date) at the end of a 7-year period if you make no withdrawals and cancel the LINCOLN LIFETIME INCOME(SM) Advantage at that time. ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee 0.65% of Guaranteed Amount 0.65% (Single Life) or 0.90% of Guaranteed Amount 0.80% (Joint Life) of (1.05% with LINCOLN Guaranteed Amount LIFETIME INCOME(SM) Advantage Plus) ------------------------------------------------------------------------------------------------------------------------- 3. Guaranteed 0.95% of Guaranteed Amount 1.50% of Guaranteed Amount 1.50% of Guaranteed Amount Maximum Fee -------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 1. Overview Designed to provide an Designed to guarantee today Designed to use the Income income program that a future minimum payout Base established under combines variable lifetime floor for i4LIFE(R) Advantage 4LATER(R) Advantage (if income payments and a death regular income payments, 4LATER(R) Advantage benefit with the ability to regardless of investment Guaranteed Income Benefit make withdrawals during a performance, by providing is elected) or the Account defined period. an Income Base during the Value* established under accumulation period that i4LIFE(R) Advantage (if can be used to establish in i4LIFE(R) Advantage the future a Guaranteed Guaranteed Income Benefit Income Benefit with i4LIFE(R) is elected) or the Advantage. Guaranteed Amount under LINCOLN LIFETIME INCOME(SM) Advantage (for prior purchasers of LINCOLN LIFETIME INCOME(SM) Advantage) to provide a minimum payout floor for i4LIFE(R) Advantage regular income payments, regardless of investment performance. * Can instead use the remaining Guaranteed Amount under LINCOLN SMARTSECURITY(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 2. Current Fee Varies based on product and 0.65% of Income Base 1) 0.65% added to the i4LIFE(R) death benefit option Advantage charge (assessed as a % of (4LATER(R) Advantage account value, and only Guaranteed Income Benefit) during annuity payout 2) 0.50% added to the i4LIFE(R) phase) Advantage charge (i4LIFE(R) Advantage Guaranteed Income Benefit) (assessed as a % of account value, and only during annuity payout phase ------------------------------------------------------------------------------------------------------------------------ 3. Guaranteed Same as current fee 1.50% of Income Base 1.50% added to the i4LIFE(R) Maximum Fee Advantage charge (assessed as a % of account value, and only during annuity payout phase) ------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------ LINCOLN SMARTSECURITY(R) LINCOLN SMARTSECURITY(R) LINCOLN LIFETIME INCOME(SM) ADVANTAGE 5-YR. ELECTIVE ADVANTAGE 1-YR. AUTOMATIC ADVANTAGE (WITH OR WITHOUT STEP-UP STEP-UP LINCOLN LIFETIME INCOME(SM) (PRIOR VERSIONS MAY VARY) ADVANTAGE PLUS) ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes - 7% annually Yes - 5% annually Yes - 5% annually Permitted Withdrawals negate LINCOLN LIFETIME INCOME(SM) Advantage Plus ------------------------------------------------------------------------------------------------------------------------ 5. Payments No Yes (if conditions are met) Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential Purchase Payments Purchase Payments Purchase Payments Increases to Optional 5-Year Step-Ups Automatic Annual Step-Ups 5% Enhancements Guaranteed Amount, (if conditions are met) (if conditions are met) Automatic Annual Step-Ups Income Base, or 200% Step-Up Guaranteed Income (if conditions are met) Benefit (as applicable) ------------------------------------------------------------------------------------------------------------------------ 7. Investment Option 3 (different Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date apply depending upon date of purchase. See of purchase. See of purchase. See Investment Requirements Investment Requirements Investment Requirements section of prospectus for section of prospectus for section of prospectus for more details) more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to Yes Yes, after the first rider Yes-may impact the charge Make Additional anniversary, if cumulative Purchase payments are over $100,000 Payments if Contract and prior Home Office Value is greater than approval is provided zero ------------------------------------------------------------------------------------------------------------------------ 9. Spousal Yes Yes No Continuation ------------------------------------------------------------------------------------------------------------------------ 10. Ability to Yes, after 5 years Yes, after 5 years Yes, after 7 Years Cancel Rider following the later of following the later of rider effective date or rider effective date or contractowner-elected step- contractowner-elected step- up up ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No Yes Home Benefit (Not available in New York) ------------------------------------------------------------------------------------------------------------------------ 12. May Elect No No No Other Living Benefit Riders ------------------------------------------------------------------------------------------------------------------------
I4LIFE(R) ADVANTAGE 4LATER(R) ADVANTAGE 1) 4LATER(R) ADVANTAGE GUARANTEED INCOME BENEFIT 2) I4LIFE(R) ADVANTAGE GUARANTEED INCOME BENEFIT (VERSION 3) (PRIOR VERSIONS MAY VARY) 3) GUARANTEED INCOME BENEFIT FOR PURCHASERS OF LINCOLN LIFETIME INCOME(SM) ADVANTAGE ------------------------------------------------------------------------------------------------------------------------ 4. Withdrawals Yes, during Access Period Yes, only after you elect No Permitted i4LIFE(R) Advantage ------------------------------------------------------------------------------------------------------------------------ 5. Payments Yes (if conditions are met) If elect i4LIFE(R)Advantage Yes (if conditions are met) for Life ------------------------------------------------------------------------------------------------------------------------ 6. Potential N/A Purchase Payments Automatic Annual Step-Ups Increases to 15% Enhancements (every 3 Prior versions will have Guaranteed Amount, years) different Step-Up Income Base, or provisions Guaranteed Income Resets to contract value Benefit (as applicable) (if conditions are met) (if conditions are met) ------------------------------------------------------------------------------------------------------------------------ 7. Investment None Option 3 (different Option 3 (different Requirements Investment Requirements may Investment Requirements may apply depending upon date apply depending upon date of purchase. See of purchase. See Investment Requirements Investment Requirements section of prospectus for section of prospectus for more details) more details) ------------------------------------------------------------------------------------------------------------------------ 8. Ability to No (non-qualified Yes No Make Additional contracts) Purchase Payments if Yes, during Access Period, Contract Value unless 4LATER(R) Advantage is greater than Guaranteed Income Benefit zero or i4LIFE(R) Advantage Guaranteed Income Benefit has been elected (qualified contracts) ------------------------------------------------------------------------------------------------------------------------ 9. Spousal No Yes (prior to Periodic No Continuation Income Commencement Date) ------------------------------------------------------------------------------------------------------------------------ 10. Ability to No (non-qualified Yes, after 3 years Yes, after 3 years Cancel Rider contracts) following the later of following the later of rider effective date or rider effective date or Yes, at any time most recent Reset most recent Reset (if (qualified contracts) 4LATER(R) Advantage Guaranteed Income Benefit is elected or purchasers of LINCOLN LIFETIME INCOME(SM) Advantage elect the Guaranteed Income Benefit) Yes, at any time (if i4LIFE(R) Advantage Guaranteed Income Benefit is elected) ------------------------------------------------------------------------------------------------------------------------ 11. Nursing No No No Home Benefit ------------------------------------------------------------------------------------------------------------------------ 12. May Elect Limited to Guaranteed No (prior to Periodic Limited to i4LIFE(R) Other Living Benefit Income Benefit Income Commencement Date) Advantage Riders ------------------------------------------------------------------------------------------------------------------------
SAI 3 Lincoln ChoicePlus AssuranceSM (B 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 (B Share) prospectus of Lincoln Life Variable Annuity Account N dated May 1, 2009. You may obtain a copy of the Lincoln ChoicePlus AssuranceSM (B 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 Capital Markets B-5 Advertising & Ratings B-6 More About the S&P 500 Index B-6 Additional Services B-6 Other Information B-7 Financial Statements B-7
This SAI is not a prospectus. The date of this SAI is May 1, 2009. 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, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, 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 The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service. Principal Underwriter Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life, serves as principal underwriter (the "Principal Underwriter") for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives, who are associated with Lincoln Financial Advisors Corporation, 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, $162,288,944, $223,104,195, and $220,940,772 to LFA and Selling Firms in 2006, 2007 and 2008, respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts. Purchase of Securities Being Offered The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived. Both before and after the annuity commencement date, there are exchange privileges between subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts. The offering of the contracts is continuous. Interest Adjustment Example Note: This example is intended to show how the interest adjustment calculation impacts the surrender value of a representative contract. The surrender charges, annual account fee, adjustment factor, and guaranteed minimum interest rate values shown here are generally different from those that apply to specific contracts, particularly those contracts that deduct an initial sales load or pay a bonus on deposits. Calculations of the interest adjustment in your contract, if applicable, will be based on the factors applicable to your contract. The interest adjustment may be referred to as a market value adjustment in your contract. B-2 SAMPLE CALCULATIONS FOR MALE 35 ISSUE CASH SURRENDER VALUES Single Premium.................. $50,000 Premium taxes................... None Withdrawals..................... None Guaranteed Period............... 5 years Guaranteed Interest Rate........ 3.50% Annuity Date.................... Age 70 Index Rate A.................... 3.50% Index Rate B.................... 4.00% End of contract year 1 3.50% End of contract year 2 3.00% End of contract year 3 2.00% End of contract year 4 Percentage adjustment to B...... 0.50%
Interest Adjustment Formula (1 + Index A)n ------------------------------ -1 n = Remaining Guaranteed Period (1 + Index B + % Adjustment)n
SURRENDER VALUE CALCULATION
(3) (1) (2) Adjusted (4) (5) (6) (7) Annuity 1 + Interest Annuity Minimum Greater of Surrender Surrender Contract Year Value Adjustment Formula Value Value (3) & (4) Charge Value --------------- --------- -------------------- ---------- --------- ------------ ----------- ---------- 1............ $51,710 0.962268 $49,759 $50,710 $50,710 $4,250 $46,460 2............ $53,480 0.985646 $52,712 $51,431 $52,712 $4,250 $48,462 3............ $55,312 1.000000 $55,312 $52,162 $55,312 $4,000 $51,312 4............ $57,208 1.009756 $57,766 $52,905 $57,766 $3,500 $54,266 5............ $59,170 N/A $59,170 $53,658 $59,170 $3,000 $56,170
ANNUITY VALUE CALCULATION
BOY* Annual EOY** Annuity Guaranteed Account Annuity Contract Year Value Interest Rate Fee Value ------------------ --------- --------------- --------- ---------- 1...............$50,000 x 1.035 - $40 = $51,710 2...............$51,710 x 1.035 - $40 = $53,480 3...............$53,480 x 1.035 - $40 = $55,312 4...............$55,312 x 1.035 - $40 = $57,208 5...............$57,208 x 1.035 - $40 = $59,170
SURRENDER CHARGE CALCULATION
Surrender Charge Surrender Contract Year Factor Deposit Charge ------------------ ---------- --------- ---------- 1............... 8.5% x $50,000 = $4,250 2............... 8.5% x $50,000 = $4,250 3............... 8.0% x $50,000 = $4,000 4............... 7.0% x $50,000 = $3,500 5............... 6.0% x $50,000 = $3,000
B-3 1 + INTEREST ADJUSTMENT FORMULA CALCULATION
Contract Year Index A Index B Adj Index B N Result ---------------- --------- --------- ------------- ----- --------- 1............. 3.50% 4.00% 4.50% 4 0.962268 2............. 3.50% 3.50% 4.00% 3 0.985646 3............. 3.50% 3.00% 3.50% 2 1.000000 4............. 3.50% 2.00% 2.50% 1 1.009756 5............. 3.50% N/A N/A N/A N/A
MINIMUM VALUE CALCULATION
Minimum Annual Guaranteed Account Minimum Contract Year Interest Rate Fee Value ------------------ --------------- --------- ---------- 1...............$50,000 x 1.015 - $40 = $50,710 2...............$50,710 x 1.015 - $40 = $51,431 3...............$51,431 x 1.015 - $40 = $52,162 4...............$52,162 x 1.015 - $40 = $52,905 5...............$52,905 x 1.015 - $40 = $53,658
* BOY = beginning of year ** EOY = end of year Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax; o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity Mortality Tables, modified, with an assumed investment return at the rate of 3%, 4%, 5% or 6% per annum, depending on the terms of your contract. The first annuity payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The assumed interest rate is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than the assumed interest rate, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. We may use sex-distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law. At an annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying B-4 the contractowner's fixed number of annuity units in each subaccount by the appropriate annuity unit value for the valuation date ending 14 days prior to the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immediately preceding valuation date by the product of: o The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and o A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days prior to the payment date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of Age, Sex and Survival We may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. Examples of Regular Income Payment Calculations These examples will illustrate the impact of the length of the access period and the impact of a withdrawal on the regular income payments. These examples assume that the investment return is the same as the assumed investment return (AIR) to make the regular income payment calculations simpler to understand. The regular income payments will vary based on the investment performance of the underlying funds. Annuitant............................ Male, Age 65 Secondary Life....................... Female, Age 63 Purchase Payment..................... $200,000.00 Regular Income Payment Frequency..... Annual AIR.................................. 4.0% Hypothetical Investment Return....... 4.0% 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. Capital Markets Beginning in 2008 and continuing as of the date of this prospectus, the capital and credit markets have experienced an unusually high degree of volatility. As a result, the market for fixed income securities has experienced illiquidity, increased price volatility, credit downgrade events and increased expected probability of default. Securities that are less liquid are more difficult to value and may be B-5 hard to sell, if desired. During this time period, domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers (such as our company) that have exposure to the real estate, mortgage and credit markets particularly affected. In any particular year, our capital may increase or decrease depending on a variety of factors - the amount of our statutory income or losses (which itself is sensitive to equity market and credit market conditions), the amount of additional capital we must hold to support business growth, changes in reserving requirements, our inability to secure capital market solutions to provide reserve relief, such as issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio and changes in interest rates. Advertising & Ratings We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln Life or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. In late September and early October of 2008, A.M. Best Company, Fitch, Moody's and Standard & Poor's each revised their outlook for the U.S. life insurance sector from stable to negative. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis or in accordance with other terms we make available, amounts from certain subaccounts, or the fixed side (if available) of the contract into the subaccounts or in accordance with other terms we make available. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. The minimum amount to be dollar cost averaged is $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; B-6 o the value of the amount being DCA'd is depleted; or o you cancel the program by written request or by telephone if we have your telephone authorization on file. We reserve the right to restrict access to this program at any time. A transfer made as part of this program is not considered a transfer for purposes of limiting the number of transfers that may be made, or assessing any charges or interest adjustment which may apply to transfers. Upon receipt of an additional purchase payment allocated to the DCA fixed account, the existing program duration will be extended to reflect the end date of the new DCA program. However, the existing interest crediting rate will not be extended. The existing interest crediting rate will expire at its originally scheduled expiration date and the value remaining in the DCA account from the original amount as well as any additional purchase payments will be credited with interest at the standard DCA rate at the time. We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. Automatic Withdrawal Service (AWS) - AWS provides an automatic, periodic withdrawal of contract value to you. AWS may take place on either a monthly, quarterly, semi-annual or annual basis, as selected by the contractowner. You may elect to participate in AWS at the time of application or at any time before the annuity commencement date by sending a written request to us. The minimum contract value required to establish AWS is $10,000. You may cancel or make changes to your AWS program at any time by sending a written request to us. If telephone authorization has been elected, certain changes may be made by telephone. Notwithstanding the requirements of the program, any withdrawal must be permitted under Section 401(a)(9) of the IRC for qualified plans or permitted under Section 72 of the IRC for non-qualified contracts. To the extent that withdrawals under AWS do not qualify for an exemption from the contingent deferred sales charge, we will assess any applicable surrender charges on those withdrawals. See Contingent deferred sales charges. 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 The December 31, 2008 financial statements of the VAA and the December 31, 2008 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, 2008 AND 2007 S-2 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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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. /s/ Ernst & Young, LLP Philadelphia, Pennsylvania March 18, 2009 S-3 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, ------------------- 2008 2007 -------- -------- ASSETS Investments: Available-for-sale securities, at fair value: Fixed maturity (amortized cost: 2008 -- $52,558; 2007 -- $53,250) $ 46,489 $ 53,405 Equity (cost: 2008 -- $187; 2007 -- $132) 139 134 Trading securities 2,189 2,533 Mortgage loans on real estate 7,396 7,117 Real estate 119 258 Policy loans 2,887 2,848 Derivative investments 60 172 Other investments 948 986 -------- -------- Total investments 60,227 67,453 Cash and invested cash 2,116 975 Deferred acquisition costs and value of business acquired 11,184 8,574 Premiums and fees receivable 445 382 Accrued investment income 782 801 Reinsurance recoverables 11,334 7,779 Reinsurance related derivative assets 167 -- Goodwill 3,520 3,539 Other assets 3,509 2,451 Separate account assets 55,655 82,263 -------- -------- Total assets $148,939 $174,217 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Future contract benefits $ 17,054 $ 13,619 Other contract holder funds 59,441 58,168 Short-term debt 4 173 Long-term debt 2,080 1,675 Reinsurance related derivative liability -- 102 Funds withheld reinsurance liabilities 2,243 1,862 Deferred gain on business sold through reinsurance 542 696 Payables for collateral under securities loaned and derivatives 880 1,135 Other liabilities 1,382 2,083 Separate account liabilities 55,655 82,263 -------- -------- Total liabilities 139,281 161,776 -------- -------- CONTINGENCIES AND COMMITMENTS (SEE NOTE 14) STOCKHOLDER'S EQUITY: Common stock -- 10,000,000 shares, authorized, issued and outstanding 9,132 9,105 Retained earnings 3,135 3,283 Accumulated other comprehensive income (loss) (2,609) 53 -------- -------- Total stockholder's equity 9,658 12,441 -------- -------- Total liabilities and stockholder's equity $148,939 $174,217 ======== ========
See accompanying Notes to the Consolidated Financial Statements S-4 CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2008 2007 2006 ------ ------ ------ REVENUES: Insurance premiums $1,835 $1,664 $1,174 Insurance fees 2,980 2,930 2,400 Net investment income 3,975 4,181 3,805 Realized loss (831) (127) (35) Amortization of deferred gain on business sold through reinsurance 76 83 76 Other revenues and fees 273 323 289 ------ ------ ------ Total revenues 8,308 9,054 7,709 ------ ------ ------ BENEFITS AND EXPENSES: Interest credited 2,438 2,379 2,175 Benefits 2,645 2,330 1,758 Underwriting, acquisition, insurance and other expenses 2,954 2,520 2,073 Interest and debt expense 85 82 82 ------ ------ ------ Total benefits and expenses 8,122 7,311 6,088 ------ ------ ------ Income before taxes 186 1,743 1,621 Federal income tax expense (benefit) (68) 504 460 ------ ------ ------ Net income $ 254 $1,239 $1,161 ====== ====== ======
See accompanying Notes to the Consolidated Financial Statements S-5 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2008 2007 2006 ------- ------- ------- COMMON STOCK: Balance at beginning-of-year $ 9,105 $ 9,088 $ 2,125 Lincoln National Corporation purchase price -- (9) 6,932 Stock compensation 27 26 31 ------- ------- ------- Balance at end-of-year 9,132 9,105 9,088 ------- ------- ------- RETAINED EARNINGS: Balance at beginning-of-year 3,283 3,341 2,748 Cumulative effect of adoption of SOP 05-1 -- (41) -- Cumulative effect of adoption of FIN 48 -- (14) -- Comprehensive income (loss) (2,408) 876 1,124 Less other comprehensive income (loss), net of tax: (2,662) (363) (37) ------- ------- ------- Net Income 254 1,239 1,161 Dividends declared (402) (1,242) (568) ------- ------- ------- Balance at end-of-year 3,135 3,283 3,341 ------- ------- ------- NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES: Balance at beginning-of-year 76 421 452 Change during the year (2,638) (345) (31) ------- ------- ------- Balance at end-of-year (2,562) 76 421 ------- ------- ------- NET UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS: Balance at beginning-of-year (19) (9) 7 Change during the year 4 (10) (16) ------- ------- ------- Balance at end-of-year (15) (19) (9) ------- ------- ------- MINIMUM PENSION LIABILITY ADJUSTMENT: Balance at beginning-of-year -- -- (6) Change during the year -- -- 6 ------- ------- ------- Balance at end-of-year -- -- -- ------- ------- ------- FUNDED STATUS OF EMPLOYEE BENEFIT PLANS: Balance at beginning-of-year (4) 4 -- Change during the year (28) (8) 4 ------- ------- ------- Balance at end-of-year (32) (4) 4 ------- ------- ------- Total stockholder's equity at end-of-year $ 9,658 $12,441 $12,845 ======= ======= =======
See accompanying Notes to the Consolidated Financial Statements S-6 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2008 2007 2006 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 254 $ 1,239 $ 1,161 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs, value of business acquired, deferred sales inducements and deferred front end loads deferrals and interest, net of amortization (244) (916) (664) Trading securities purchases, sales and maturities, net 177 316 165 Change in premiums and fees receivable (61) (88) (3) Change in accrued investment income 19 13 21 Change in future contract benefits 4,169 526 109 Change in other contract holder funds (71) 453 741 Change in funds withheld reinsurance liability and reinsurance recoverables (3,618) (493) 304 Change in federal income tax accruals (45) 310 150 Realized loss 831 127 35 Amortization of deferred gain on business sold through reinsurance (76) (83) (76) Stock-based compensation expense 19 26 31 Other (31) (160) (1,055) ------- ------- ------- Net cash provided by operating activities 1,323 1,270 919 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (5,776) (8,606) (9,323) Sales of available-for-sale securities 1,506 3,453 5,328 Maturities of available-for-sale securities 3,732 4,087 3,326 Purchases of other investments (1,163) (2,018) (696) Sales or maturities of other investments 907 1,880 585 Increase (decrease) in payables for collateral under securities loaned and derivatives (255) (369) 538 Purchase of Jefferson-Pilot stock, net of cash acquired of $39 -- -- 154 Other (117) (84) 58 ------- ------- ------- Net cash used in investing activities (1,166) (1,657) (30) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 250 375 140 Issuance (decrease) in commercial paper (14) 13 (13) Deposits of fixed account values, including the fixed portion of variable 9,806 9,481 7,444 Withdrawals of fixed account values, including the fixed portion of variable (5,910) (6,645) (6,660) Transfers to and from separate accounts, net (2,204) (2,448) (1,821) Payment of funding agreements (550) -- -- Common stock issued for benefit plans and excess tax benefits 8 -- -- Dividends paid to stockholder (402) (787) (568) ------- ------- ------- Net provided by (used in) financing activities 984 (11) (1,478) ------- ------- ------- Net increase (decrease) in cash and invested cash 1,141 (398) (589) Cash and invested cash at beginning-of-year 975 1,373 1,962 ------- ------- ------- Cash and invested cash at end-of-period $ 2,116 $ 975 $ 1,373 ======= ======= =======
See accompanying Notes to the Consolidated Financial Statements S-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Lincoln National Life Insurance Company ("LNL" or the "Company," which also may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of Lincoln National Corporation ("LNC" or the "Parent Company"), is domiciled in the state of Indiana. We own 100% of the outstanding common stock of one insurance company subsidiary, Lincoln Life & Annuity Company of New York ("LLANY"). We also own several non-insurance companies, including Lincoln Financial Distributors ("LFD") and Lincoln Financial Advisors ("LFA"), LNC's wholesaling and retailing business units, respectively. LNL's principal businesses consist of underwriting annuities, deposit-type contracts and life insurance through multiple distribution channels. LNL is licensed and sells its products throughout the United States of America ("U.S.") and several U.S. territories, see Note 23. BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. On 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 Combination" ("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, in a manner similar to a pooling-of-interests. The consolidated financial statements for the period from January 1, 2006 through April 2, 2006 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 year ended December 31, 2006. 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 21 for additional discussion on SAP. Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications had no effect on net income or stockholder's equity of the prior years. For the two years ended December 31, 2007, we have reclassified the results of certain derivatives and embedded derivatives to realized gain (loss), which were previously reported within insurance fees, net investment income, interest credited or benefits on our Consolidated Statements of Income. The associated amortization expense of deferred acquisition costs ("DAC") and value of business acquired ("VOBA") (previously reported within underwriting, acquisition, insurance and other expenses), deferred sales inducements ("DSI") (previously reported within interest credited), deferred front-end loads ("DFEL") (previously reported within insurance fees) and changes in contract holder funds (previously reported within benefits) have also been reclassified to realized gain (loss) on our Consolidated Statements of Income. The detail of the reclassifications (in millions) from what was previously reported in prior period Consolidated Statements of Income (in millions) was as follows: FOR THE YEARS ENDED DECEMBER, 31 ------------------- 2007 2006 ----- ---- Realized loss, as previously reported $(112) $ (2) Effect of reclassifications to: Insurance fees 64 39 Net investment income (5) 62 Interest credited (19) (66) Benefits (103) (55) Underwriting, acquisition, insurance and other expenses 48 (13) ----- ---- Realized loss, as adjusted $(127) $(35) ===== ==== SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of LNL and all other entities in which we have a controlling financial interest and any variable interest entities ("VIEs") in which we are the primary beneficiary. Entities in which we do not have a controlling financial interest and do not exercise significant management influence over the operating and financing decisions are reported using the equity method. The carrying value of our investments that we account for using the equity method on our Consolidated Balance Sheets and equity in earnings on our Consolidated Statements of Income is not material. All material inter-company accounts and transactions have been eliminated in consolidation. See Note 4 for additional discussion on our VIEs. S-8 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, DAC, VOBA, goodwill, future contract benefits, other contract holder funds (including DFEL), pension plans, income taxes and the potential effects of resolving litigated matters. BUSINESS COMBINATIONS For all business combination transactions 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 allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information relative to the fair values as of the acquisition date becomes available. The consolidated financial statements include the results of operations of any acquired company since the acquisition date. 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 accumulated other comprehensive income ("OCI"), net of associated DAC, VOBA, DSI, other contract holder funds and deferred income taxes. We measure the fair value of our securities classified as available-for-sale based on assumptions used by market participants in pricing the security. Pursuant to SFAS No. 157, we have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and we consistently apply the valuation methodology to measure the security's fair value. Our fair value measurement is based on a market approach which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include: third party pricing services, independent broker quotations or pricing matrices. We use observable and unobservable inputs to our valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, and discussions with senior business leaders and brokers as well as observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on management's judgment concerning: the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity. We do not adjust prices received from third parties; however, we analyze the third party pricing services' valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy. See Note 2 "STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 157 ("SFAS 157") - FAIR VALUE MEASUREMENTS" for more information regarding the fair value hierarchy. 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. We regularly review available-for-sale securities for declines in fair value that we determine 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 gain (loss) on our Consolidated Statements of Income. A write-down for impairment can be recognized for both credit-related events and for a decline in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery of fair 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, a recovery in value is accreted through investment income over the life of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors including, but not limited to: the severity (generally if greater than 20%) and duration (generally if greater than six months) of the decline; our ability and intent to hold the security for a sufficient period of time to allow for a recovery in value; the cause of the decline; and fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer. S-9 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 on our Consolidated Statements of Income as they occur. The fair value for our trading securities is determined in the same manner as our securities classified as available-for-sale discussed in "AVAILABLE-FOR-SALE SECURITIES" above. For discussion of how the fair value of our embedded derivatives is determined see "DERIVATIVE INSTRUMENTS" below. ASSET-BACKED AND MORTGAGE-BACKED SECURITIES 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 on our Consolidated Statements of Income. 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 and derivatives 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 expense associated with these transactions are recorded as investment income and investment expense 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 and derivatives 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 expense associated with these transactions are recorded as investment income and investment expense within net investment income on our Consolidated Statements of 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 on our Consolidated Statements of 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: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the loan's collateral. Valuation allowances are maintained at a level we believe is adequate to absorb estimated probable credit losses. 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 on our Consolidated Statements of Income when received, depending on the assessment of the collectibility 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 gain (loss) on our Consolidated Statements of Income. POLICY LOANS Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances. REAL ESTATE Real estate includes both real estate held for the production of income and real estate held-for-sale. Real estate held for the production of income is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. We periodically review properties held for the production of income for impairment. S-10 Properties whose carrying values are greater than their projected undiscounted cash flows are written down to estimated fair value, with impairment losses reported in realized gain (loss) on our Consolidated Statements of Income. The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate classified as held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs at the time classified as held-for-sale. Real estate is not depreciated while it is classified as held-for-sale. Also, valuation allowances for losses are established, as appropriate, for real estate held-for-sale and any changes to the valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Income. Real estate acquired through foreclosure proceedings is recorded at fair value at the settlement date. DERIVATIVE INSTRUMENTS We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by entering into derivative transactions. All of our derivative instruments are recognized as either assets or liabilities on our Consolidated Balance Sheets at estimated fair value. Pursuant to SFAS No. 157, we have categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. The accounting for changes in the estimated fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument based upon the exposure being hedged: as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign subsidiary. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated OCI and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of change in estimated fair values. For derivative instruments not designated as hedging instruments but that are economic hedges, the gain or loss is recognized in net income within realized gain (loss) during the period of change. The Company purchases and issues financial instruments and products that contain embedded derivative instruments. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the Consolidated Balance Sheets, is carried at fair value with changes in fair value reported in realized gain (loss) on our Consolidated Statements of Income. See Note 6 for additional discussion of our derivative instruments. We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market conditions. We calculate the present value of the cash flows to measure the current fair value of the derivative. We do not adjust prices received from third parties. However, we do analyze the third party pricing services' valuation methodologies and related inputs and perform additional evaluation to determine the appropriate hierarchy levels described in Note 2 "SFAS 157 - FAIR VALUE MEASUREMENTS." CASH AND CASH EQUIVALENTS Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with a maturity of three months or less. DAC, VOBA, DSI AND DFEL Commissions and other costs of acquiring UL insurance, VUL insurance, traditional life insurance, annuities and other investment contracts, which vary with and are related primarily to the production of new business, have been deferred (i.e. DAC) to the extent recoverable. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for dollar cost averaging contracts are considered DSI, and the unamortized balance is reported in other assets on our Consolidated Balance Sheets. Contract sales charges that are collected in the early years of an insurance contract are deferred (referred to as "DFEL"), and the unamortized balance is reported in other contract holder funds on our Consolidated Balance Sheets. The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type based on two different accounting pronouncements: SFAS No. 97, "Accounting and Reporting by Insurance 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"). For S-11 all SFAS 97 and SFAS 60 contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. Both DAC and VOBA amortization is reported within underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. DSI is expensed in interest credited on our Consolidated Statements of Income. The amortization of DFEL is reported within insurance fees on our Consolidated Statements of Income. Under SFAS 97, acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits ("EGPs") from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 30 years, based on the expected lives of the contracts. 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. All SFAS 60 contracts, including traditional life insurance, 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, VOBA, DSI or DFEL balance or related amortization under SFAS 60 for fixed and variable payout annuities. The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated Statements of Income reflecting the incremental impact of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss). On a quarterly basis, we may record an adjustment to the amounts included 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, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for annuity and life insurance products with certain guarantees. These assumptions include investment margins, mortality, retention and rider utilization. Based on our 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. 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 explicit in the reinsurance agreements. 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. Under SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") 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. SFAS 142 requires that we perform a two-step test in our evaluation of the carrying value of goodwill for impairment. In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value is greater than the carrying value, then the carrying value is deemed to be sufficient and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist and Step 2 is required to be performed. In Step 2, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value as determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, S-12 goodwill is impaired and written down to its fair value, and a charge is reported in impairment of intangibles on our Consolidated Statements of Income. SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS Specifically identifiable intangible assets, net of accumulated amortization, are reported in other assets on our Consolidated Balance Sheets. The carrying values of specifically identifiable intangible assets are reviewed periodically for indicators of impairment in value, including unexpected or adverse changes in the following: the economic or competitive environments in which the Company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of impairment, then the cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our Consolidated Statements of Income. Sales force intangibles are attributable to the value of the distribution system acquired in the Insurance Solutions - Life Insurance segment. These assets are amortized on a straight-line basis over their useful life of 25 years. OTHER LONG-LIVED ASSETS Property and equipment owned for company use is included in other assets on our Consolidated Balance Sheets and is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. SEPARATE ACCOUNT ASSETS AND LIABILITIES We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts. See Note 11 for additional information regarding arrangements with contractual guarantees. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that accrue to the benefit of the contract holders, excluding surrender charges. The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.00% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.00% to 13.50%. These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable. The liabilities for future claim reserves for variable annuity products containing guaranteed death benefit ("GDB") features are calculated by estimating the present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments over the life of the contract ("benefit ratio") multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GDB payments plus interest. The change in the reserve for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. With respect to our future contract benefits and other contract holder funds, we continually review: overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur. The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. UL and VUL products with secondary guarantees represented approximately 35% of permanent life insurance in force as of S-13 December 31, 2008, and approximately 71% of sales for these products in 2008. Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI. Future contract benefits on our Consolidated Balance Sheets include GLB features and remaining guaranteed interest and similar contracts that are carried at fair value. The fair values for the GLB contracts are based on their approximate surrender values. Our LINCOLN SMARTSECURITY(R) Advantage guaranteed withdrawal benefit ("GWB") feature, GIB and 4LATER(R) features have elements of both insurance benefits accounted for under Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1") and embedded derivatives accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS 157. We weight these features and their associated reserves accordingly based on their hybrid nature. 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. We classify these items in level 3 within the hierarchy levels described in "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. BORROWED FUNDS LNL's short-term borrowings are defined as borrowings with contractual or expected maturities of one year or less. Long-term borrowings have contractual or expected maturities greater than one year. DEFERRED GAIN ON BUSINESS SOLD THROUGH REINSURANCE Our reinsurance operations were acquired by Swiss Re Life & Health America, Inc. ("Swiss Re") in December 2001 through a series of indemnity reinsurance transactions. We are recognizing the gain related to these transactions at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years, in accordance with the requirements of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). In addition, for the deferred loss on the reinsurance ceded to LNBAR we are recognizing it over 30 years. COMMITMENTS AND CONTINGENCIES Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable. INSURANCE FEES Insurance fees for investment and interest-sensitive life insurance contracts consist of asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance. In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the "attributed fees"), which are not reported within insurance fees on our Consolidated Statements of Income. These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Income. The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms. For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue. INSURANCE PREMIUMS Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Our group non-medical insurance products consist primarily of term life, disability and dental. REALIZED GAIN (LOSS) Realized gain (loss) on our Consolidated Statements of Income includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and S-14 net gains and losses on reinsurance embedded derivative and trading securities on Modco and CFW reinsurance arrangements. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation. OTHER REVENUES AND FEES Other revenues and fees 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. INTEREST CREDITED Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in our general account during 2006 through 2008 ranged from 3.00% to 9.00%. BENEFITS Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits and annuity products with guaranteed death benefits. For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Pursuant to the accounting rules for our obligations to employees under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is 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 18 for additional information. STOCK-BASED COMPENSATION In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date LNC's Board of Directors approves stock awards, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholder's equity. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on our Consolidated Balance Sheets and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. See Note 20 for additional information. INTEREST AND DEBT EXPENSES Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts, costs or hedges are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. INCOME TAXES We have elected to file consolidated federal income tax returns with LNC and its subsidiaries. Pursuant to an intercompany tax sharing agreement with LNC, we provide for income taxes on a separate return filing basis. The tax sharing agreement also provides that we will receive benefit for net operating losses, capital losses and tax credits which are not usable on a separate return basis to the extent such items may be utilized in the consolidated income tax returns of LNC. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required to reduce the deferred tax asset to an amount that we expect, more likely than not, will be realized. See Note 7 for additional information. 2. NEW ACCOUNTING STANDARDS ADOPTION OF NEW ACCOUNTING STANDARDS 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, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("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 are accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract are accounted for as an extinguishment of the S-15 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 total assets of $69 million, total liabilities of $28 million and retained earnings of $41 million on our Consolidated Balance Sheets. 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 STAFF POSITION FAS 115-1 AND FAS 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 nullified 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 superseded EITF Topic No. D-44 "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." Under the impairment model in FSP 115-1, any security in an unrealized loss position is considered impaired. An evaluation is made to determine whether the impairment is other-than-temporary based on existing accounting guidance. If an impairment is considered other-than-temporary, a realized loss is recognized to write the security's cost or amortized cost basis down to fair value. The fair value of the security on the measurement date of the other-than-temporary impairment becomes the new cost basis for the security, which may not be adjusted for subsequent recoveries in fair value. Subsequent to the recognition of an interest-related other-than-temporary impairment for debt securities, the resulting discount, or reduction to the premium, is amortized over the remaining life of the debt security, prospectively, based on the amount and timing of the estimated future cash flows of the debt security. We adopted FSP 115-1 effective January 1, 2006. The adoption of FSP 115-1 did not have a material effect on our consolidated financial condition or results of operations. 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 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. 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"). Because SFAS 155 eliminated the interim guidance related to securitized financial assets, DIG B40 provided a narrow scope exception for securitized interests that contain only an embedded derivative related to prepayment risk. 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. 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 and DIG B40 did not have a material impact on our consolidated financial condition or results of operations. 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 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 7 for more information regarding our adoption of FIN 48. SFAS 157 -- FAIR VALUE MEASUREMENTS In September 2006, the FASB issued SFAS 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement S-16 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 non-performance 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 three-level hierarchy for fair value measurement is defined as follows: - Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date. "Blockage discounts" for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available for an identical asset or liability in an active market are prohibited; - Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and - Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. We have certain guaranteed benefit features within our annuity products 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 Level 3 inputs and some Level 2 inputs, which are reflective of the hypothetical market participant perspective for fair value measurement, including liquidity assumptions and assumptions regarding the Company's own credit or non-performance risk. 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. See Note 22 for additional information about our fair value disclosures for financial instruments required by SFAS 157. We adopted SFAS 157 effective January 1, 2008, by recording increases (decreases) to the following categories (in millions) on our consolidated financial statements: ASSETS DAC $ (3) VOBA (8) Other assets -- DSI (1) ---- Total assets $(12) ==== LIABILITIES Future contract benefits: Remaining guaranteed interest and similar contracts $(20) Other liabilities -- income tax liabilities 3 ---- Total liabilities $(17) ==== REVENUES Realized gain $ 10 Federal income tax 3 ---- Increase to net income $ 7 ==== See "Summary of Significant Accounting Policies" in Note 1 for discussion of the methodologies and assumptions used to determine the fair value of our financial instruments carried at fair value. FSP NO. FAS 157-2 -- EFFECTIVE DATE OF FASB STATEMENT NO. 157 In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, we did not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities within the scope of FSP 157-2. Examples of items to which the deferral is applicable include, but are not limited to: - Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods; - Reporting units measured at fair value in the goodwill impairment test under SFAS 142, and indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142; - Nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"; - Asset retirement obligations initially measured at fair value under SFAS No. 143, "Accounting for Asset Retirement Obligations"; and - Nonfinancial liabilities for exit or disposal activities initially measured at fair value under SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." S-17 As of January 1, 2009, the deferral from FSP 157-2 will no longer be effective. We will apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities beginning on January 1, 2009, and we do not expect the application to have a material impact on our consolidated financial condition or results of operations. FSP NO. FAS 157-3 -- DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an illustrative example of key considerations to analyze in determining fair value of a financial asset when the market for the asset is not active. During times when there is little market activity for a financial asset, the objective of fair value measurement remains the same, that is, to value the asset at the price that would be received by the holder of the financial asset in an orderly transaction (exit price) that is not a forced liquidation or distressed sale at the measurement date. Determining fair value of a financial asset during a period of market inactivity may require the use of significant judgment and an evaluation of the facts and circumstances to determine if transactions for a financial asset represent a forced liquidation or distressed sale. An entity's own assumptions regarding future cash flows and risk-adjusted discount rates for financial assets are acceptable when relevant observable inputs are not available. FSP 157-3 was effective on October 10, 2008, and for all prior periods for which financial statements have not been issued. Any changes in valuation techniques resulting from the adoption of FSP 157-3 shall be accounted for as a change in accounting estimated in accordance with SFAS No. 154, "Accounting Changes and Error Corrections." We adopted the guidance in FSP 157-3 in our financial statements for the reporting period ending September 30, 2008. The adoption did not have a material impact on our consolidated financial condition or results of operations. 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 that date. 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 Derivative Implementation Group ("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 relationships involving an interest-bearing financial instrument and/or an interest rate swap, originally outlined in paragraph 68 in SFAS 133. We adopted DIG E23 effective January 1, 2008, for hedging relationships designated on or after that date. The adoption did not have a material impact on our consolidated financial condition or results of operations. FSP FAS NO. 133-1 AND FIN 45-4 -- DISCLOSURES ABOUT CREDIT DERIVATIVES AND CERTAIN GUARANTEES: AN AMENDMENT OF FASB STATEMENT NO. 133 AND FASB INTERPRETATION NO. 45; AND CLARIFICATION OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 161 In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161" ("FSP 133-1"). FSP 133-1 amends the disclosure requirements of SFAS 133 to require the seller of credit derivatives, including hybrid financial instruments with embedded credit derivatives, to disclose additional information regarding, among other things, the nature of the credit derivative, information regarding the facts and circumstances that may require performance or payment under the credit derivative, and the nature of any recourse provisions the seller can use for recovery of payments made under the credit derivative. In addition, FSP 133-1 amends the disclosure requirements in FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") to require additional disclosure about the payment/performance risk of a guarantee. Finally, FSP 133-1 clarifies the intent of the FASB regarding the effective date of SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). The provisions of FSP 133-1 related to SFAS 133 and FIN 45 are effective for annual and interim reporting periods ending after November 15, 2008, with comparative disclosures required only for those periods ending subsequent to initial adoption. The clarification of the effective date of SFAS 161 was effective upon the issuance of FSP 133-1, and will not impact the effective date of SFAS 161 in our financial statements. We have included these required enhanced disclosures related to credit derivatives, hybrid financial instruments and guarantees in the notes to the consolidated financial statements beginning in the reporting period ended December 31, 2008. S-18 FSP FAS 140-4 AND FIN 46(R)-8 -- ENHANCED DISCLOSURE REQUIREMENTS RELATED TO TRANSFERS OF FINANCIAL ASSETS AND VARIABLE INTEREST ENTITIES. In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" ("FSP 140-4"). FSP 140-4 amends FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140") to require additional disclosures regarding a transferor's continuing involvement with transferred financial assets in a securitization or asset-backed financing arrangement. FSP 140-4 also amends FIN 46 (revised December 2003) "Consolidation of Variable Interest Entities," to expand the disclosure requirements for VIEs to include information regarding the decision to consolidate the VIE, the nature of and changes in risks related to a VIE, and the impact on the entity's financial statements due to the involvement with a VIE. Those variable interests required to comply with the guidance in FSP 140-4 include the primary beneficiary of the VIE, the holder of a significant variable interest and a sponsor that holds a variable interest. Further, FSP 140-4 requires enhanced disclosures for certain sponsors and holders of a significant variable interest in a qualifying special purpose entity. The provisions of FSP 140-4 are effective for the first reporting period ending after December 15, 2008, and comparative disclosures are not required. We included the enhanced disclosures required by FSP 140-4 in the notes to the consolidated financial statements beginning in the reporting period ended December 31, 2008. See Note 4 for more information regarding our involvement with VIEs. FSP EITF 99-20-1 -- AMENDMENTS TO THE IMPAIRMENT GUIDANCE IN EITF ISSUE NO. 99-20 In January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment Guidance in EITF Issue No. 99-20" ("EITF 99-20-1"), which eliminates the requirement in EITF No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets" ("EITF 99-20") for holders of beneficial interests to estimate cash flow using current information and events that a market participant would use in determining the current fair value and other-than-temporary impairment of the beneficial interest. FSP 99-20-1 removes the reference to a market participant and requires that an other-than-temporary impairment be recognized in earnings when it is probable that there has been an adverse change in the holder's estimated cash flows from the cash flows previously projected, which is consistent with the impairment model used in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." FSP 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and must be applied prospectively at the balance sheet date of the reporting period for which the assessment of cash flows is made. We adopted the guidance in FSP 99-20-1 as of December 31, 2008. The adoption did not have a material impact on our consolidated financial condition or results of operations. FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS SFAS NO. 141(R) -- BUSINESS COMBINATIONS In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business Combinations" ("SFAS 141(R)"), which is a revision of SFAS No. 141 "Business Combinations" ("SFAS 141"). SFAS 141(R) retains the fundamental requirements of SFAS 141, but establishes principles and requirements for the acquirer in a business combination to recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree and the goodwill acquired or the gain from a bargain purchase. The revised statement requires, among other things, that assets acquired, liabilities assumed and any noncontrolling interest in the acquiree shall be measured at their acquisition-date fair values. For business combinations completed upon adoption of SFAS 141(R), goodwill will be measured as the excess of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree, in excess of the fair values of the identifiable net assets acquired. Any contingent consideration shall be recognized at the acquisition-date fair value, which improves the accuracy of the goodwill measurement. Under SFAS 141(R), contractual pre-acquisition contingencies will be recognized at their acquisition-date fair values and non-contractual pre-acquisition contingencies will be recognized at their acquisition date fair values if it is more likely than not that the contingency gives rise to an asset or liability. Deferred recognition of pre-acquisition contingencies will no longer be permitted. Acquisition costs will be expensed in the period the costs are incurred, rather than included in the cost of the acquiree, and disclosure requirements will be enhanced to provide users with information to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively 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, with earlier adoption prohibited. We will adopt SFAS 141(R) for acquisitions occurring after January 1, 2009. 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 ("ARB") No. 51" ("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 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 Statements of Income. Changes in a parent's ownership S-19 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, sells some of its ownership interests in its subsidiary, the subsidiary reacquires some of its ownership interests or the subsidiary 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 will adopt SFAS 160 effective January 1, 2009, and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations. FSP FAS NO. 140-3 -- ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS AND REPURCHASE FINANCING TRANSACTIONS In February 2008, the FASB issued FSP FAS No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP 140-3"), regarding the criteria for a repurchase financing to be considered a linked transaction under SFAS 140. A repurchase financing is a transaction where the buyer ("transferee") of a financial asset obtains financing from the seller ("transferor") and transfers the financial asset back to the seller as collateral until the financing is repaid. Under FSP 140-3, the transferor and the transferee shall not separately account for the transfer of a financial asset and a related repurchase financing unless the two transactions have a valid and distinct business or economic purpose for being entered into separately and the repurchase financing does not result in the initial transferor regaining control over the financial asset. In addition, an initial transfer of a financial asset and a repurchase financing entered into contemporaneously with, or in contemplation of, one another, must meet the criteria identified in FSP 140-3 in order to receive separate accounting treatment. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. FSP 140-3 will be applied prospectively to initial transfers and repurchase financings executed on or after the beginning of the fiscal year in which FSP 140-3 is initially applied. Early application is not permitted. We will adopt FSP 140-3 effective January 1, 2009, and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations. SFAS 161 -- DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- AN AMENDMENT OF FASB STATEMENT NO. 133 In March 2008, the FASB issued SFAS 161, which amends and expands current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities. Enhanced disclosures will include: how and why we use derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS 133; and how derivative instruments and related hedged items affect our financial position, financial performance and cash flows. Quantitative disclosures will be enhanced by requiring a tabular format by primary underlying risk and accounting designation for the fair value amount and location of derivative instruments in the financial statements and the amount and location of gains and losses in the financial statements for derivative instruments and related hedged items. The tabular disclosures should improve transparency of derivative positions existing at the end of the reporting period and the effect of using derivatives during the reporting period. SFAS 161 also requires the disclosure of credit-risk-related contingent features in derivative instruments and cross-referencing within the notes to the consolidated financial statements to assist users in locating information about derivative instruments. The amended and expanded disclosure requirements apply to all derivative instruments within the scope of SFAS 133, non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt SFAS 161 effective January 1, 2009, at which time we will include these required enhanced disclosures related to derivative instruments and hedging activities in our financial statements. FSP FAS NO. 142-3 -- DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE ASSETS In April 2008, the FASB issued FSP FAS No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"), which applies to recognized intangible assets accounted for under the guidance in SFAS 142. When developing renewal or extension assumptions in determining the useful life of recognized intangible assets, FSP 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements. Absent the historical experience, an entity should use the assumptions a market participant would make when renewing and extending the intangible asset consistent with the highest and best use of the asset by market participants. In addition, FSP 142-3 requires financial statement disclosure regarding the extent to which expected future cash flows associated with the asset are affected by an entity's intent and/or ability to renew or extend an arrangement. FSP 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, with early adoption prohibited. FSP 142-3 should be applied prospectively to determine the useful life of a recognized intangible asset acquired after the effective date. In addition, FSP 142-3 requires prospective application of the disclosure requirements to all intangible assets recognized as of, and subsequent to, the effective date. We will adopt FSP 142-3 on January 1, 2009, and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations. S-20 SFAS NO. 163 -- ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS -- AN INTERPRETATION OF FASB STATEMENT NO. 60 In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60" ("SFAS 163"), which applies to financial guarantee insurance and reinsurance contracts not accounted for as derivative instruments, and issued by entities within the scope of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises." SFAS 163 changes current accounting practice related to the recognition and measurement of premium revenue and claim liabilities such that premium revenue recognition is linked to the amount of insurance protection and the period in which it is provided, and a claim liability is recognized when it is expected that a claim loss will exceed the unearned premium revenue. In addition, SFAS 163 expands disclosure requirements to include information related to the premium revenue and claim liabilities, as well as information related to the risk-management activities used to evaluate credit deterioration in insured financial obligations. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years; early application is not permitted. However, the disclosure requirements related to risk-management activities are effective in the first period (including interim periods) beginning after May 2008. Because we do not hold a significant amount of financial guarantee insurance and reinsurance contracts, no additional disclosures have been made, and we expect the adoption of SFAS 163 will not be material to our consolidated financial condition or results of operations. EITF NO. 07-5 -- DETERMINING WHETHER AN INSTRUMENT (OR EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK In June 2008, the FASB issued EITF No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides guidance to determine whether an instrument (or an embedded feature) is indexed to an entity's own stock when evaluating the instrument as a derivative under SFAS 133. An instrument that is both indexed to an entity's own stock and classified in stockholder's equity in the entity's statement of financial position is not considered a derivative for the purposes of applying the guidance in SFAS 133. EITF 07-5 provides a two-step process to determine whether an equity-linked instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument's contingent exercise provisions, if any, and second, by evaluating the instrument's settlement provisions. EITF 07-5 is applicable to outstanding instruments as of the beginning of the fiscal year in which the issue is adopted and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt EITF 07-5 on January 1, 2009, and do not expect the adoption will be material to our consolidated financial condition and results of operations. EITF NO. 08-6 -- INVESTMENT ACCOUNTING CONSIDERATIONS In November 2008, the FASB issued EITF No. 08-6, "Equity Method Investment Accounting Considerations" ("EITF 08-6"), which addresses the effect of SFAS 141(R) and SFAS 160 on equity-method accounting under Accounting Principles Board Opinion 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). EITF 08-6 will continue the APB 18 requirement that the cost basis of a new equity-method investment will follow a cost accumulation model, which includes transaction costs in the cost of the equity investment and excludes the value of contingent consideration unless it is required to be recognized under other literature. Subsequently, issuances of shares by the equity-method investee that reduce the investor's ownership percentage should be accounted for as if the investor sold a proportionate share of the investment, with gain or loss recognized through earnings. The EITF decided that the investor would not have to complete a separate impairment analysis on the investee's underlying assets, but rather the entire equity-method investment would continue to be subject to the current other-than-temporary impairment guidance in APB 18. EITF 08-6 is applicable to all investments accounted for under the equity method and is effective, prospectively, in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. We will adopt EITF 08-6 on January 1, 2009, and do not expect the adoption will have a material impact on our financial condition and results of operations. FSP FAS NO. 132(R)-1 -- EMPLOYERS' DISCLOSURES ABOUT POSTRETIREMENT BENEFIT PLAN ASSETS In December 2008, the FASB issued FSP FAS No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"), which requires enhanced disclosures of the plan assets of an employer's defined benefit pension or other postretirement benefit plans. The disclosures required under FSP 132(R)-1 will include information regarding the investment allocation decisions made for plan assets, the fair value of each major category of plan assets disclosed separately for pension plans and other postretirement benefit plans and the inputs and valuation techniques used to measure the fair value of plan assets including the level within the fair value hierarchy as defined by SFAS 157. FSP 132(R)-1 requires the additional disclosure in SFAS 157 for Level 3 fair value measurements, must also be provided for the fair value measurements of plan assets using Level 3 inputs. The disclosures in FSP 132(R)-1 are effective for fiscal years ending after December 15, 2009, and are not required for earlier periods that are presented for comparative purposes. We will include the disclosures required in FSP 132(R)-1 in the notes to our consolidated financial statements for the year ending December 31, 2009. S-21 3. ACQUISITION, DIVIDEND OF FPP AND REINSURANCE CEDED TO LNBAR JEFFERSON-PILOT ACQUISITION On April 3, 2006, LNC completed its merger with Jefferson-Pilot Corporation ("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. 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. REINSURANCE CEDED TO LNBAR We completed a reinsurance transaction during the fourth quarter of 2008 whereby we ceded a block of business to Lincoln National Reinsurance Company (Barbados) Limited ("LNBAR"), a wholly-owned subsidiary of LNC, which resulted in the release of approximately $240 million of capital previously supporting a portion of statutory reserves related to our insurance products with secondary guarantees. The following summarizes the impact (in millions) on the Consolidated Balance Sheets for the ceding of this block of business to LNBAR: ASSETS Deferred acquisition costs and value of business acquired $(230) Other assets (130) ----- Total assets $(360) ===== LIABILITIES Future contract benefits $(539) Other contract holder funds (47) Funds withheld reinsurance liabilities 434 Deferred loss on business sold through reinsurance (78) Other liabilities (130) ----- Total liabilities $(360) ===== 4. VARIABLE INTEREST ENTITIES Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. We have carefully analyzed each VIE to determine whether we are the primary beneficiary. Based on our analysis of the expected losses and residual returns of the VIEs in which we have a variable interest, we have concluded that there are no VIEs for which we are the primary beneficiary, and, as such, we have not consolidated the VIEs in our consolidated financial statements. However, for those VIEs in which we are not the primary beneficiary, but hold a variable interest, we recognize the fair value of our variable interest in our consolidated financial statements. Information (in millions) included in our Consolidated Balance Sheet as of December 31, 2008 for those VIEs where we had significant variable interest and where we were a sponsor that held a variable interest was as follows: LNL AMOUNTS RELATED TO VIE ------------------------------- MAXIMUM TOTAL TOTAL LOSS ASSETS LIABILITIES EXPOSURE ------ ----------- -------- Credit-linked notes $50 $-- $600 We invested in two credit-linked notes where the note holders do not have voting rights or decision-making capabilities. The entities that issued the credit-linked notes are financed by the note holders, and as such, the note holders participate in the expected losses and residual returns of the entities. Because the note holders' investment does not permit them to make decisions about the entities' activities that would have a significant effect on the success of the entities, we have determined that these entities are VIEs. We are not the primary beneficiary of the VIEs as the multi-tiered class structure of the credit-linked notes requires the subordinated classes of the investment pool to absorb credit losses prior to our class of notes. As a result, we will not absorb the majority of the expected losses and the coupon we receive on the credit-linked notes limits our participation in the residual returns. For information regarding our exposure to loss in our credit-linked notes, see "Credit-Linked Notes" in Note 5. S-22 5. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES Pursuant to SFAS No. 157, we have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. See Note 22 for additional disclosures regarding our fair values required by SFAS 157. 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, 2008 ---------------------------------------- GROSS UNREALIZED AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE --------- ----- ---------- ------- Corporate bonds $39,463 $614 $4,993 $35,084 U.S. Government bonds 158 36 -- 194 Foreign government bonds 509 33 48 494 Mortgage-backed securities: Mortgage pass-through securities 1,749 57 37 1,769 Collateralized mortgage obligations 6,612 168 733 6,047 Commerical mortgage-backed securities 2,428 7 588 1,847 State and municipal bonds 118 2 2 118 Hybrid and redeemable preferred stocks 1,521 6 591 936 ------- ---- ------ ------- Total fixed maturity securities 52,558 923 6,992 46,489 Equity securities 187 9 57 139 ------- ---- ------ ------- Total available-for-sale securities $52,745 $932 $7,049 $46,628 ======= ==== ====== =======
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 Mortgage-backed securities: Mortgage pass-through securities 1,185 23 4 1,204 Collateralized mortgage obligations 6,441 75 124 6,392 Commerical mortgage-backed securities 2,598 48 67 2,579 State and municipal bonds 143 2 -- 145 Hybrid and 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 ======= ====== ====== =======
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, 2008 ----------------------- AMORTIZED FAIR COST VALUE --------- ------- Due in one year or less $ 1,712 $ 1,694 Due after one year through five years 12,568 11,869 Due after five years through ten years 14,036 12,013 Due after ten years 13,453 11,250 Subtotal 41,769 36,826 ------- ------- Mortgage-backed securities 10,789 9,663 ------- ------- Total fixed maturity available-for-sale securities $52,558 $46,489 ======= =======
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations. S-23 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, 2008 ----------------------------------------------------------------- LESS THAN OR EQUAL TO TWELVE GREATER THAN TWELVE MONTHS MONTHS TOTAL -------------------- ------------------- -------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------- ---------- ------ ---------- ------- ---------- Corporate bonds $18,449 $2,303 $5,809 $2,690 $24,258 $4,993 U.S. Government bonds 3 -- -- -- 3 -- Foreign government bonds 145 15 50 33 195 48 Mortgage-backed securities: Mortgage pass-through securities 95 25 51 12 146 37 Collateralized mortgage obligations 807 279 688 454 1,495 733 Commercial mortgage-backed securities 1,099 169 474 419 1,573 588 State and municipal bonds 28 2 2 -- 30 2 Hybrid and redeemable preferred stocks 448 261 406 330 854 591 ------- ------ ------ ------ ------- ------ Total fixed maturity securities 21,074 3,054 7,480 3,938 28,554 6,992 Equity securities 82 56 2 1 84 57 ------- ------ ------ ------ ------- ------ Total available-for-sale securities $21,156 $3,110 $7,482 $3,939 $28,638 $7,049 ======= ====== ====== ====== ======= ====== Total number of securities in an unrealized loss position 3,507 ======
AS OF DECEMBER 31, 2007 ----------------------------------------------------------------- LESS THAN OR EQUAL TO TWELVE GREATER THAN TWELVE MONTHS 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 Mortgage-backed securities: Mortgage pass-through securities 32 -- 189 4 221 4 Collateralized mortgage obligations 1,672 96 1,069 28 2,741 124 Commercial mortgage-backed securities 490 46 535 21 1,025 67 State and municipal bonds 29 -- 15 -- 44 -- Hybrid and 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-24 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, 2008 -------------------------------- GROSS NUMBER FAIR UNREALIZED OF VALUE LOSSES SECURITIES ------ ---------- ---------- Less than six months $ 781 $ 389 159 Six months or greater, but less than nine months 1,141 536 206 Nine months or greater, but less than twelve months 1,552 785 223 Twelve months or greater 4,027 3,509 785 ------ ------ ----- Total available-for-sale securities $7,501 $5,219 1,373 ====== ====== ===== 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 described more fully in Note 1, we regularly review our investment holdings for other-than-temporary impairments. Based upon this review, the cause of the $5.9 billion increase in our gross unrealized losses for available-for-sale securities for the year ended December 31, 2008, was attributable primarily to a combination of reduced liquidity in several market segments and deterioration in credit fundamentals. We believe that the securities in an unrealized loss position as of December 31, 2008 and 2007 were not other-than-temporarily impaired due to our ability and intent to hold for a period of time sufficient for recovery. 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, ------------------ 2008 2007 ------ ------ Corporate bonds $1,467 $1,817 U.S. Government bonds 414 366 Foreign government bonds 38 45 Mortgage-backed securities: Mortgage pass-through securities 31 21 Collateralized mortgage obligations 118 153 Commercial mortgage-backed securities 76 104 State and municipal bonds 13 17 Hybrid and redeemable preferred stocks 30 8 Total fixed maturity securities 2,187 2,531 Equity securities 2 2 ------ ------ Total trading securities $2,189 $2,533 ====== ====== The portion of the market adjustment for losses that relate to trading securities still held as of December 31, 2008, 2007 and 2006 was $172 million, $8 million and $48 million, respectively. MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S with the largest concentrations in California and Texas, which accounted for approximately 30% and 29% of mortgage loans as of December 31, 2008 and 2007, respectively. As of December 31, 2008, we held no impaired mortgage loans and therefore had no valuation allowance. NET INVESTMENT INCOME The major categories of net investment income (in millions) on our Consolidated Statements of Income were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2008 2007 2006 ------ ------ ------ NET INVESTMENT INCOME Fixed maturity available-for-sale securities $3,236 $3,264 $2,968 Equity available-for-sale securities 8 19 11 Trading securities 154 163 181 Mortgage loans on real estate 473 491 466 Real estate 20 41 36 Standby real estate equity commitments 3 12 18 Policy loans 177 172 158 Invested cash 33 49 62 Alternative investments (34) 102 46 Consent fees 5 10 8 Other investments 12 36 15 ------ ------ ------ Investment income 4,087 4,359 3,969 Investment expense (112) (178) (164) ------ ------ ------ Net investment income $3,975 $4,181 $3,805 ====== ====== ====== S-25 REALIZED LOSS RELATED TO INVESTMENTS The detail of the realized loss related to investments (in millions) was as follows: FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2008 2007 2006 ------- ----- ----- Fixed maturity available-for-sale securities: Gross gains $ 49 $ 120 $ 123 Gross losses (1,059) (176) (99) Equity available-for-sale securities: Gross gains 1 3 2 Gross losses (33) (111) -- Gain (loss) on other investments 31 22 5 Associated amortization expense of DAC, VOBA, DSI and DFEL and changes in other contract holder funds and funds withheld reinsurance liabilities 244 29 (38) ------- ----- ----- Total realized loss on investments, excluding trading securities (767) (113) (7) Loss on certain derivative instruments (83) (2) 2 Associated amortization expense of DAC, VOBA, DSI and DFEL and changes in other contract holder funds -- 1 -- ------- ----- ----- Total realized loss on investments and certain derivative instruments, excluding trading securities $ (850) $(114) $ (5) ======= ===== ===== Write-downs for other-than-temporary impairments included in realized loss on available-for-sale securities above $ (900) $(257) $ (64) ======= ===== ===== See Note 15 for a comprehensive listing of realized loss reported on our Consolidated Statements of Income SECURITIES LENDING The carrying values of securities pledged under securities lending agreements were $427 million and $655 million as of December 31, 2008 and 2007, respectively. The fair values of these securities were $410 million and $634 million as of December 31, 2008 and 2007, respectively. The carrying value and fair value of the collateral receivable held for derivatives is $17 million as of December 31, 2008. We did not have a collateral payable for derivatives as of December 31, 2007. REVERSE REPURCHASE AGREEMENTS The carrying values of securities pledged under reverse repurchase agreements were $470 million and $480 million as of December 31, 2008 and 2007, respectively. The fair values of these securities were $496 million and $502 million as of December 31, 2008 and 2007, respectively. INVESTMENT COMMITMENTS As of December 31, 2008, our investment commitments for fixed maturity securities (primarily private placements), limited partnerships, real estate and mortgage loans on real estate were $705 million, which included $267 million of standby commitments to purchase real estate upon completion and leasing. CONCENTRATIONS OF FINANCIAL INSTRUMENTS As of December 31, 2008, we had investments in the collateralized mortgage obligation industry with a fair value of $6.5 billion or 11% of the invested assets portfolio totaling $60.2 billion. We utilized the industry classifications to obtain the concentration of financial instruments amount, as such, this amount will not agree to the available-for-sale securities table above. We did not have a concentration of financial instruments in a single industry as of December 31, 2007. As of December 31, 2008 and 2007, we did not have a significant concentration of financial instruments in a single investee or geographic region of the U.S. CREDIT-LINKED NOTES As of December 31, 2008 and 2007, other contract holder funds on our Consolidated Balance Sheets included $600 million and $1.2 billion outstanding in funding agreements, respectively. 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. One of the credit linked notes totaling $250 million was paid off at par in September of 2008 and as a result, the related structure, including the $250 million funding agreement, was terminated. The two remaining credit-linked notes are asset-backed securities, classified as corporate bonds in the tables above and are reported as fixed maturity securities on our Consolidated Balance Sheets. An additional $300 million funding agreement was assumed as a result of the merger of Jefferson-Pilot, but was not invested into credit-linked notes. This $300 million funding agreement matured on June 2, 2008. We earn a spread between the coupon received on the credit-linked notes and the interest credited on the funding agreement. Our credit-linked notes were created using a special purpose trust that combines highly rated assets with credit default swaps to produce a multi-class structured security. The high quality asset in these transactions is a AAA-rated asset-backed security secured by a pool of credit card receivables. Our affiliate, Delaware Investments, actively manages the credit default swaps in the underlying portfolios. As permitted in the credit-linked note agreements, Delaware Investments acts as the investment manager for the pool of underlying issuers in each of the transactions. Delaware Investments, from time to time, has directed substitutions of corporate names in the reference portfolio. When substituting corporate names, the issuing special purpose trust transacts with a third party to sell credit protection on a new issuer, selected by Delaware Investments. The cost to substitute the corporate names is based on market conditions and the liquidity of the corporate names. This new issuer will replace the issuer Delaware Investments has identified to remove from the pool of issuers. The substitution of corporate issuers does not revise the credit-linked note agreement. The subordination and the participation in credit losses may change as a result of the substitution. The amount of the change is dependant upon the relative risk of the issuers removed and replaced in the pool of issuers. S-26 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. 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 subordinated classes of the investment pool to absorb all of the credit losses. We own the mezzanine tranche of these investments. To date, there has been one default in the underlying collateral pool of the $400 million credit-linked note and two defaults in the underlying collateral pool of the $200 million credit-linked note. There has been no event of default on the credit-linked notes themselves. We feel the remaining subordination is sufficient to absorb future credit losses, subject to changing market conditions. We do not anticipate any future payments under the credit-linked notes and there are no recourse provisions or assets held as collateral that would enable us to recover payments if made. Similar to other debt market instruments, our maximum principal loss is limited to our original investment of $600 million as of December 31, 2008. As in the general markets, spreads on these transactions have widened, causing unrealized losses. We had unrealized losses of $550 million on the $600 million in credit-linked notes as of December 31, 2008 and $190 million on the $850 million in credit-linked notes as of December 31, 2007. 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, 2008 and 2007. The following summarizes information regarding our investments in these securities (dollars in millions): AMOUNT AND DATE OF ISSUANCE --------------------------- $400 $200 DECEMBER 2006 APRIL 2007 ------------- ---------- Amortized cost(1) $400 $200 Fair value(1) 30 20 Attachment point(1) 4.77% 1.48% Maturity 12/20/2016 3/20/2017 Current rating of tranche(1) BBB- Baa2 Current rating of underlying collateral pool(1) Aaa-Caa1 Aaa-Ba3 Number of entities(1) 124 98 Number of countries(1) 20 23 ---------- (1) As of December 31, 2008 6. DERIVATIVE INSTRUMENTS TYPES OF DERIVATIVE INSTRUMENTS AND DERIVATIVE STRATEGIES We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk 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, call options on the Standard & Poor's ("S&P") 500 Index(R) ("S&P 500") 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, 2008 and 2007, 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 living benefit guarantees offered in our variable annuities including the LINCOLN SMARTSECURITY(R) Advantage guaranteed minimum withdrawal benefit ("GWB") feature, the 4LATER(R) Advantage guaranteed income benefit ("GIB") feature and the I4LIFE(R) Advantage GIB feature that is available in our variable annuity products. Certain features of these guarantees, notably our GIB and 4LATER(R) features have elements of both insurance benefits accounted for under SOP 03-1 and embedded derivatives accounted for under SFAS 133 and SFAS 157. We weight these features and their associated reserves accordingly based on their hybrid nature. The change in estimated fair value of the portion of guarantee features that are considered to be derivatives under SFAS 133 is reported in net income. The hedging strategy is designed such that changes in the value of the hedge contracts generally offset changes in the value of the embedded derivative of the GWB and GIB. As part of our current hedging program, equity markets, interest rates 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 S-27 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 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. This feature represents an embedded derivative under SFAS 133. 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 call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the indexed annuity, both of which are recorded as a component of realized gain (loss) on our Consolidated Statements of Income. In calculating our future contract benefit liabilities under these contracts, 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 Sheet, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities are included as a component of realized gain (loss) on our Consolidated Statements of Income. Pursuant to SFAS 157, we have categorized our derivative instruments into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in "SFAS 157 - FAIR VALUE MEASUREMENTS" in Note 2. See Note 22 for additional disclosures regarding our fair values required by SFAS 157. 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 ---------------- ---------------------- 2008 2007 2008 2007 ------ ------ ------- ----- Cash flow hedges: Interest rate swap agreements $ 780 $1,372 $ (50) $ (5) Foreign currency swaps 366 366 64 (17) Call options (based on LNC stock) -- -- -- 1 ------ ------ ------- ----- Total cash flow hedges 1,146 1,738 14 (21) ------ ------ ------- ----- All other derivative instruments: Interest rate cap agreements 2,200 4,100 -- 2 Credit default swaps 149 60 (51) -- Call options (based on LNC stock) 18 23 -- 13 Call options (based on S&P 500 Index(R)) 2,951 2,858 31 149 ------ ------ ------- ----- Total other derivative instruments 5,318 7,041 (20) 164 Embedded derivatives per SFAS 133 -- -- (2,722) (303) ------ ------ ------- ----- Total derivative instruments $6,464 $8,779 $(2,728) $(160) ====== ====== ======= =====
The carrying or fair value of total derivative instruments (in millions) reported above is reflected within the Consolidated Balance Sheets as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------- ----- Derivative investments $ 60 $ 172 Reinsurance related derivative asset (liability) 167 (102) Future contract benefits liability (2,904) (230) Other liabilities -- credit default swaps (51) -- ------- ----- Total $(2,728) $(160) ======= ===== S-28 The notional amount of derivative financial instruments by maturity (in millions) was as follows:
REMAINING LIFE AS OF DECEMBER 31, 2008 ----------------------------------------------- LESS THAN 1 - 5 5 - 10 AFTER 1 YEAR YEARS YEARS 10 YEARS TOTAL --------- ------ ------ -------- ------ Cash flow hedges: Interest rate swap agreements $ 146 $ 128 $240 $266 $ 780 Foreign currency swaps -- -- 231 135 366 ------ ------ ---- ---- ------ Total cash flow hedges 146 128 471 401 1,146 ------ ------ ---- ---- ------ All other derivative instruments: Interest rate cap agreements 1,200 1,000 -- -- 2,200 Credit default swaps -- 60 89 -- 149 Call options (based on LNC stock) -- 18 -- -- 18 Call options (based on S&P 500 Index(R)) 2,185 766 -- -- 2,951 ------ ------ ---- ---- ------ Total other derivative instruments 3,385 1,844 89 -- 5,318 ------ ------ ---- ---- ------ Total derivative instruments $3,531 $1,972 $560 $401 $6,464 ====== ====== ==== ==== ======
The settlement payments and mark-to-market adjustments on derivative instruments (in millions) recorded on our Consolidated Statements of Income were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ----- ---- ---- Cash flow hedges: Interest rate swap agreements(1) $ 4 $ 5 $ 5 Foreign currency swaps(1) (1) (1) (1) ----- --- --- Total cash flow hedges 3 4 4 ----- --- --- All other derivative instruments: Credit default swaps(1) 1 -- -- Call options (based on LNC stock)(2) (8) (3) 10 Call options (based on S&P 500)(3) (204) 6 62 ----- --- --- Total other derivative instruments (211) 3 72 ----- --- --- Total derivative instruments $(208) $ 7 $76 ===== === === ---------- (1) Reported in net investment income on our Consolidated Statements of Income. (2) Reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. (3) Reported in net realized loss on our Consolidated Statements of Income. DERIVATIVE INSTRUMENTS DESIGNATED AS CASH FLOW HEDGES Gains (losses) (in millions) on derivative instruments designated as cash flow hedges were as follows: FOR THE YEARS ENDED DECEMBER 31, -------------------- 2008 2007 2006 ---- ---- ---- Ineffective portion recognized in realized loss $ 1 $(1) $ 1 === === === Gains recognized as a component of OCI with the offset to: Net investment (income) $(2) $(3) $(3) Benefit expense (recovery) -- (1) (1) --- --- --- $(2) $(4) $(4) === === === As of December 31, 2008, $7 million of the deferred net gains on derivative instruments in accumulated OCI were expected to be reclassified to earnings during 2009. This reclassification is due primarily to the receipt of interest payments associated with variable rate securities and forecasted purchases, payment of interest on our long-term 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, 2008, 2007 and 2006, 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 on our Consolidated Statements of 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. In addition, we use interest rate swap agreements to hedge our exposure to fixed rate bond coupon payments and the change in underlying asset values as interest rates fluctuate. The net receipts/payments from these interest rate swaps are recorded in net investment income on our Consolidated Statements of Income. 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 S-29 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. 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 our stock. Upon option expiration, the payment, if any, is the increase in our 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 SARs 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. 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 our Retirement Solutions - Annuities and Retirement Solutions - Defined Contribution segments. 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. CALL OPTIONS (BASED ON LNC STOCK) We use call options on LNC stock to hedge the expected increase in liabilities arising from SARs granted on LNC stock. Call options hedging vested SARs are not eligible for hedge accounting treatment under SFAS 133. Mark-to-market changes are recorded in net income as underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. CALL OPTIONS (BASED ON S&P 500) We use indexed annuity contracts to permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. 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 decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the indexed annuity, both of which are recorded as a component of realized gain (loss) on our Consolidated Statements of Income. CREDIT DEFAULT SWAPS We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counter-party at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. Our credit default swaps are not currently qualified for hedge accounting under SFAS 133, as amounts are insignificant 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. Information related to our open credit default swaps for which we are the seller (in millions) as of December 31, 2008, was as follows: REASON NATURE CREDIT MAXIMUM FOR OF RATING OF FAIR POTENTIAL MATURITY ENTERING RECOURSE COUNTERPARTY VALUE(4) PAYOUT ---------- -------- -------- ------------ -------- --------- 3/20/2010 (1) (3) Aa3/A+ $(1) $ 10 6/20/2010 (1) (3) Aa2/A -- 10 12/20/2012 (2) (3) Aa2/A+ -- 10 12/20/2012 (2) (3) Aa2/A+ -- 10 12/20/2012 (2) (3) A1/A -- 10 12/20/2012 (2) (3) A1/A (1) 10 3/20/2017 (2) (3) A2/A (14) 22(5) 3/20/2017 (2) (3) A2/A (10) 14(5) 3/20/2017 (2) (3) A2/A (8) 18(5) 3/20/2017 (2) (3) A2/A (11) 18(5) 3/20/2017 (2) (3) A2/A (6) 17(5) ---- ---- $(51) $149 ==== ==== ---------- (1) Credit default swap was entered into in order to generate income by providing protection on a highly rated basket of securities in return for a quarterly payment. (2) Credit default swap was entered into in order to generate income by providing default protection in return for a quarterly payment. (3) Seller does not have the right to demand indemnification/compensation from third parties in case of a loss (payment) on the contract. (4) Broker quotes are used to determine the market value of credit default swaps. (5) These credit default swaps were sold to a counter party of the issuing special purpose trust as discussed in the "Credit-Linked Notes" section in Note 5. S-30 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 through net income as a component of realized gain (loss) on our Consolidated Statements of Income. These embedded derivatives are included in reinsurance related derivative asset or (liability) on the Consolidated Balance Sheets; which amounts were $15 million and $(211) million as of December 31, 2008 and 2007, respectively. DERIVATIVE RELATED TO REINSURANCE CEDED TO AFFILIATE We are involved in an inter-company reinsurance agreement where we cede to LNBAR the risk under certain UL contracts for no-lapse benefit guarantees. If our contract holders' account value is not sufficient to pay the cost of insurance charges required to keep the policy inforce, and the contract holder has made required deposits, LNBAR will reimburse us for the charges. These embedded derivatives are included in reinsurance related derivative asset or (liability) on the Consolidated Balance Sheets; which amounts were $152 million and $109 million as of December 31, 2008 and 2007, respectively. VARIABLE ANNUITY PRODUCTS We have certain variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees, notably our GIB and 4LATER(R) features, have elements of both insurance benefits accounted for under SOP 03-1 and embedded derivatives accounted for under SFAS 133 and SFAS 157. We weight these features and their associated reserves accordingly based on their hybrid nature. The change in fair value of the embedded derivatives flows through net income as realized gain (loss) on our Consolidated Statements of Income. As of December 31, 2008 and 2007, we had approximately $12.7 billion and $18.9 billion, respectively, of account values that were attributable to variable annuities with a GWB feature. As of December 31, 2008 and 2007, we had approximately $4.7 billion and $4.9 billion, respectively, of 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 GWB 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 GWB 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: contain call options to exchange the debt security for other specified securities of the borrower, usually common stock; or contain call options to receive the return on equity-like indexes. 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 on our Consolidated Statements of Income. CREDIT RISK We are exposed to credit loss in the event of nonperformance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or non-performance risk. 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 the liquidity position of any insurance subsidiary of the Company. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. As of December 31, 2008 and 2007, the exposure was $150 million and $169 million, respectively. S-31 7. FEDERAL INCOME TAXES The components of federal income tax expense (benefit) as reported on the Consolidated Statements of Income (in millions) were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ----- ---- ---- Current $(292) $372 $244 Deferred 224 132 216 ----- ---- ---- Total federal income tax expense (benefit) $ (68) $504 $460 ===== ==== ==== A reconciliation of the effective tax rate differences (dollars in millions) was as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ---- Tax rate of 35% times pre-tax income $ 65 $610 $568 Effect of: Separate account dividend received deduction (82) (88) (80) Tax credits (25) (22) (21) Prior year tax return adjustment (34) (14) (25) Other items 8 18 18 ---- ---- ---- Provision (benefit) for income taxes $(68) $504 $460 ==== ==== ==== Effective tax rate N/M 29% 28% ==== ==== ==== The effective tax rate is a ratio of tax expense over pre-tax income. Since the pre-tax income of $186 million resulted in a tax benefit of $68 million in 2008, the effective tax rate was not meaningful. The separate account dividend received deduction included in the table above is exclusive of any prior years' tax return resolution. The federal income tax asset (liability) (in millions), which is included in other assets as of December 31, 2008, and other liabilities as of December 31, 2007, on our Consolidated Balance Sheets, was as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ----- Current $(66) $(390) Deferred 954 (239) ---- ----- Total federal income tax asset (liability) $888 $(629) ==== ===== Significant components of our deferred tax assets and liabilities (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ DEFERRED TAX ASSETS Future contract benefits and other contract holder funds $1,550 $1,904 Reinsurance deferred gain 190 244 Modco embedded derivative -- 74 Postretirement benefits other than pensions 21 8 Compensation and benefit plans 135 175 Net unrealized loss on securities available-for-sale 2,142 -- Other investments 362 77 Ceding commission asset 5 7 Other 102 55 ------ ------ Total deferred tax assets 4,507 2,544 ------ ------ DEFERRED TAX LIABILITIES Deferred acquisition costs 1,992 1,436 Net unrealized gain on securities available-for-sale -- 40 Net unrealized gain on trading securities 12 71 Present value of business in-force 1,317 985 Modco embedded derivative 5 -- Other 227 251 ------ ------ Total deferred tax liabilities 3,553 2,783 ------ ------ Net deferred tax asset (liability) $ 954 $ (239) ====== ====== 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 with LNY 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, 2008 and 2007, 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 at December 31, 2008 and 2007. As discussed in Note 2, we adopted FIN 48 on January 1, 2007. As of December 31, 2008 and 2007, $142 million and $134 million, of our unrecognized tax benefits presented below, if recognized, would have impacted our income tax expense and our effective tax rate. We anticipate a change to our unrecognized tax benefits during 2009 to range of none to $48 million. S-32 A reconciliation of the unrecognized tax benefits (in millions) was as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 ---- ---- Balance at beginning-of-year $290 $272 Increases for prior year tax positions 16 5 Decreases for prior year tax positions (46) (1) Increases for current year tax positions 20 21 Decreases for current year tax positions (6) (7) Decreases for settlements with taxing authorities (8) -- Decreases for lapse of statute of limitations (2) -- ---- ---- Balance at end-of-year $264 $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, 2008, 2007 and 2006, we recognized interest and penalty expense related to uncertain tax positions of $1 million, $19 million and $13 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $64 million and $64 million as of December 31, 2008 and 2007, respectively. We are subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the third quarter of 2008, the IRS completed its examination for tax years 2003 and 2004 resulting in a proposed assessment. We believe a portion of the assessment is inconsistent with existing law are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our consolidated results of operations or financial condition. We are currently under audit by the IRS for years 2005 and 2006. The Jefferson-Pilot subsidiaries acquired in the April 2006 merger are subject to a separate IRS examination cycle. For the former Jefferson-Pilot Corporation and its subsidiaries, the IRS is examining tax year ended April 2nd, 2006. 8. DAC, VOBA, AND DSI During the fourth quarter of 2008, we recorded a decrease to income totaling $262 million, for a reversion to the mean prospective unlocking of DAC, VOBA, and DSI as a result of significant and sustained declines in the equity markets during 2008. The pre-tax impact for these items is included within the prospective unlocking line items in the changes in DAC, VOBA, and DSI tables below. Changes in DAC (in millions) were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2008 2007 2006 ------ ------ ------ Balance at beginning-of-year $5,765 $4,577 $3,676 Cumulative effect of adoption of SOP 05-1 -- (31) -- Dividend of FPP -- (246) -- Reinsurance ceded to LNBAR (230) -- -- Deferrals 1,811 2,002 1,479 Amortization, net of interest: Prospective unlocking -- assumption changes (368) 27 (9) Prospective unlocking -- model refinements 44 (49) (2) Retrospective unlocking (120) 64 35 Other amortization, net of interest (704) (753) (635) Adjustment related to realized gains on available-for-sale securities and derivatives 129 78 (53) Adjustment related to unrealized losses on available-for-sale securities and derivatives 1,094 96 86 ------ ------ ------ Balance at end-of-year $7,421 $5,765 $4,577 ====== ====== ====== Changes in VOBA (in millions) were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2008 2007 2006 ------ ------ ------ Balance at beginning-of-year $2,809 $3,032 $ 742 Cumulative effect of adoption of SOP 05-1 -- (35) -- Business acquired -- 14 2,478 Deferrals 40 46 96 Amortization, net of interest: Prospective unlocking -- assumption changes (7) 13 5 Prospective unlocking -- model refinements 6 (2) -- Retrospective unlocking (38) 13 6 Other amortization (335) (421) (349) Accretion of interest 116 125 111 Adjustment related to realized gains (losses) on available-for-sale securities and derivatives 98 -- (9) Adjustment related to unrealized gains (losses) on available-for-sale securities and derivatives 1,074 24 (48) ------ ------ ------ Balance at end-of-year $3,763 $2,809 $3,032 ====== ====== ====== Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2008, was as follows: 2009 $ 258 2010 241 2011 209 2012 192 2013 175 Thereafter 1,626 ------ Total $2,701 ====== S-33 Changes in DSI (in millions) were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------ 2008 2007 2006 ---- ---- ---- Balance at beginning-of-year $279 $194 $129 Cumulative effect of adoption of SOP 05-1 -- (3) -- Deferrals 96 116 86 Amortization, net of interest: Prospective unlocking -- assumption changes (37) 2 1 Prospective unlocking -- model refinements -- (1) -- Retrospective unlocking (6) 1 3 Other amortization, net of interest (28) (35) (22) Adjustment related to realized gains (losses) on available-for-sale securities and derivatives 6 5 (3) ---- ---- ---- Balance at end-of-year $310 $279 $194 ==== ==== ==== 9. REINSURANCE The following summarizes reinsurance amounts (in millions) recorded on our Consolidated Statements of Income, excluding amounts attributable to the indemnity reinsurance transaction with Swiss Re: FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2008 2007 2006 ------- ------- ------- Direct insurance premiums and fees $ 5,853 $ 5,645 $ 4,587 Reinsurance assumed 18 12 8 Reinsurance ceded (1,056) (1,063) (1,021) ------- ------- ------- Total insurance premiums and fees, net $ 4,815 $ 4,594 $ 3,574 ======= ======= ======= Direct insurance benefits $ 4,245 $ 3,579 $ 2,662 Reinsurance recoveries netted against benefits (1,600) (1,249) (904) ------- ------- ------- Total benefits, net $ 2,645 $ 2,330 $ 1,758 ======= ======= ======= We cede insurance to other companies. The portion of risks exceeding our retention limit is reinsured with other insurers. We seek reinsurance coverage within the businesses that sell life insurance in order to limit our exposure to mortality losses and enhance our capital management. As discussed in Note 25, a portion of this reinsurance activity is with affiliated companies. Under our reinsurance program, we reinsure approximately 50% to 55% 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 VUL 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, 2008, the reserves associated with these reinsurance arrangements totaled $1.1 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 $4.2 billion as of December 31, 2008. Swiss Re has funded a trust, with a balance of $1.9 billion as of December 31, 2008, 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, 2008, included $1.8 billion and $26 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 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 S-34 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 2008, 2007 and 2006 we amortized $50 million, $55 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, 2008, 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 the Company 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 recoverable 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 recoverable 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. 10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows: FOR THE YEAR ENDED DECEMBER 31, 2008 --------------------------------------------- BALANCE AT PURCHASE BALANCE BEGINNING- ACCOUNTING DIVIDEND AT END- OF-YEAR ADJUSTMENTS OF FPP OF-YEAR ---------- ----------- -------- ------- Retirement Solutions: Annuities $1,046 $ (6) $-- $1,040 Defined Contribution 20 -- -- 20 Insurance Solutions: Life Insurance 2,199 (13) 2,186 Group Protection 274 -- -- 274 ------ ---- --- ------ Total goodwill $3,539 $(19) $-- $3,520 ====== ==== === ====== FOR THE YEAR ENDED DECEMBER 31, 2007 --------------------------------------------- BALANCE AT PURCHASE BALANCE BEGINNING- ACCOUNTING DIVIDEND AT END- OF-YEAR ADJUSTMENTS OF FPP OF-YEAR ---------- ----------- -------- ------- Retirement Solutions: Annuities $1,032 $14 $-- $1,046 Defined Contribution 20 -- -- 20 Insurance Solutions: Life Insurance 2,181 20 (2) 2,199 Group Protection 281 (7) -- 274 ------ --- --- ------ Total goodwill $3,514 $27 $(2) $3,539 ====== === === ====== S-35 The purchase accounting adjustments above relate to income tax deductions recognized when stock options attributable to mergers were exercised or the release of unrecognized tax benefits acquired through mergers. We performed a Step 1 goodwill impairment analysis on all of our reporting units, which utilized primarily a discounted cash flow valuation technique. The discounted cash flow analysis required us to make judgments about revenues, earnings projections, growth rates and discount rates. We also considered other valuation techniques such as an analysis of peer companies and market participants. In the valuation process, we gave consideration to the current economic and market conditions. We also updated our October 1 analysis of goodwill impairment to reflect fourth quarter results and forecasts as of December 31, 2008, due to sharp declines in the equity markets and our stock price in the fourth quarter. In determining the estimated fair value of our reporting units, we incorporated consideration of discounted cash flow calculations, peer company price-to-earnings multiples, the level of our own share price and assumptions that market participants would make in valuing our reporting units. Our fair value estimations were based primarily on an in-depth analysis of future cash flows and relevant discount rates, which considered market participant inputs (income approach). All of our reporting units passed the Step 1 analysis. While the Step 1 analysis of our Insurance Solutions - Life reporting unit indicated that its fair value exceeded its carrying value, the margin above carrying value was relatively small. Therefore, we concluded that we should perform additional analysis for our Insurance Solutions - Life reporting unit under the Step 2 requirements of SFAS 142. In our Step 2 analysis, we estimated the implied fair value of the reporting unit's goodwill as determined by allocating the reporting unit's fair value determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at the date of the impairment test by performing a hypothetical purchase price allocation as if the reporting unit had been acquired for its estimated fair value on that date. We utilized very detailed forecasts of cash flows and market observable inputs in determining a fair value of the net assets for each of the reporting units similar to what would be estimated in a business combination between market participants. The implied fair value of goodwill for Insurance Solutions - Life was higher than its carrying amount; therefore, the goodwill for this reporting unit was not impaired. 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, ------------------------------------------------- 2008 2007 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Individual Markets -- Life Insurance: Sales force $100 $11 $100 $ 7 Retirement Solutions -- Defined Contribution: Mutual fund contract rights(1) 3 -- 3 -- ---- --- ---- --- Total $103 $11 $103 $ 7 ==== === ==== ===
---------- (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, 2008 was as follows: 2009 $ 4 2010 4 2011 4 2012 4 2013 4 Thereafter 69 --- Total $89 === 11. GUARANTEED BENEFIT FEATURES We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of GDB, GWB and GIB features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals ("return of net deposits"); total deposits made to the S-36 contract less any partial withdrawals plus a minimum return ("minimum return"); or the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary ("anniversary contract value"). Certain features of these guarantees are considered embedded derivatives and are recorded in future contract benefits on our Consolidated Balance Sheets at fair value under SFAS 133 and SFAS 157. Other guarantees that are not considered embedded derivatives meet the criteria as insurance benefits and are accounted for under the valuation techniques included in SOP 03-1. Still other guarantees contain characteristics of both an embedded derivative and an insurance benefit and are accounted for under an approach that weights these features and their associated reserves accordingly based on their hybrid nature. Effective January 1, 2008, we adopted SFAS 157, which affected the valuation of our embedded derivatives. See Note 22 for details on the adoption of SFAS 157. We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in fair value of the embedded derivatives. The net impact of these changes is reported as guaranteed living benefits ("GLB"), which is reported as a component of realized gain (loss) on our Consolidated Statements of Income and is discussed in Note 16. Information on the GDB features outstanding (dollars in millions) was as follows (our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive): AS OF DECEMBER 31, ------------------- 2008 2007 -------- -------- RETURN OF NET DEPOSITS Total account value $33,907 $44,833 Net amount at risk(1) 6,337 93 Average attained age of contract holders 56 years 55 years MINIMUM RETURN Total account value $ 191 $ 355 Net amount at risk(1) 109 25 Average attained age of contract holders 68 years 68 years Guaranteed minimum return 5% 5% ANNIVERSARY CONTRACT VALUE Total account value $16,950 $25,537 Net amount at risk(1) 8,402 359 Average attained age of contract holders 65 years 64 years ---------- (1) Represents the amount of death benefit in excess of the account balance. The increase in net amount of risk when comparing December 31, 2008, to December 31, 2007, was attributable primarily to the decline in equity markets and associated reduction in the account values. The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDB (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets: FOR THE YEARS ENDED DECEMBER 31, -------------------- 2008 2007 2006 ---- ---- ---- Balance at beginning-of-year $ 38 $23 $15 Cumulative effect of adoption of SOP 05-1 -- (4) -- Changes in reserves 312 25 14 Benefits paid (73) (6) (6) ---- --- --- Balance at end-of-year $277 $38 $23 ==== === === The changes to the benefit reserves amounts above are reflected in benefits on our Consolidated Statements of Income. Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------- ------- ASSET TYPE Domestic equity $24,877 $44,982 International equity 9,204 8,076 Bonds 6,701 8,034 Money market 5,802 6,545 ------- ------- Total $46,584 $67,637 ======= ======= Percent of total variable annuity separate account values 99% 97% Future contract benefits also include reserves for our products with secondary guarantees for our products sold through our Insurance Solutions - Life Insurance segment. These UL and VUL products with secondary guarantees represented approximately 34% of permanent life insurance in force as of December 31, 2008 and approximately 68% of sales for these products in 2008. S-37 12. OTHER CONTRACT HOLDER FUNDS Details of other contract holder funds (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------- ------- Account values and other contract holder funds $57,875 $56,668 Deferred front-end loads 948 768 Contract holder dividends payable 498 524 Premium deposit funds 109 113 Undistributed earnings on participating business 11 95 ------- ------- Total other contract holder funds $59,441 $58,168 ======= ======= As of December 31, 2008 and 2007, participating policies comprised approximately 1.4% and 1.5%, respectively, of the face amount of insurance in force, and dividend expenses were $92 million for the year ended December 31, 2008 and $85 million for the years ended December 31, 2007 and 2006, respectively. 13. SHORT-TERM AND LONG-TERM DEBT Details underlying short-term and long-term debt (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ Short-term debt(1) $ 4 $ 18 Note due LNC, due 2009 -- 155 ------ ------ Total short-term debt $ 4 $ 173 ====== ====== Long-term debt: Note due LNC, due 2010 $ 155 $ -- LIBOR + 0.03% note, due 2017 250 -- LIBOR + 1.00% note, due 2037 375 375 Surplus Notes due LNC: 9.76% surplus note, due 2024 50 50 6.56% surplus note, due 2028 500 500 6.03% surplus note, due 2028 750 750 ------ ------ Total surplus notes 1,300 1,300 ------ ------ Total long-term debt $2,080 $1,675 ====== ====== ---------- (1) The short-term debt represents short-term notes payable to LNC. A consolidated subsidiary of LNL issued two notes for a combined amount not to exceed $250 million to LNC in 2006. The notes called 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. As of December 31, 2006, $139 million had been advanced to us and was classified as long-term debt. During 2007, $16 million was borrowed, bringing the outstanding balance to $155 million, which was classified as short-term debt. During the third quarter of 2008, the notes were extended and are now due on September 30, 2010. The notes are now classified as long-term debt. In the third quarter of 2008, LNL made an investment of $19 million in the Federal Home Loan Bank of Indianapolis ("FHLBI"), a AAA-rated entity. This relationship provides us with another source of liquidity as an alternative to commercial paper and repurchase agreements as well as provides funding at comparatively low borrowing rates. We are allowed to borrow up to 20 times the amount of our common stock investment in FHLBI. All borrowings from the FHLBI are required to be secured by certain investments owned by LNL. As of December 31, 2008, based on our common stock investment, we had borrowing capacity of up to approximately $378 million from FHLBI. We also had a $250 million floating-rate term loan outstanding under the facility due June 20, 2017, which may be prepaid beginning June 20, 2010. 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 note on or before March 31, 2028 and interest to be paid quarterly at an annual rate of 6.56%. Subject to approval by the Indiana Insurance Commissioner, LNC also has a right to redeem the note for immediate repayment in total or in part once per year on the anniversary date of the note. Any payment of interest or repayment of principal may be paid only out of our statutory earnings, only if our statutory capital surplus exceeds our statutory capital surplus as of the date of note issuance of $2.3 billion, and subject to approval by the Indiana Insurance Commissioner. We issued a surplus note for $750 million to LNC in 1998. This note calls for us to pay the principal amount of the note on or before December 31, 2028 and interest to be paid quarterly at an annual rate of 6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also has a right to redeem the note for immediate repayment in total or in part once per year on the anniversary date of the note. Any payment of interest or repayment of principal may be paid only out of our statutory earnings, only if our statutory capital surplus exceeds our statutory capital surplus as of the date of note issuance of $2.4 billion, and subject to approval by the Indiana Insurance Commissioner. S-38 14. 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 Regulatory Authority, and we have responded to these inquiries. We continue to cooperate fully with such authority. In the ordinary course of its business, LNL and its subsidiaries are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of LNL. However, given the large and indeterminate amounts sought in certain of these proceedings and the inherent difficulty in predicting the outcome of such legal proceedings, it is possible that an adverse outcome in certain matters could be material to our operating results for any particular reporting period. COMMITMENTS LEASES We lease our home office 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. In 2007, we exercised the right and option to extend the Hartford lease for one extended term such that the lease shall expire in 2013. Total rental expense on operating leases for the years ended December 31, 2008, 2007 and 2006 was $49 million, $56 million and $53 million, respectively. Future minimum rental commitments (in millions) as of December 31, 2008 were as follows: 2009 $ 50 2010 38 2011 33 2012 26 2013 21 Thereafter 107 ---- $275 Total ==== 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 February 2010. Annual costs are dependent on usage but are expected to be approximately $9 million. VULNERABILITY FROM CONCENTRATIONS As of December 31, 2008, we did not have a concentration of: business transactions with a particular customer or lender; sources of supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes 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 Retirement Solutions - Annuities segment is significant to this segment. The American Legacy Variable Annuity product accounted for 37%, 46% and 48% of Retirement Solutions - Annuities' variable annuity product deposits in 2008, 2007 and 2006, respectively and represented approximately 62%, 66% and 67% of our total Retirement Solutions - Annuities' variable annuity product account values as of December 31, 2008, 2007 and 2006. In addition, fund choices for certain of our other variable annuity products offered in our Retirement Solutions - Annuities segment include American Fund Insurance Series(SM) ("AFIS") funds. For the Retirement Solutions - Annuities segment, AFIS funds accounted for 44%, 55% and 58% of variable annuity product deposits in 2008, 2007 and 2006 respectively and represented 70%, 75% and 75% of the segment's total variable annuity product account values as of December 31, 2008, 2007 and 2006, respectively. OTHER CONTINGENCY MATTERS State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments net of estimated future premium tax deductions of $6 million and $4 million as of December 31, 2008 and 2007, respectively. GUARANTEES We have guarantees with off-balance-sheet risks having contractual values of $1 million and $2 million as of December 31, 2008 and 2007, 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. Our assessment of the off-balance-sheet risk was based upon the borrower's credit rating of Baa1. S-39 TAX MATTERS Changes to the Internal Revenue Code, administrative rulings or court decisions could increase our effective tax rate. In this regard, on August 16, 2007, the Internal Revenue Service ("IRS") issued a revenue ruling that purports, among other things, to modify the calculation of the separate account dividends received deduction received by life insurance companies. Subsequently, the IRS issued another revenue ruling that suspended the August 16, 2007, ruling and announced a new regulation project on the issue. See Note 7 for the impact of the separate account dividends received deduction on our effective tax rate. 15. 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, ---------------------- 2008 2007 2006 ------- ----- ---- UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning-of-year $ 76 $ 421 $452 Other comprehensive income (loss): Unrealized holding losses arising during the year (7,316) (871) (96) Change in DAC, VOBA and other contract holder funds 2,522 177 29 Income tax benefit 1,703 243 23 Change in foreign currency exchange rate adjustment (66) 18 5 Less: Reclassification adjustment for gains (losses) included in net income (1,042) (164) 24 Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 244 29 (37) Income tax benefit 279 47 5 ------- ----- ---- Balance at end-of-year $(2,562) $ 76 $421 ======= ===== ==== FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ---- UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS Balance at beginning-of-year $(19) $ (9) $ 7 Other comprehensive income (loss): Unrealized holding gains arising during the year (42) 14 (22) Change in DAC, VOBA and other contract holder funds (36) (6) 1 Income tax (expense) benefit 27 11 2 Change in foreign currency exchange rate adjustment 1 (30) 4 Less: Reclassification adjustment for gains (losses) included in net income (83) (2) 2 Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds -- 1 -- Income tax (expense) benefit 29 -- (1) ---- ---- ---- Balance at end-of-year $(15) $(19) $ (9) ==== ==== ==== MINIMUM PENSION LIABILITY ADJUSTMENT Balance at beginning-of-year $ -- $ -- $ (6) Other comprehensive income (loss): Adjustment arising during the year -- -- 6 ---- ---- ---- Balance at end-of-year $ -- $ -- $ -- ==== ==== ==== FUNDED STATUS OF EMPLOYEE BENEFIT PLANS Balance at beginning-of-year $ (4) $ 4 $-- Other comprehensive income (loss): Adjustment arising during the year (45) (13) -- Income tax benefit 17 5 -- Adjustment for adoption of SFAS 158, net of tax -- -- 4 ---- ---- ---- Balance at end-of-year $(32) $ (4) $ 4 ==== ==== ==== S-40 16. REALIZED LOSS Details underlying realized loss (in millions) reported on our Consolidated Statements of Income were as follows: FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2008 2007 2006 ----- ----- ---- Total realized loss on investments and certain derivative instruments, excluding trading securities(1) $(850) $(114) $ (5) Gain on certain reinsurance derivative/trading securities(2) 5 2 4 Indexed annuity net derivative results(3): Gross 13 (17) (2) Associated amortization expense of DAC, VOBA, DSI and DFEL 22 9 1 Guaranteed living benefits: Gross 2 (36) (16) Associated amortization expense of DAC, VOBA, DSI and DFEL (23) 28 (19) Guaranteed death benefits(4): Associated amortization expense of DAC, VOBA, DSI and DFEL -- 1 2 ----- ----- ---- Total realized (loss) $(831) $(127) $(35) ===== ===== ==== ---------- (1) See "Realized Loss Related to Investments" section in Note 5 for detail. (2) Represents changes in the fair value of total return swaps (embedded derivatives) related to various modified coinsurance and coinsurance with funds withheld reinsurance arrangements that have contractual returns related to various assets and liabilities associated with these arrangements. Changes in the fair value of these derivatives are offset by the change in fair value of trading securities in the portfolios that support these arrangements. (3) Represents the net difference between the change in the fair value of the S&P 500 call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity products along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products as required under SFAS 133 and 157. The year ended December 31, 2008, includes a $10 million gain from the initial impact of adopting SFAS 157. (4) Represents the change in the fair value of the derivatives used to hedge our GDB riders. 17. UNDERWRITING, ACQUISITION, INSURANCE, RESTRUCTURING AND OTHER EXPENSES Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows: FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2008 2007 2006 ------ ------- ------ Commissions $1,863 $ 2,051 $1,527 General and administrative expenses 1,282 1,246 1,093 DAC and VOBA deferrals and interest, net of amortization (445) (1,065) (735) Other intangibles amortization 4 4 3 Taxes, licenses and fees 200 192 158 Merger-related expenses 50 92 27 ------ ------- ------ Total $2,954 $ 2,520 $2,073 ====== ======= ====== All restructuring charges are included in underwriting, acquisition, insurance and other expenses within primarily Other Operations on our Consolidated Statements of Income in the year incurred and for the 2006 restructuring plan most such charges are included within merger-related expenses in the table above. 2008 RESTRUCTURING PLAN Starting in December 2008, we implemented a restructuring plan in response to the current economic downturn and sustained market volatility, which focused on reducing expenses. These actions included the elimination of approximately 500 jobs across the Company. During the fourth quarter, we recorded a pre-tax charge of $8 million and expect to record additional pre-tax charges of approximately $7 million in 2009 for severance, benefits and related costs associated with the plan for workforce reduction and other restructuring actions. We expect to complete the plan by the end of 2009. 2006 RESTRUCTURING PLAN Upon completion of the merger with Jefferson-Pilot, we implemented a restructuring plan relating to the integration of our legacy operations with those of Jefferson-Pilot. The realignment will enhance productivity, efficiency and scalability while positioning us for future growth. S-41 Details underlying reserves for restructuring charges (in millions) were as follows: TOTAL ----- Restructuring reserve at December 31, 2007 $ 2 Amounts incurred in 2008 Employee severance and termination benefits 2 Other -- ---- Total 2008 restructuring charges 2 Amounts expended in 2008 (3) ---- Restructuring reserve at December 31, 2008 $ 1 ==== Additional amounts expended in 2008 that do not qualify as restructuring charges $ 48 Total expected costs 190 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. Merger integration costs relating to employee severance and termination benefits of $13 million were included in other liabilities on our Consolidated Balance Sheets 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. 18. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS LNC maintains qualified funded defined benefit pension plans in which many of our employees, including those of LNL, are participants. LNC also maintains non-qualified, unfunded defined benefit pension plans for certain employees, and certain employees and certain retired employees of acquired companies. In addition, for certain employees LNC has supplemental retirement plans that provide defined pension benefits in excess of limits imposed by federal tax law. All of LNC's U.S. defined benefit pension plans were "frozen" as of either December 31, 1994, or December 31, 2007, or earlier. For their frozen plans, there are no new participants and no future accruals of benefits from the date of the freeze. The eligibility requirements for each plan are described in each plan document and vary for each plan based on completion of a specified period of continuous service or date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional or cash balance formula. Those formulas are based upon years of credited service and eligible earnings as defined in each plan document. The traditional formula provides benefits stated in terms of a single life annuity payable at age 65. Under the cash balance formula benefits are stated as a lump sum hypothetical account balance. That account balance equals the sum of the employee's accumulated annual benefit credits plus interest credits. Benefit credits, which are based on years of service and base salary plus bonus, ceased as of the date the plan was frozen. Interest Credits continue until the employee's benefit is paid. LNC also sponsors voluntary employees' beneficiary association ("VEBA") trust that provides postretirement medical, dental and life insurance benefits to retired full-time employees and agents who, depending on the plan, have worked for us for 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide employee benefits and also are subject to preferential tax treatment under the Internal Revenue Code. Medical and dental benefits are available to spouses and other eligible dependents of retired employees and agents. Retirees may be required to contribute toward the cost of these benefits. Eligibility and the amount of required contribution for these benefits varies based upon a variety of factors, including years of service and year of retirement. Effective January 1, 2008, the postretirement plan providing benefits to former employees of Jefferson-Pilot was amended such that only employees who had attained age 55 with a minimum of 10 years of service by December 31, 2007, and who later retire on or after age 60 with 15 years of service will be eligible to receive life insurance benefits when they retire. S-42 OBLIGATIONS, FUNDED STATUS AND ASSUMPTIONS Information (in millions) with respect to our defined benefit plan asset activity and defined benefit plan obligations was as follows:
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2008 2007 2008 2007 ----- ----- ----- ----- OTHER PENSION POSTRETIREMENT BENEFITS BENEFITS --------------- --------------- CHANGE IN PLAN ASSETS Fair value at beginning-of-year $ 140 $ 141 $ -- $ -- Actual return on plan assets (31) 8 -- -- Company and participant contributions -- (1) 2 2 Benefits paid (8) (8) (2) (2) ----- ----- ----- ----- Fair value at end-of-year 101 140 -- -- ----- ----- ----- ----- CHANGE IN BENEFIT OBLIGATION Balance at beginning-of-year 116 117 14 19 Interest cost 7 7 1 1 Plan participants' contributions -- -- 1 1 Actuarial (gains) losses -- -- -- (4) Benefits paid (8) (8) (2) (3) ----- ----- ----- ----- Balance at end-of-year 115 116 14 14 ----- ----- ----- ----- Funded status of the plans $ (14) $ 24 $ (14) $ (14) ===== ===== ===== ===== AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS Other assets $ 5 $ 25 $ -- $ -- Other liabilities (19) (1) (14) (14) ----- ----- ----- ----- Net amount recognized $ (14) $ 24 $ (14) $ (14) ===== ===== ===== ===== AMOUNTS RECOGNIZED IN ACCUMULATED OCI, NET OF TAX Net (gain) loss $ 35 $ 8 $ (3) $ (4) ----- ----- ----- ----- Net amount recognized $ 35 $ 8 $ (3) $ (4) ===== ===== ===== ===== RATE OF INCREASE IN COMPENSATION Salary continuation plan N/A 4.00% N/A 0.00% All other plans N/A 4.00% 4.00% 4.00% WEIGHTED-AVERAGE ASSUMPTIONS Benefit obligations: Weighted-average discount rate 6.00% 6.08% 6.00% 6.00% Expected return on plan assets 8.00% 8.00% 6.50% 6.50% Net periodic benefit cost: Weighted-average discount rate 6.00% 6.00% 6.00% 6.00% Expected return on plan assets 8.00% 8.00% 6.50% 6.50%
Consistent with our benefit plans' year end, we use December 31 as the measurement date. The expected return on plan assets was determined based on historical and expected future returns of the various asset classes, using the plan's target plan allocation. LNC reevaluates this assumption at an interim date each plan year. For 2009, our expected return on plan assets for the U.S. 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) was as follows: AS OF DECEMBER 31, ------------------ 2008 2007 2006 ---- ---- ---- Health care cost trend rate N/A 12% 12% Pre-65 health care cost trend rate 10% N/A N/A Post-65 health care cost trend rate 12% N/A N/A Ultimate trend rate 5% 5% 5% Year that the rate reaches the ultimate trend rate 2019 2018 2017 S-43 In order to improve the measurement of the heath care trend rate with industry trends and practice, we separated our trend rate to assess the pre-65 and post-65 populations separately for the year ended December 31, 2008. LNC expects the health care cost trend rate for 2009 to be 10% for pre-65 and 13% for the post-65 population. The health care cost trend rate assumption is a key percentage that affects the amounts reported. A one-percentage point increase in assumed health care cost trend rates would have increased the accumulated postretirement benefit obligation by less than $1 million and total service and interest cost components of less than $1 million. A one-percentage point decrease in assumed health care cost trend rates would have decreased the accumulated postretirement benefit obligation by less than $1 million and total service and interest cost components by less than $1 million. Information for our pension plans with an accumulated benefit obligation in excess of plan assets (in millions) was as follows: AS OF DECEMBER 31, ----------------- 2008 2007 ---- ---- Accumulated benefit obligation $91 $ 1 Projected benefit obligation 91 1 Fair value of plan assets 72 -- 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, ------------------------------------------ OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ------------------- -------------------- 2008 2007 2006 2008 2007 2006 ---- ----- ---- ---- ---- ---- Interest cost $ 7 $ 7 $ 6 $ 1 $ 1 $ 1 Expected return on plan assets (11) (11) (9) -- -- -- Recognized net actuarial (gain) loss 1 -- 1 (1) (1) -- ---- ---- --- --- --- --- Net periodic benefit expense (recovery) $ (3) $ (4) $(2) $-- $-- $ 1 ==== ==== === === === ===
For 2009, the estimated amount of amortization from accumulated OCI into net periodic benefit expense related to net actuarial (gains) losses is expected to be approximately a $5 million loss for our pension benefit plan and approximately an $1 million gain for our postretirement benefit plan. PLAN ASSETS Our pension plan asset allocations by asset category based on estimated fair values were as follows: AS OF DECEMBER 31, ------------ TARGET 2008 2007 ALLOCATION ---- ---- ---------- Domestic large cap equity 32% 37% 35% International equity 14% 15% 15% Fixed income securities 53% 48% 50% Cash and cash equivalents 1% 0% 0% --- --- Total 100% 100% === === The primary investment objective for the assets related to our U.S. defined benefit pension plan is for capital appreciation with an emphasis on avoiding undue risk. Investments can be made in various asset classes and styles, including, but not limited to: domestic and international equity, fixed income securities 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. Our defined benefit plan assets have been combined into a master retirement trust where a variety of qualified managers, with Northern Trust as the manager of managers, are 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 approved investment policy 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. We currently target asset weightings as follows: domestic equity allocations (32%) are split into large cap growth (14%), large cap value (14%) and small cap (4%); international equity; and fixed income allocations are weighted between core fixed income and long-term bonds. The performance of the pension trust assets is monitored on a quarterly basis relative to the plan's objectives. The performance of the trust is measured against the following indices: Russell 1000 Index; Morgan Stanley Capital International Europe, Australia and Far East Index; and Lehman Brothers Aggregate Bond Index. We review this investment policy on an annual basis. Prior to 2007, our plan assets were principally managed by LNC's Investment Management segment. During the last quarter of 2007, the management of the equity portion of these 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 It is LNC's practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. In accordance with such practice, no contributions were made nor required for the years ended December 31, 2008 or 2007. No contributions are required nor expected to be made in 2009. S-44 LNC expects the following benefit payments (in millions): PENSION PLANS POSTRETIREMENT PLANS -------------------- --------------------- U.S. NOT DEFINED REFLECTING REFLECTING BENEFIT MEDICARE MEDICARE MEDICARE PENSION PART D PART D PART D PLANS SUBSIDY SUBSIDY SUBSIDY ------- ---------- -------- ---------- 2009 $ 8 $2 $-- $2 2010 9 2 -- 2 2011 9 2 -- 2 2012 9 2 -- 2 2013 9 2 -- 2 Following Five Years Thereafter 46 6 (1) 7 19. 401(k), MONEY PURCHASE AND PROFIT SHARING PLANS LNC sponsors a contributory defined contribution plan or a 401(k) plan for our eligible employees, including those of LNL. LNL sponsors a number of contributory defined plans for agents only. These plans include a 401(k) plan for eligible agents and a defined contribution money purchase plan for eligible agents of the former Jefferson-Pilot. LNL also sponsor a money purchase plan for LNL agents that was frozen in 2004. LNC or LNL makes contributions and matching contributions to each of the active plans in accordance with the plan document and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. The expenses (in millions) for the 401(k) and profit sharing plans were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ---- Total expenses for the 401(k) and profit sharing plans $54 $31 $22 DEFERRED COMPENSATION PLANS LNC sponsors separate non-qualified unfunded, deferred compensation plans for certain of our employees, including those of LNL. LNL sponsors non-qualified unfunded, deferred compensation plan for certain agents. Liabilities (in millions) with respect to these deferred compensation plans were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Total liabilities $132 $137 THE DEFERRED COMPENSATION PLAN FOR CERTAIN U.S. EMPLOYEES Certain U.S. employees may participate in the Deferred Compensation & Supplemental/Excess Retirement Plan (the "DC SERP"). All participants may elect to defer payment of a portion of their compensation as defined by the plan. DC SERP participants may select from a menu of "phantom" investment options (identical to those offered under our qualified savings plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of the DC SERP, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of our contribution is calculated in accordance with the plan document, which is similar to our 401(k) plans. Expenses (in millions) for this plan were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ---- Employer matching contributions $5 $ 1 $ 4 Increase in measurement of liabilities, net of LNC total return swap 1 10 13 --- --- --- Total DC SERP expenses $6 $11 $17 === === === The terms of the DC SERP provide that plan participants who select our 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 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 plan. DEFERRED COMPENSATION PLANS FOR CERTAIN AGENTS LNL also sponsors a deferred compensation plan for certain eligible agents. 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 S-45 pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNL agents invest in phantom investments that mirror those offered to qualified plan participants. Jefferson-Pilot agents invest in a different line up of "phantom" investments. Expenses (in millions) for this plan were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ----- Employer matching contributions $2 $3 $-- Increase in measurement of liabilities, net of LNC total return swap 2 5 8 --- --- --- Total expenses for certain agents $4 $8 $8 === === === 20. 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, ------------------- 2008 2007 2006 ---- ---- ---- Stock options $ 8 $10 $ 3 Shares 2 3 19 Cash awards -- -- 1 SARs 4 5 (1) Restricted stock 5 6 1 --- --- --- Total $19 $24 $23 === === === Recognized tax benefit $ 7 $ 8 $ 8 21. STATUTORY INFORMATION AND RESTRICTIONS We prepare financial statements in accordance with statutory accounting principles ("SAP") prescribed or permitted by the insurance departments of our states of domicile, which may vary materially from GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Specified statutory information (in millions) was as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ Capital and surplus $4,600 $5,000 FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ----- ---- ---- Net income (loss) $(261) $971 $299 Dividends to LNC 400 770 568 The decline in statutory net income in 2008 from that of 2007 was primarily due to a significant increase in realized losses on investments combined with reserve strain due to deteriorating market conditions throughout 2008. Our states of domicile, Indiana for LNL and New York for LLANY, have adopted certain prescribed accounting practices that differ from those found in NAIC SAP. These prescribed practices are the use of continuous Commissioners Annuity Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed by the state of New York and the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of Indiana. We also have several accounting practices permitted by the states of domicile that differ from those found in NAIC SAP. Specifically, these are the use of a more conservative valuation interest rate on certain annuities as of December 31, 2008 and 2007, the use of less conservative mortality tables on certain life insurance S-46 products as of December 31, 2008, and a less conservative standard in determining the admitted amount of deferred tax assets as of December 31, 2008. The effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Calculation of reserves using the Indiana universal life method $289 $246 Calculation of reserves using continuous CARVM (10) (10) Conservative valuation rate on certain variable annuities (12) (14) Less conservative mortality tables on certain life insurance products 16 -- Less conservative standard in determining the amount of deferred tax assets 298 -- A new statutory reserving standard (commonly called "VACARVM") has been developed by the NAIC replacing current statutory reserve practices for variable annuities with guaranteed benefits, such as GWBs. The effective date for VACARVM is December 31, 2009. Based upon the level of variable annuity account values as of December 31, 2008, we estimate that VACARVM would have decreased our statutory capital by $125 to $175 million. The actual impact of the adoption will be dependent upon account values and conditions that exist as of December 31, 2009. We plan to utilize existing affiliate reinsurance structures, as well as pursue additional third-party reinsurance arrangements, to lessen any negative impact on statutory capital and dividend capacity. However, additional statutory reserves could lead to lower risk-based capital ("RBC") ratios and potentially reduce future dividend capacity from our insurance subsidiaries. We are subject to certain insurance department regulatory restrictions as to the transfer of funds and the payment of dividends to the holding company. Under Indiana laws and regulations, LNL may pay dividends to LNC within the statutory limitations without prior approval of the Indiana Insurance Commissioner (the "Commissioner"). The current statutory limitation is the greater of 10% of the insurer's policyholders' surplus, as shown on its last annual statement on file with the Commissioner or the insurer's statutory net gain from operations for the previous twelve months. If a proposed dividend, along with all other dividends paid within the preceding twelve consecutive months exceeds the statutory limitation, LNL must receive prior approval of the Commissioner to pay such dividend. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. LNC is also the holder of surplus notes issued by LNL. The payment of principal and interest on the surplus notes to LNC must be approved by the Commissioner as well. LLANY is subject to similar, but not identical, regulatory restrictions as LNL with regard to the transfer of funds and the payment of dividends. We expect we could pay dividends of approximately $500 million in 2009 without prior approval from the respective insurance commissioners. However, if current conditions do not improve we believe this dividend capacity will decline. 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
AS OF DECEMBER 31, ----------------------------------------- 2008 2007 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- ASSETS Available-for-sale securities: Fixed maturities $ 46,489 $ 46,489 $ 53,405 $ 53,405 Equity 139 139 134 134 Trading securities 2,189 2,189 2,533 2,533 Mortgage loans on real estate 7,396 7,116 7,117 7,291 Derivative instruments 60 60 172 172 Other investments 948 948 986 986 Cash and invested cash 2,594 2,594 1,395 1,395 LIABILITIES Future contract benefits: Remaining guaranteed interest and similar contracts (252) (252) (619) (619) Embedded derivative instruments -- living benefits (liabilities) contra liabilities (2,904) (2,904) (229) (229) Other contract holder funds: Account value of certain investment contracts (21,893) (22,338) (21,173) (20,515) Reinsurance related derivative assets (liabilities) 167 167 (102) (102) Short-term debt (4) (4) (173) (173) Long-term debt (2,080) (1,503) (1,675) (1,569) OFF-BALANCE-SHEET Guarantees -- (1) -- (2)
S-47 See Note 1 for discussion of the methodologies and assumptions used to determine the fair value of financial instruments carried at fair value. The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments. MORTGAGE LOANS ON REAL ESTATE The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan to value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price, or the fair value of the collateral if the loan is collateral dependent. OTHER INVESTMENTS 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. FUTURE CONTRACT BENEFITS AND 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 value of the investment contracts is based on their approximate surrender value at the balance sheet date. The fair value for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations at the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. SHORT-TERM AND LONG-TERM DEBT The fair value of long-term debt is based on quoted market prices or estimated using discounted cash flow analysis determined in conjunction with our incremental borrowing rate at the balance sheet date for similar types of borrowing arrangements where quoted prices are not available. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value. 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. FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE See "Summary of Significant Accounting Policies" in Note 1 and "SFAS 157 - FAIR VALUE MEASUREMENTS" in Note 2 for discussions of the methodologies and assumptions used to determine the fair value of our financial instruments carried at fair value. The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the SFAS 157 fair value hierarchy levels described in Note 2:
AS OF DECEMBER 31, 2008 ------------------------------------------------- QUOTED PRICES IN ACTIVE MARKETS FOR SIGNIFICANT SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL ASSETS INPUTS INPUTS FAIR (LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE --------- ----------- ------------ -------- ASSETS Investments: Available-for-sale securities: Fixed maturities $220 $ 42,977 $ 3,292 $ 46,489 Equity 41 5 93 139 Trading securities 2 2,110 77 2,189 Derivative instruments -- (18) 78 60 Cash and invested cash -- 2,594 -- 2,594 Separate account assets -- 55,655 -- 55,655 Reinsurance related derivative assets -- 167 -- 167 ---- -------- ------- -------- Total assets $263 $103,490 $ 3,540 $107,293 ==== ======== ======= ======== LIABILITIES Future contract benefits: Remaining guaranteed interest and similar contracts $ -- $ -- $ (252) $ (252) Embedded derivative instruments -- living benefits liabilities -- -- (2,904) (2,904) ---- -------- ------- -------- Total liabilities $ -- $ -- $(3,156) $ (3,156) ==== ======== ======= ========
We did not have any assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2008. S-48 The following table summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This information excludes any impact of amortization on DAC, VOBA, DSI and DFEL. When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Certain securities trade in less liquid or illiquid markets with limited or no pricing information, and the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components (that is, components that are actively quoted or can be validated to market-based sources). The gains and losses in the table below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
FOR THE YEAR ENDED DECEMBER 31, 2008 --------------------------------------------------------------- SALES, ITEMS ISSUANCES, TRANSFERS INCLUDED GAINS MATURITIES, IN OR BEGINNING IN (LOSSES) SETTLEMENTS, OUT OF ENDING FAIR NET IN CALLS, LEVEL 3, FAIR VALUE INCOME OCI NET NET(1) VALUE --------- -------- -------- ------------ --------- ------- Investments: Available-for-sale securities: Fixed maturities $4,325 $ (170) $(1,199) $ 52 $284 $ 3,292 Equity 54 (30) (17) 86 -- 93 Trading securities 107 (28) -- (13) 11 77 Derivative instruments 195 (237) 29 91 -- 78 Future contract benefits: Remaining guaranteed interest and similar contracts (389) 37 -- 100 -- (252) Embedded derivative instruments -- living benefits liabilities (279) (2,476) -- (149) -- (2,904) ------ ------- ------- ----- ---- ------- Total, net $4,013 $(2,904) $(1,187) $ 167 $295 $ 384 ====== ======= ======= ===== ==== =======
---------- (1) Transfers in or out of Level 3 for available-for-sale and trading securities are displayed at amortized cost at the beginning of the period. For available-for-sale and trading securities, the difference between beginning of period amortized cost and beginning of period fair value was included in OCI and earnings, respectively, in prior periods. The following table provides the components of the items included in net income, excluding any impact of amortization on DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported in the table above:
FOR THE YEAR ENDED DECEMBER 31, 2008 ------------------------------------------------------------------ GAINS (LOSSES) FROM OTHER- SALES, UNREALIZED (AMORTIZATION) THAN- MATURITIES, HOLDING ACCRETION, TEMPORARY SETTLEMENTS, GAINS NET IMPAIRMENT CALLS (LOSSES)(3) TOTAL -------------- ---------- ------------ ----------- ------- Investments: Available-for-sale securities: Fixed maturities(1) $ 2 $(168) $ (4) $ -- $ (170) Equity -- (31) 1 -- (30) Trading securities(1) 2 (7) -- (23) (28) Derivative instruments(2) -- -- (108) (129) (237) Future contract benefits: Remaining guaranteed interest and similar contracts(2) -- -- 14 23 37 Embedded derivative instruments -- living benefits liabilities(2) -- -- 8 (2,484) (2,476) --- ----- ----- ------- ------- Total, net $ 4 $(206) $ (89) $(2,613) $(2,904) === ===== ===== ======= =======
---------- (1) Amortization and accretion, net and unrealized holding losses are included in net investment income on our Consolidated Statements of Income. All other amounts are included in realized loss on our Consolidated Statements of Income. (2) All amounts are included in realized loss on our Consolidated Statements of Income. (3) This change in unrealized gains or losses relates to assets and liabilities that we still held as of December 31, 2008. S-49 The fair value of available-for-sale fixed maturity securities (in millions) classified within Level 3 of the fair value hierarchy was as follows: AS OF DECEMBER 31, 2008 ----------------------- FAIR % OF TOTAL VALUE FAIR VALUE ------ ---------- Corporate bonds $2,180 66.4% Asset-backed securities 261 7.9% Commercial mortgage-backed securities 238 7.2% Collateralized mortgage obligations 157 4.8% Mortgage pass-through securities 21 0.5% Municipals 106 3.2% Government and government agencies 235 7.1% Redeemable preferred stock 94 2.9% ------ ----- Total available-for-sale fixed maturity securities $3,292 100.0% ====== ===== AS OF DECEMBER 31, 2007 ----------------------- FAIR % OF TOTAL VALUE FAIR VALUE ------ ---------- Corporate bonds $2,099 48.5% Asset-backed securities 1,097 25.4% Commercial mortgage-backed securities 382 8.8% Collateralized mortgage obligations 295 6.8% Mortgage pass-through securities 31 0.7% Municipals 132 3.1% Government and government agencies 258 6.0% Redeemable preferred stock 31 0.7% ------ ----- Total available-for-sale fixed maturity securities $4,325 100.0% ====== ===== 23. SEGMENT INFORMATION On July 21, 2008, we announced the realignment of our segments under our former Employer Markets and Individual Markets operating businesses into two new operating businesses - Retirement Solutions and Insurance Solutions. We believe the new structure more closely aligns with consumer needs and should lead to more coordinated product development and greater effectiveness across the enterprise. The segment changes are in accordance with the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and reflect the manner in which we are organized for purposes of making operating decisions and assessing performance. Accordingly, we have restated results from prior periods in a consistent manner with our realigned segments. Under our newly realigned segments, we report the results of the Executive Benefits business, which as of June 30, 2008, was part of the Retirement Products segment, in the Life Insurance segment. We do not view these changes to our segment reporting as material to our consolidated financial statements. We provide products and services in two operating businesses: Retirement Solutions and Insurance Solutions, 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 manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations. RETIREMENT SOLUTIONS The Retirement Solutions business provides its products through two segments: Annuities and Defined Contribution. The Retirement Solutions - 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 Retirement Solutions - Defined Contribution segment provides employer-sponsored variable and fixed annuities and mutual-fund based programs in the 401(k), 403(b) and 457 marketplaces. INSURANCE SOLUTIONS The Insurance Solutions business provides its products through two segments: Life Insurance and Group Protection. The Insurance Solutions - Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs) and both single and survivorship versions of UL and VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL insurance products. The Insurance Solutions - Group Protection segment offers group life, disability and dental insurance to employers, and its products are marketed primarily through a national distribution system of regional group offices. These offices develop business through employee benefit brokers, third-party administrators and other employee benefit firms. OTHER OPERATIONS Other Operations includes investments related to excess capital and other corporate investments, benefit plan net assets, the unamortized deferred gain on indemnity reinsurance, which was sold to Swiss Re in 2001, external debt and business sold through reinsurance. Other Operations also includes the Institutional Pension business, which was previously reported in Employer Markets - Retirement Products prior to our segment realignment. The Institutional Pension business is a closed-block of pension business, the majority of which was sold on a group annuity basis, and is currently in run-off. Beginning with the quarter ended June 30, 2008, we changed our definitions of segment operating revenues and income from operations to better reflect: the underlying economics of S-50 our variable and indexed annuities that employ derivative instruments to hedge policy benefits; and the manner in which management evaluates that business. Our change in the definition of income from operations is primarily the result of our adoption of SFAS 157 during the first quarter of 2008 (see Note 2). Under the fair value measurement provisions of SFAS 157, we are required to measure the fair value of these annuities from an "exit price" perspective, (i.e., the exchange price between market participants to transfer the liability). We, therefore, must include margins that a market participant buyer would require as well as a factor for non-performance risk related to our credit quality. We do not believe that these factors relate to the economics of the underlying business and do not reflect the manner in which management evaluates the business. The items that are now excluded from our operating results that were previously included are as follows: GLB net derivatives results; indexed annuity forward-starting option; and GDB derivatives results. For more information regarding this change, see LNC's current report on Form 8-K dated July 16, 2008. We continue to exclude the effects of any realized loss on investments from segment operating revenues and income from operations as we believe that such items are 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. We believe that our new definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business. Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: - Realized gains and losses associated with the following ("excluded realized loss"): - Sale or disposal of securities; - Impairments of securities; - Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of related trading securities; - Change in the fair value of the embedded derivatives of our GLBs within our variable annuities net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative; - Net difference between the benefit ratio unlocking of SOP 03-1 reserves on our GDB riders within our variable annuities and the change in the fair value of the derivatives excluding our expected cost of purchasing the hedging instruments; and - Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products as required under SFAS 133 and 157. - Income (loss) from the initial adoption of changes in accounting principles; - Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance; Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: - Excluded realized gain (loss); - Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and - Revenue adjustments from the initial impact of the adoption of changes in accounting principles. 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, ------------------------ 2008 2007 2006 ------ ------ ------ REVENUES Operating revenues: Retirement Solutions: Annuities $2,191 $2,277 $1,878 Defined Contribution 913 968 981 ------ ------ ------ Total Retirement Solutions 3,104 3,245 2,859 ------ ------ ------ Insurance Solutions: Life Insurance 3,994 3,963 3,394 Group Protection 1,640 1,500 1,032 ------ ------ ------ Total Insurance Solutions 5,634 5,463 4,426 ------ ------ ------ Other Operations 435 474 466 Excluded realized gain (loss), pre-tax (868) (137) (43) Amortization of deferred gain arising from reserve changes on business sold through reinsurance, pre-tax 3 9 1 ------ ------ ------ Total revenues $8,308 $9,054 $7,709 ====== ====== ====== S-51 FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2008 2007 2006 ----- ------ ------ NET INCOME Income (loss) from operations: Retirement Solutions: Annuities $ 154 $ 418 $ 350 Defined Contribution 117 171 198 ----- ------ ------ Total Retirement Solutions 271 589 548 ----- ------ ------ Insurance Solutions: Life Insurance 489 666 506 Group Protection 104 114 99 ----- ------ ------ Total Insurance Solutions 593 780 605 ----- ------ ------ Other Operations (47) (34) 35 Excluded realized gain (loss), after-tax (565) (89) (28) Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance, after-tax 2 (7) 1 ----- ------ ------ Net income $ 254 $1,239 $1,161 ===== ====== ====== FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2008 2007 2006 ------ ------ ------ NET INVESTMENT INCOME Retirement Solutions: Annuities $ 958 $1,022 $ 971 Defined Contribution 695 708 738 ------ ------ ------ Total Retirement Solutions 1,653 1,730 1,709 ------ ------ ------ Insurance Solutions: Life Insurance 1,867 1,975 1,676 Group Protection 117 115 80 ------ ------ ------ Total Insurance Solutions 1,984 2,090 1,756 ------ ------ ------ Other Operations 338 361 340 ------ ------ ------ Total net investment income $3,975 $4,181 $3,805 ====== ====== ====== FOR THE YEARS ENDED DECEMBER 31, -------------------- 2008 2007 2006 ------ ---- ---- AMORTIZATION OF DAC AND VOBA, NET OF INTEREST Retirement Solutions: Annuities $ 721 $373 $301 Defined Contribution 130 93 74 ------ ---- ---- Total Retirement Solutions 851 466 375 ------ ---- ---- Insurance Solutions: Life Insurance 519 486 446 Group Protection 36 31 16 ------ ---- ---- Total Insurance Solutions 555 517 462 ------ ---- ---- Other Operations -- -- 1 ------ ---- ---- Total amortization of DAC and VOBA, net of interest $1,406 $983 $838 ====== ==== ==== FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ----- ---- ---- FEDERAL INCOME TAX EXPENSE (BENEFIT) Retirement Solutions: Annuities $ (76) $123 $ 61 Defined Contribution 26 66 76 ----- ---- ---- Total Retirement Solutions (50) 189 137 ----- ---- ---- Insurance Solutions: Life Insurance 240 338 253 Group Protection 56 61 53 ----- ---- ---- Total Insurance Solutions 296 399 306 ----- ---- ---- Other Operations (11) (33) 33 Realized loss (304) (47) (16) Amortization of deferred gain on indemnity reinsurance related to reserve developments 1 (4) -- ----- ---- ---- Total federal income tax expense (benefit) $ (68) $504 $460 ===== ==== ==== S-52 AS OF DECEMBER 31, ------------------- 2008 2007 -------- -------- ASSETS Retirement Solutions: Annuities $ 65,206 $ 81,112 Defined Contribution 22,930 30,180 -------- -------- Total Retirement Solutions 88,136 111,292 -------- -------- Insurance Solutions: Life Insurance 46,588 45,867 Group Protection 2,482 1,471 -------- -------- Total Insurance Solutions 49,070 47,338 -------- -------- Other Operations 10,845 15,696 -------- -------- Total $148,051 $174,326 ======== ======== 24. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The following summarizes our supplemental cash flow data (in millions):
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2008 2007 2006 ----- ------- -------- Interest paid $ 81 $ 104 $ 85 Income taxes paid (received) (23) 194 310 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 $ -- ----- ------- -------- Reinsurance ceded to LNBAR: Carrying value of assets $ 360 $ -- $ -- Carrying value of liabilities (360) -- -- ----- ------- -------- Total reinsurance ceded to LNBAR $ -- $ -- $ -- ===== ======= ========
S-53 25. TRANSACTIONS WITH AFFILIATES Transactions with affiliates (in millions) recorded on our consolidated financial statements were as follows:
AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ Assets with affiliates: Corporate bonds(1) $ 115 $ 221 Reinsurance on ceded reinsurance contracts(2) 152 109 Cash management agreement investment(3) 478 420 Service agreement receivable(3) (13) (9) Liabilities with affiliates: Reinsurance future contract benefits on ceded reinsurance contracts(4) 4,688 1,257 Inter-company short-term debt(5) 4 173 Inter-company long-term debt(6) 1,841 1,688
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2008 2007 2006 ----- ----- ----- Revenues with affiliates: Premiums paid on ceded reinsurance contracts(7) $(222) $(308) $(234) Net investment income on cash management agreement(8) 11 28 14 Fees for management of general account(8) (65) (62) (57) Benefits and expenses with affiliates: Reinsurance (recoveries) benefits on ceded reinsurance contracts(9) (655) (337) 16 Service agreement payments(10) 100 99 59 Transfer pricing arrangement(10) (32) (38) (36) Interest expense on inter-company debt(11) 83 82 82
---------- (1) Reported in fixed maturity available-for-sale securities on our Consolidated Balance Sheets. (2) Reported in reinsurance related derivative assets (liability) on our Consolidated Balance Sheets. (3) Reported in other assets on our Consolidated Balance Sheets. (4) Reported in future contract benefits on our Consolidated Balance Sheets. (5) Reported in short-term debt on our Consolidated Balance Sheets. (6) Reported in long-term debt on our Consolidated Balance Sheets. (7) Reported in insurance premiums on our Consolidated Statements of Income. (8) Reported in net investment income on our Consolidated Statement of Income. (9) Reported in benefits on our Consolidated Statements of Income. (10) Reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income. (11) Reported in interest and debt expense on our Consolidated Statements of Income. CORPORATE BONDS LNC issues corporate bonds to us for a predetermined face value to be repaid by LNC at a predetermined maturity with a specified interest rate. We purchase these investments for our segmented portfolios that have yield, duration and other characteristics that take into account the liabilities being supported. CASH MANAGEMENT AGREEMENT In order to manage our capital more efficiently, we participate in an inter-company cash management program where LNC can lend to or borrow from us to meet short-term borrowing needs. The cash management program is essentially a series of demand loans, which are permitted under applicable insurance laws, among LNC and its affiliates that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs. The borrowing and lending limit is currently the lesser of 3% of our admitted assets and 25% of its surplus, in both cases, as of its most recent year end. SERVICE AGREEMENT In accordance with service agreements with LNC and other subsidiaries of LNC for personnel and facilities usage, general management services and investment management services, we receive services from and provide services to affiliated companies and also receive an allocation of corporate overhead from LNC. Corporate overhead expenses are assigned based on specific methodologies for each function. The majority of the expenses are assigned based on the following methodologies: assets by product, assets under management, weighted number of policy applications, weighted policies in force, and sales. TRANSFER PRICING ARRANGEMENT 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. FEES FOR MANAGEMENT OF GENERAL ACCOUNT DMH is responsible for the management of our general account investments. CEDED REINSURANCE CONTRACTS As discussed in Note 9, we cede and accept reinsurance from affiliated companies. We cede certain Guaranteed Benefit risks (including certain GDB and GWB benefits) to Lincoln National Reinsurance Company (Barbados) Ltd. ("LNR Barbados"). We also cede reserves related to certain risks for certain UL policies, which resulted from recent actuarial reserving guidelines. As discussed in Note 6, we cede to LNBAR the risk under certain UL contracts for no-lapse benefit guarantees. S-54 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 $1.7 billion and $1.4 billion at December 31, 2008 and 2007, respectively. The letters of credit are issued by banks and represent guarantees of performance under the reinsurance agreement, and are guaranteed by LNC. S-55 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N N-1 LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2008
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 $ 3,357,912 $ 315 $ 3,358,227 $ -- $ 132 $ 3,358,095 AIM V.I. Capital Appreciation Class II 1,996,367 -- 1,996,367 -- 87 1,996,280 AIM V.I. Core Equity 11,146,909 10,291 11,157,200 -- 443 11,156,757 AIM V.I. Core Equity Class II 3,811,000 17,374 3,828,374 -- 160 3,828,214 AIM V.I. International Growth 4,158,904 -- 4,158,904 6 168 4,158,730 AIM V.I. International Growth Class II 3,645,908 -- 3,645,908 6,024 157 3,639,727 ABVPSF Global Technology Class B 16,996,589 -- 16,996,589 10,268 777 16,985,544 ABVPSF Growth and Income Class B 128,506,302 -- 128,506,302 2,675 5,632 128,497,995 ABVPSF International Value Class B 87,858,313 31,491 87,889,804 -- 3,934 87,885,870 ABVPSF Large Cap Growth Class B 13,536,831 -- 13,536,831 128 579 13,536,124 ABVPSF Small/Mid Cap Value Class B 85,029,974 -- 85,029,974 131,551 3,755 84,894,668 American Century VP Inflation Protection Class 2 237,224,978 -- 237,224,978 128,198 11,070 237,085,710 American Funds Global Growth Class 2 216,962,962 14,452 216,977,414 -- 9,831 216,967,583 American Funds Global Small Capitalization Class 2 174,216,948 199,682 174,416,630 -- 7,598 174,409,032 American Funds Growth Class 2 1,096,584,189 -- 1,096,584,189 89,787 49,606 1,096,444,796 American Funds Growth-Income Class 2 1,214,105,082 -- 1,214,105,082 95,058 54,340 1,213,955,684 American Funds International Class 2 568,187,704 -- 568,187,704 211,363 25,901 567,950,440 Delaware VIPT Capital Reserves Service Class 81,304,180 88,020 81,392,200 -- 3,344 81,388,856 Delaware VIPT Diversified Income Service Class 383,751,231 -- 383,751,231 489,686 17,889 383,243,656 Delaware VIPT Emerging Markets Service Class 141,195,119 -- 141,195,119 150,728 6,500 141,037,891 Delaware VIPT High Yield 8,034,580 -- 8,034,580 113 310 8,034,157 Delaware VIPT High Yield Service Class 165,603,794 903,352 166,507,146 -- 7,562 166,499,584 Delaware VIPT International Value Equity 423,351 -- 423,351 -- 16 423,335 Delaware VIPT REIT 5,882,054 -- 5,882,054 17 222 5,881,815 Delaware VIPT REIT Service Class 97,628,352 -- 97,628,352 16,995 4,223 97,607,134 Delaware VIPT Small Cap Value 9,652,264 -- 9,652,264 15 364 9,651,885 Delaware VIPT Small Cap Value Service Class 230,227,431 50,754 230,278,185 -- 10,412 230,267,773 Delaware VIPT Trend 7,012,292 -- 7,012,292 1,363 266 7,010,663 Delaware VIPT Trend Service Class 52,014,774 -- 52,014,774 8,658 2,276 52,003,840 Delaware VIPT U.S. Growth Service Class 21,250,864 -- 21,250,864 20,645 879 21,229,340 Delaware VIPT Value 6,353,437 -- 6,353,437 1,040 245 6,352,152 Delaware VIPT Value Service Class 93,097,869 -- 93,097,869 460,903 4,223 92,632,743 DWS VIP Equity 500 Index 24,171,883 -- 24,171,883 796 1,002 24,170,085 DWS VIP Equity 500 Index Service Class 29,394,402 -- 29,394,402 1,345 1,325 29,391,732 DWS VIP Small Cap Index 6,804,470 -- 6,804,470 90 287 6,804,093 DWS VIP Small Cap Index Service Class 18,441,657 -- 18,441,657 10,703 796 18,430,158 Fidelity VIP Contrafund Service Class 2 500,114,395 190,295 500,304,690 -- 22,629 500,282,061 Fidelity VIP Equity-Income 7,636,644 -- 7,636,644 10,982 290 7,625,372 Fidelity VIP Equity-Income Service Class 2 47,477,240 -- 47,477,240 7,573 2,054 47,467,613 Fidelity VIP Growth 5,289,525 -- 5,289,525 1,237 202 5,288,086 Fidelity VIP Growth Service Class 2 46,923,182 -- 46,923,182 23,430 2,138 46,897,614 Fidelity VIP Mid Cap Service Class 2 211,977,130 99,667 212,076,797 -- 9,753 212,067,044 Fidelity VIP Overseas 2,693,470 -- 2,693,470 11 103 2,693,356 Fidelity VIP Overseas Service Class 2 72,050,111 -- 72,050,111 30,664 3,228 72,016,219 FTVIPT Franklin Income Securities Class 2 358,864,287 125,243 358,989,530 -- 16,650 358,972,880 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 60,989,875 20,072 61,009,947 -- 2,715 61,007,232 FTVIPT Mutual Shares Securities Class 2 228,786,260 501,177 229,287,437 -- 9,697 229,277,740
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 $398,066,469 $499,417 $398,565,886 $ -- $18,222 $398,547,664 FTVIPT Templeton Growth Securities Class 2 83,664,864 474 83,665,338 -- 3,812 83,661,526 Goldman Sachs VIT Growth & Income Service Class 39,031 -- 39,031 -- 2 39,029 Janus Aspen Series Balanced Service Shares 24,900,340 8,710 24,909,050 -- 1,069 24,907,981 Janus Aspen Series Mid Cap Growth Service Shares 7,128,299 -- 7,128,299 131 306 7,127,862 Janus Aspen Series Worldwide Growth Service Shares 1,809,609 -- 1,809,609 -- 77 1,809,532 Lincoln VIPT Baron Growth Opportunities Service Class 41,549,881 -- 41,549,881 127,702 1,889 41,420,290 Lincoln VIPT Capital Growth Service Class 7,668,473 52,581 7,721,054 -- 234 7,720,820 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 39,027,129 -- 39,027,129 104,876 1,775 38,920,478 Lincoln VIPT Columbia Value Opportunities Service Class 3,824,214 32,978 3,857,192 -- 170 3,857,022 Lincoln VIPT Delaware Bond 224,947,292 -- 224,947,292 234,026 9,963 224,703,303 Lincoln VIPT Delaware Bond Service Class 590,440,334 286,284 590,726,618 -- 26,397 590,700,221 Lincoln VIPT Delaware Growth and Income Service Class 18,014,409 -- 18,014,409 318,266 803 17,695,340 Lincoln VIPT Delaware Social Awareness 12,931,146 -- 12,931,146 202 559 12,930,385 Lincoln VIPT Delaware Social Awareness Service Class 42,927,639 -- 42,927,639 14,773 1,873 42,910,993 Lincoln VIPT Delaware Special Opportunities Service Class 8,284,223 22,687 8,306,910 -- 368 8,306,542 Lincoln VIPT FI Equity-Income Service Class 21,692,614 1,326 21,693,940 -- 985 21,692,955 Lincoln VIPT Janus Capital Appreciation 2,443,524 -- 2,443,524 14 109 2,443,401 Lincoln VIPT Janus Capital Appreciation Service Class 24,874,567 -- 24,874,567 16,903 1,158 24,856,506 Lincoln VIPT Marsico International Growth Service Class 23,015,936 4,191 23,020,127 -- 1,085 23,019,042 Lincoln VIPT MFS Value Service Class 81,535,290 -- 81,535,290 32,853 3,077 81,499,360 Lincoln VIPT Mid-Cap Value Service Class 13,004,745 17,777 13,022,522 -- 580 13,021,942 Lincoln VIPT Mondrian International Value 28,631,389 -- 28,631,389 280,759 1,271 28,349,359 Lincoln VIPT Mondrian International Value Service Class 105,146,702 -- 105,146,702 6,214 4,692 105,135,796 Lincoln VIPT Money Market 178,784,205 -- 178,784,205 179,250 7,888 178,597,067 Lincoln VIPT Money Market Service Class 621,949,043 -- 621,949,043 2,817,790 29,297 619,101,956 Lincoln VIPT SSgA Bond Index Service Class 125,806,904 723,560 126,530,464 -- 6,105 126,524,359 Lincoln VIPT SSgA Developed International 150 Service Class 16,997,592 125,235 17,122,827 -- 813 17,122,014 Lincoln VIPT SSgA Emerging Markets 100 Service Class 14,088,787 91,739 14,180,526 -- 678 14,179,848 Lincoln VIPT SSgA International Index Service Class 21,958,252 275,373 22,233,625 -- 1,036 22,232,589 Lincoln VIPT SSgA Large Cap 100 Service Class 32,791,447 212,334 33,003,781 -- 1,560 33,002,221 Lincoln VIPT SSgA S&P 500 Index 496,710 -- 496,710 2 19 496,689 Lincoln VIPT SSgA S&P 500 Index Service Class 64,455,019 445,203 64,900,222 -- 3,065 64,897,157 Lincoln VIPT SSgA Small-Cap Index Service Class 23,663,226 135,850 23,799,076 -- 1,075 23,798,001
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 SSgA Small-Mid Cap 200 Service Class $ 9,924,558 $ 75,417 $ 9,999,975 $ -- $ 458 $ 9,999,517 Lincoln VIPT T. Rowe Price Growth Stock Service Class 10,040,418 -- 10,040,418 21,775 461 10,018,182 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 1,390,208 -- 1,390,208 14 61 1,390,133 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 13,818,458 -- 13,818,458 168 627 13,817,663 Lincoln VIPT Templeton Growth Service Class 67,579,428 180,036 67,759,464 -- 3,109 67,756,355 Lincoln VIPT Turner Mid-Cap Growth Service Class 10,259,759 -- 10,259,759 6,599 476 10,252,684 Lincoln VIPT UBS Global Asset Allocation 15,330,941 -- 15,330,941 512 711 15,329,718 Lincoln VIPT UBS Global Asset Allocation Service Class 42,307,096 -- 42,307,096 382,630 2,013 41,922,453 Lincoln VIPT Wilshire 2010 Profile Service Class 5,875,450 -- 5,875,450 -- 274 5,875,176 Lincoln VIPT Wilshire 2020 Profile Service Class 9,485,155 -- 9,485,155 -- 435 9,484,720 Lincoln VIPT Wilshire 2030 Profile Service Class 4,561,919 -- 4,561,919 -- 208 4,561,711 Lincoln VIPT Wilshire 2040 Profile Service Class 3,326,470 -- 3,326,470 -- 170 3,326,300 Lincoln VIPT Wilshire Aggressive Profile Service Class 71,146,662 -- 71,146,662 851,906 3,343 70,291,413 Lincoln VIPT Wilshire Conservative Profile Service Class 199,567,995 -- 199,567,995 360,473 9,480 199,198,042 Lincoln VIPT Wilshire Moderate Profile Service Class 654,005,375 33,893 654,039,268 -- 31,455 654,007,813 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 409,506,217 -- 409,506,217 876,896 19,170 408,610,151 Lord Abbett All Value Class VC 32,466 -- 32,466 -- 1 32,465 MFS VIT Core Equity Service Class 3,042,488 -- 3,042,488 -- 136 3,042,352 MFS VIT Growth 3,067,402 -- 3,067,402 762 118 3,066,522 MFS VIT Growth Service Class 6,032,769 6,017 6,038,786 -- 261 6,038,525 MFS VIT Total Return 17,290,258 -- 17,290,258 1,020 668 17,288,570 MFS VIT Total Return Service Class 256,691,217 -- 256,691,217 135,282 11,690 256,544,245 MFS VIT Utilities 15,768,762 -- 15,768,762 1,000 601 15,767,161 MFS VIT Utilities Service Class 159,238,310 -- 159,238,310 105,381 7,067 159,125,862 NB AMT Mid-Cap Growth 51,366,953 -- 51,366,953 107 2,283 51,364,563 NB AMT Regency 52,217,842 -- 52,217,842 20,048 2,287 52,195,507 Oppenheimer Global Securities Service Class 10,166 -- 10,166 -- -- 10,166 Putnam VT Growth & Income Class IB 2,633,844 -- 2,633,844 4 114 2,633,726 Putnam VT Health Sciences Class IB 5,001,055 5,773 5,006,828 -- 206 5,006,622 Van Kampen Capital Growth Class II 8,735 -- 8,735 -- -- 8,735
See accompanying notes. N-4 [THIS PAGE INTENTIONALLY LEFT BLANK] STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2008
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ------------------------------------------------------------ ----------- ----------------- ------------- AIM V.I. Capital Appreciation $ -- $ (81,216) $ (81,216) AIM V.I. Capital Appreciation Class II -- (49,449) (49,449) AIM V.I. Core Equity 322,928 (243,919) 79,009 AIM V.I. Core Equity Class II 94,107 (84,447) 9,660 AIM V.I. International Growth 32,686 (102,330) (69,644) AIM V.I. International Growth Class II 23,785 (90,299) (66,514) ABVPSF Global Technology Class B -- (433,902) (433,902) ABVPSF Growth and Income Class B 3,206,319 (2,963,714) 242,605 ABVPSF International Value Class B 1,197,744 (2,340,300) (1,142,556) ABVPSF Large Cap Growth Class B -- (335,810) (335,810) ABVPSF Small/Mid Cap Value Class B 446,335 (1,762,966) (1,316,631) American Century VP Inflation Protection Class 2 10,051,375 (3,622,738) 6,428,637 American Funds Global Growth Class 2 5,407,365 (4,583,848) 823,517 American Funds Global Small Capitalization Class 2 -- (4,578,073) (4,578,073) American Funds Growth Class 2 13,263,096 (25,673,758) (12,410,662) American Funds Growth-Income Class 2 28,817,893 (26,587,151) 2,230,742 American Funds International Class 2 15,745,118 (13,024,359) 2,720,759 Delaware VIPT Capital Reserves Service Class 1,586,159 (594,311) 991,848 Delaware VIPT Diversified Income Service Class 13,532,467 (6,462,740) 7,069,727 Delaware VIPT Emerging Markets Service Class 2,786,199 (3,718,682) (932,483) Delaware VIPT High Yield 818,549 (142,282) 676,267 Delaware VIPT High Yield Service Class 14,922,224 (3,102,792) 11,819,432 Delaware VIPT International Value Equity 29,892 (14,263) 15,629 Delaware VIPT REIT 266,501 (147,739) 118,762 Delaware VIPT REIT Service Class 3,302,498 (2,550,122) 752,376 Delaware VIPT Small Cap Value 125,686 (213,638) (87,952) Delaware VIPT Small Cap Value Service Class 1,346,582 (4,939,729) (3,593,147) Delaware VIPT Trend -- (181,938) (181,938) Delaware VIPT Trend Service Class -- (1,395,683) (1,395,683) Delaware VIPT U.S. Growth Service Class -- (470,758) (470,758) Delaware VIPT Value 328,406 (147,957) 180,449 Delaware VIPT Value Service Class 3,140,262 (2,049,428) 1,090,834 DWS VIP Equity 500 Index 965,528 (580,751) 384,777 DWS VIP Equity 500 Index Service Class 800,811 (625,722) 175,089 DWS VIP Small Cap Index 166,847 (159,544) 7,303 DWS VIP Small Cap Index Service Class 355,979 (435,628) (79,649) Fidelity VIP Contrafund Service Class 2 5,749,702 (10,893,853) (5,144,151) Fidelity VIP Equity-Income 283,325 (195,411) 87,914 Fidelity VIP Equity-Income Service Class 2 1,608,241 (1,231,437) 376,804 Fidelity VIP Growth 68,487 (136,952) (68,465) Fidelity VIP Growth Service Class 2 424,708 (1,186,289) (761,581) Fidelity VIP Mid Cap Service Class 2 625,420 (4,430,632) (3,805,212) Fidelity VIP Overseas 105,839 (65,208) 40,631 Fidelity VIP Overseas Service Class 2 2,565,423 (1,749,969) 815,454 FTVIPT Franklin Income Securities Class 2 21,479,436 (6,848,688) 14,630,748 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 -- (1,391,995) (1,391,995) FTVIPT Mutual Shares Securities Class 2 8,052,767 (3,966,966) 4,085,801 FTVIPT Templeton Global Income Securities Class 2 11,426,841 (5,418,995) 6,007,846 FTVIPT Templeton Growth Securities Class 2 2,364,286 (2,205,212) 159,074 Goldman Sachs VIT Growth & Income Service Class 924 (20) 904 Janus Aspen Series Balanced Service Shares 714,232 (477,024) 237,208 Janus Aspen Series Mid Cap Growth Service Shares 7,118 (208,692) (201,574) Janus Aspen Series Worldwide Growth Service Shares 29,394 (48,000) (18,606) Lincoln VIPT Baron Growth Opportunities Service Class -- (710,060) (710,060) Lincoln VIPT Capital Growth Service Class -- (42,499) (42,499) Lincoln VIPT Cohen & Steers Global Real Estate Service Class 561,874 (731,425) (169,551) Lincoln VIPT Columbia Value Opportunities Service Class 6,878 (34,499) (27,621)
See accompanying notes. N-6
DIVIDENDS FROM TOTAL NET REALIZED NET REALIZED NET REALIZED GAIN (LOSS) GAIN ON GAIN (LOSS) SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ------------------------------------------------------------ -------------- ------------ -------------- AIM V.I. Capital Appreciation $ (246,130) $ -- $ (246,130) AIM V.I. Capital Appreciation Class II (42,701) -- (42,701) AIM V.I. Core Equity 148,817 -- 148,817 AIM V.I. Core Equity Class II 39,102 -- 39,102 AIM V.I. International Growth 1,062,522 79,038 1,141,560 AIM V.I. International Growth Class II 564,719 69,152 633,871 ABVPSF Global Technology Class B (2,180,070) -- (2,180,070) ABVPSF Growth and Income Class B (8,188,497) 33,082,593 24,894,096 ABVPSF International Value Class B (17,119,241) 8,569,002 (8,550,239) ABVPSF Large Cap Growth Class B (146,236) -- (146,236) ABVPSF Small/Mid Cap Value Class B (5,297,633) 10,512,192 5,214,559 American Century VP Inflation Protection Class 2 (2,423,200) -- (2,423,200) American Funds Global Growth Class 2 (6,796,767) 23,191,338 16,394,571 American Funds Global Small Capitalization Class 2 (7,445,761) 39,171,807 31,726,046 American Funds Growth Class 2 (12,470,123) 174,635,500 162,165,377 American Funds Growth-Income Class 2 (16,691,400) 105,976,443 89,285,043 American Funds International Class 2 (10,028,662) 108,105,270 98,076,608 Delaware VIPT Capital Reserves Service Class (283,418) -- (283,418) Delaware VIPT Diversified Income Service Class (2,596,493) 4,950,034 2,353,541 Delaware VIPT Emerging Markets Service Class (7,619,765) 34,230,444 26,610,679 Delaware VIPT High Yield (420,474) -- (420,474) Delaware VIPT High Yield Service Class (6,046,860) -- (6,046,860) Delaware VIPT International Value Equity (399,526) 109,421 (290,105) Delaware VIPT REIT (1,641,822) 4,141,494 2,499,672 Delaware VIPT REIT Service Class (24,094,795) 59,533,032 35,438,237 Delaware VIPT Small Cap Value 518,095 1,101,156 1,619,251 Delaware VIPT Small Cap Value Service Class (7,721,672) 19,437,144 11,715,472 Delaware VIPT Trend (625,906) 2,793,641 2,167,735 Delaware VIPT Trend Service Class (1,858,688) 17,930,288 16,071,600 Delaware VIPT U.S. Growth Service Class 320,564 818,950 1,139,514 Delaware VIPT Value (249,448) 942,883 693,435 Delaware VIPT Value Service Class (6,956,736) 10,145,461 3,188,725 DWS VIP Equity 500 Index 748,271 -- 748,271 DWS VIP Equity 500 Index Service Class (185,820) -- (185,820) DWS VIP Small Cap Index (361,363) 1,060,930 699,567 DWS VIP Small Cap Index Service Class (2,075,032) 2,722,195 647,163 Fidelity VIP Contrafund Service Class 2 (23,939,882) 17,196,439 (6,743,443) Fidelity VIP Equity-Income (1,419,807) 15,901 (1,403,906) Fidelity VIP Equity-Income Service Class 2 (4,247,797) 85,892 (4,161,905) Fidelity VIP Growth (701,321) -- (701,321) Fidelity VIP Growth Service Class 2 (1,207,775) -- (1,207,775) Fidelity VIP Mid Cap Service Class 2 (10,723,225) 37,374,458 26,651,233 Fidelity VIP Overseas 30,069 605,127 635,196 Fidelity VIP Overseas Service Class 2 (1,639,910) 12,835,935 11,196,025 FTVIPT Franklin Income Securities Class 2 (13,079,983) 8,993,929 (4,086,054) FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 (2,812,537) 10,654,288 7,841,751 FTVIPT Mutual Shares Securities Class 2 (8,327,076) 11,453,732 3,126,656 FTVIPT Templeton Global Income Securities Class 2 569,166 -- 569,166 FTVIPT Templeton Growth Securities Class 2 (5,455,022) 9,316,744 3,861,722 Goldman Sachs VIT Growth & Income Service Class -- 5 5 Janus Aspen Series Balanced Service Shares 820,138 2,075,337 2,895,475 Janus Aspen Series Mid Cap Growth Service Shares 1,039,985 784,471 1,824,456 Janus Aspen Series Worldwide Growth Service Shares 28,212 -- 28,212 Lincoln VIPT Baron Growth Opportunities Service Class (2,411,057) 2,473,844 62,787 Lincoln VIPT Capital Growth Service Class (123,940) -- (123,940) Lincoln VIPT Cohen & Steers Global Real Estate Service Class (2,784,748) -- (2,784,748) Lincoln VIPT Columbia Value Opportunities Service Class (553,605) 869,728 316,123 NET CHANGE NET INCREASE IN UNREALIZED (DECREASE) APPRECIATION OR IN NET ASSETS DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------ ---------------- --------------- AIM V.I. Capital Appreciation $ (2,665,933) $ (2,993,279) AIM V.I. Capital Appreciation Class II (1,579,978) (1,672,128) AIM V.I. Core Equity (5,818,753) (5,590,927) AIM V.I. Core Equity Class II (1,906,377) (1,857,615) AIM V.I. International Growth (4,517,485) (3,445,569) AIM V.I. International Growth Class II (3,468,544) (2,901,187) ABVPSF Global Technology Class B (13,660,503) (16,274,475) ABVPSF Growth and Income Class B (120,361,865) (95,225,164) ABVPSF International Value Class B (87,990,600) (97,683,395) ABVPSF Large Cap Growth Class B (10,242,171) (10,724,217) ABVPSF Small/Mid Cap Value Class B (49,408,096) (45,510,168) American Century VP Inflation Protection Class 2 (15,677,986) (11,672,549) American Funds Global Growth Class 2 (150,139,999) (132,921,911) American Funds Global Small Capitalization Class 2 (226,522,034) (199,374,061) American Funds Growth Class 2 (1,000,789,987) (851,035,272) American Funds Growth-Income Class 2 (837,753,220) (746,237,435) American Funds International Class 2 (525,863,754) (425,066,387) Delaware VIPT Capital Reserves Service Class (1,960,606) (1,252,176) Delaware VIPT Diversified Income Service Class (38,437,202) (29,013,934) Delaware VIPT Emerging Markets Service Class (177,059,146) (151,380,950) Delaware VIPT High Yield (2,533,472) (2,277,679) Delaware VIPT High Yield Service Class (58,596,553) (52,823,981) Delaware VIPT International Value Equity (199,913) (474,389) Delaware VIPT REIT (6,352,515) (3,734,081) Delaware VIPT REIT Service Class (94,873,617) (58,683,004) Delaware VIPT Small Cap Value (6,406,374) (4,875,075) Delaware VIPT Small Cap Value Service Class (111,254,918) (103,132,593) Delaware VIPT Trend (9,517,850) (7,532,053) Delaware VIPT Trend Service Class (65,019,379) (50,343,462) Delaware VIPT U.S. Growth Service Class (16,613,721) (15,944,965) Delaware VIPT Value (5,148,508) (4,274,624) Delaware VIPT Value Service Class (56,261,001) (51,981,442) DWS VIP Equity 500 Index (18,011,470) (16,878,422) DWS VIP Equity 500 Index Service Class (16,953,948) (16,964,679) DWS VIP Small Cap Index (4,861,128) (4,154,258) DWS VIP Small Cap Index Service Class (11,683,124) (11,115,610) Fidelity VIP Contrafund Service Class 2 (343,104,284) (354,991,878) Fidelity VIP Equity-Income (5,913,856) (7,229,848) Fidelity VIP Equity-Income Service Class 2 (36,883,533) (40,668,634) Fidelity VIP Growth (4,871,180) (5,640,966) Fidelity VIP Growth Service Class 2 (40,457,396) (42,426,752) Fidelity VIP Mid Cap Service Class 2 (155,350,024) (132,504,003) Fidelity VIP Overseas (3,216,855) (2,541,028) Fidelity VIP Overseas Service Class 2 (71,028,940) (59,017,461) FTVIPT Franklin Income Securities Class 2 (157,550,496) (147,005,802) FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 (51,680,767) (45,231,011) FTVIPT Mutual Shares Securities Class 2 (121,281,552) (114,069,095) FTVIPT Templeton Global Income Securities Class 2 3,363,424 9,940,436 FTVIPT Templeton Growth Securities Class 2 (74,896,610) (70,875,814) Goldman Sachs VIT Growth & Income Service Class 230 1,139 Janus Aspen Series Balanced Service Shares (8,851,214) (5,718,531) Janus Aspen Series Mid Cap Growth Service Shares (8,384,603) (6,761,721) Janus Aspen Series Worldwide Growth Service Shares (1,746,434) (1,736,828) Lincoln VIPT Baron Growth Opportunities Service Class (20,658,819) (21,306,092) Lincoln VIPT Capital Growth Service Class (1,463,752) (1,630,191) Lincoln VIPT Cohen & Steers Global Real Estate Service Class (22,019,517) (24,973,816) Lincoln VIPT Columbia Value Opportunities Service Class (1,557,973) (1,269,471)
N-7
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) ------------------------------------------------------------ ------------ ----------------- ------------- Lincoln VIPT Delaware Bond $ 11,458,927 $ (4,223,321) $ 7,235,606 Lincoln VIPT Delaware Bond Service Class 26,925,278 (9,476,012) 17,449,266 Lincoln VIPT Delaware Growth and Income Service Class 230,757 (365,305) (134,548) Lincoln VIPT Delaware Social Awareness 162,268 (314,999) (152,731) Lincoln VIPT Delaware Social Awareness Service Class 334,035 (989,781) (655,746) Lincoln VIPT Delaware Special Opportunities Service Class 82,704 (112,606) (29,902) Lincoln VIPT FI Equity-Income Service Class 376,573 (378,734) (2,161) Lincoln VIPT Janus Capital Appreciation 24,063 (58,761) (34,698) Lincoln VIPT Janus Capital Appreciation Service Class 156,530 (533,078) (376,548) Lincoln VIPT Marsico International Growth Service Class 294,131 (495,469) (201,338) Lincoln VIPT MFS Value Service Class 752,287 (573,742) 178,545 Lincoln VIPT Mid-Cap Value Service Class 13,618 (260,564) (246,946) Lincoln VIPT Mondrian International Value 1,905,989 (702,816) 1,203,173 Lincoln VIPT Mondrian International Value Service Class 6,491,489 (2,364,158) 4,127,331 Lincoln VIPT Money Market 3,386,473 (2,399,496) 986,977 Lincoln VIPT Money Market Service Class 8,397,993 (7,588,901) 809,092 Lincoln VIPT SSgA Bond Index Service Class 452,376 (437,321) 15,055 Lincoln VIPT SSgA Developed International 150 Service Class 143,005 (54,905) 88,100 Lincoln VIPT SSgA Emerging Markets 100 Service Class 74,031 (46,327) 27,704 Lincoln VIPT SSgA International Index Service Class 136,484 (70,303) 66,181 Lincoln VIPT SSgA Large Cap 100 Service Class 95,421 (105,017) (9,596) Lincoln VIPT SSgA S&P 500 Index 17,428 (4,055) 13,373 Lincoln VIPT SSgA S&P 500 Index Service Class 1,853,927 (590,062) 1,263,865 Lincoln VIPT SSgA Small-Cap Index Service Class 169,667 (220,380) (50,713) Lincoln VIPT SSgA Small-Mid Cap 200 Service Class 61,432 (37,015) 24,417 Lincoln VIPT T. Rowe Price Growth Stock Service Class -- (149,217) (149,217) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth -- (33,936) (33,936) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class -- (296,299) (296,299) Lincoln VIPT Templeton Growth Service Class 1,520,218 (1,089,576) 430,642 Lincoln VIPT Turner Mid-Cap Growth Service Class -- (243,194) (243,194) Lincoln VIPT UBS Global Asset Allocation 1,481,928 (449,078) 1,032,850 Lincoln VIPT UBS Global Asset Allocation Service Class 3,559,507 (978,102) 2,581,405 Lincoln VIPT Wilshire 2010 Profile Service Class 89,319 (68,748) 20,571 Lincoln VIPT Wilshire 2020 Profile Service Class 101,242 (105,880) (4,638) Lincoln VIPT Wilshire 2030 Profile Service Class 27,282 (50,564) (23,282) Lincoln VIPT Wilshire 2040 Profile Service Class 6,170 (49,839) (43,669) Lincoln VIPT Wilshire Aggressive Profile Service Class 277,101 (1,612,371) (1,335,270) Lincoln VIPT Wilshire Conservative Profile Service Class 3,899,948 (3,358,580) 541,368 Lincoln VIPT Wilshire Moderate Profile Service Class 13,053,626 (12,322,774) 730,852 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 3,862,209 (8,131,597) (4,269,388) Lord Abbett All Value Class VC 40 (5) 35 MFS VIT Core Equity Service Class 19,158 (75,144) (55,986) MFS VIT Growth 11,920 (71,555) (59,635) MFS VIT Growth Service Class -- (131,579) (131,579) MFS VIT Total Return 795,244 (345,247) 449,997 MFS VIT Total Return Service Class 8,800,761 (5,140,575) 3,660,186 MFS VIT Utilities 390,703 (348,594) 42,109 MFS VIT Utilities Service Class 2,927,993 (3,816,236) (888,243) NB AMT Mid-Cap Growth -- (1,374,903) (1,374,903) NB AMT Regency 990,119 (1,434,249) (444,130) Oppenheimer Global Securities Service Class -- (2) (2) Putnam VT Growth & Income Class IB 91,771 (65,792) 25,979 Putnam VT Health Sciences Class IB -- (79,089) (79,089) Van Kampen Capital Growth Class II -- (2) (2)
See accompanying notes. N-8
DIVIDENDS FROM TOTAL NET REALIZED NET REALIZE NET REALIZED GAIN (LOSS) GAIN ON GAIN (LOSS) SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ------------------------------------------------------------ -------------- ----------- -------------- Lincoln VIPT Delaware Bond $ (2,365,001) $ 93,301 $(2,271,700) Lincoln VIPT Delaware Bond Service Class (4,409,618) 214,032 (4,195,586) Lincoln VIPT Delaware Growth and Income Service Class (1,012,479) 2,401,381 1,388,902 Lincoln VIPT Delaware Social Awareness 638,370 1,152,181 1,790,551 Lincoln VIPT Delaware Social Awareness Service Class 669,857 3,625,074 4,294,931 Lincoln VIPT Delaware Special Opportunities Service Class (778,695) 727,841 (50,854) Lincoln VIPT FI Equity-Income Service Class (2,171,794) 2,110,458 (61,336) Lincoln VIPT Janus Capital Appreciation 88,678 -- 88,678 Lincoln VIPT Janus Capital Appreciation Service Class (157,122) -- (157,122) Lincoln VIPT Marsico International Growth Service Class (3,552,555) 2,975,823 (576,732) Lincoln VIPT MFS Value Service Class (660,618) 819,937 159,319 Lincoln VIPT Mid-Cap Value Service Class (2,582,941) 1,273,723 (1,309,218) Lincoln VIPT Mondrian International Value 2,290,172 2,689,779 4,979,951 Lincoln VIPT Mondrian International Value Service Class 3,305,760 9,405,316 12,711,076 Lincoln VIPT Money Market (20) 640 620 Lincoln VIPT Money Market Service Class (155) 1,776 1,621 Lincoln VIPT SSgA Bond Index Service Class 69,343 -- 69,343 Lincoln VIPT SSgA Developed International 150 Service Class (69,873) -- (69,873) Lincoln VIPT SSgA Emerging Markets 100 Service Class (66,298) -- (66,298) Lincoln VIPT SSgA International Index Service Class (162,335) -- (162,335) Lincoln VIPT SSgA Large Cap 100 Service Class (362,864) -- (362,864) Lincoln VIPT SSgA S&P 500 Index (30,802) -- (30,802) Lincoln VIPT SSgA S&P 500 Index Service Class (1,682,975) -- (1,682,975) Lincoln VIPT SSgA Small-Cap Index Service Class (747,560) 1,295,349 547,789 Lincoln VIPT SSgA Small-Mid Cap 200 Service Class (163,611) -- (163,611) Lincoln VIPT T. Rowe Price Growth Stock Service Class (565,679) -- (565,679) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 67,911 -- 67,911 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class (569,123) -- (569,123) Lincoln VIPT Templeton Growth Service Class (2,810,577) 2,938,374 127,797 Lincoln VIPT Turner Mid-Cap Growth Service Class (1,659,401) 2,675,758 1,016,357 Lincoln VIPT UBS Global Asset Allocation (1,036,194) 2,169,499 1,133,305 Lincoln VIPT UBS Global Asset Allocation Service Class (3,090,463) 5,281,736 2,191,273 Lincoln VIPT Wilshire 2010 Profile Service Class (263,641) 4,280 (259,361) Lincoln VIPT Wilshire 2020 Profile Service Class (397,126) 9,347 (387,779) Lincoln VIPT Wilshire 2030 Profile Service Class (239,821) 3,405 (236,416) Lincoln VIPT Wilshire 2040 Profile Service Class (516,713) 2,355 (514,358) Lincoln VIPT Wilshire Aggressive Profile Service Class (2,811,430) 2,478,950 (332,480) Lincoln VIPT Wilshire Conservative Profile Service Class (3,916,001) 2,011,513 (1,904,488) Lincoln VIPT Wilshire Moderate Profile Service Class (9,985,642) 16,095,076 6,109,434 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class (11,160,171) 9,808,070 (1,352,101) Lord Abbett All Value Class VC -- 46 46 MFS VIT Core Equity Service Class 98,509 -- 98,509 MFS VIT Growth (476,942) -- (476,942) MFS VIT Growth Service Class 455,674 -- 455,674 MFS VIT Total Return (241,491) 1,575,128 1,333,637 MFS VIT Total Return Service Class (6,557,277) 19,190,762 12,633,485 MFS VIT Utilities 1,016,839 4,044,394 5,061,233 MFS VIT Utilities Service Class (10,560,124) 35,644,040 25,083,916 NB AMT Mid-Cap Growth 3,913,192 -- 3,913,192 NB AMT Regency (1,224,760) 182,937 (1,041,823) Oppenheimer Global Securities Service Class -- -- -- Putnam VT Growth & Income Class IB (487,756) 789,091 301,335 Putnam VT Health Sciences Class IB 42,423 44,128 86,551 Van Kampen Capital Growth Class II -- -- -- NET CHANGE NET INCREASE IN UNREALIZED (DECREASE) APPRECIATION OR IN NET ASSETS DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------ --------------- --------------- Lincoln VIPT Delaware Bond $ (16,897,124) $ (11,933,218) Lincoln VIPT Delaware Bond Service Class (42,956,750) (29,703,070) Lincoln VIPT Delaware Growth and Income Service Class (11,057,023) (9,802,669) Lincoln VIPT Delaware Social Awareness (9,555,409) (7,917,589) Lincoln VIPT Delaware Social Awareness Service Class (28,529,259) (24,890,074) Lincoln VIPT Delaware Special Opportunities Service Class (3,189,439) (3,270,195) Lincoln VIPT FI Equity-Income Service Class (11,657,664) (11,721,161) Lincoln VIPT Janus Capital Appreciation (1,855,666) (1,801,686) Lincoln VIPT Janus Capital Appreciation Service Class (15,493,442) (16,027,112) Lincoln VIPT Marsico International Growth Service Class (18,392,610) (19,170,680) Lincoln VIPT MFS Value Service Class (17,543,357) (17,205,493) Lincoln VIPT Mid-Cap Value Service Class (6,926,296) (8,482,460) Lincoln VIPT Mondrian International Value (25,878,598) (19,695,474) Lincoln VIPT Mondrian International Value Service Class (83,222,840) (66,384,433) Lincoln VIPT Money Market 32 987,629 Lincoln VIPT Money Market Service Class 86 810,799 Lincoln VIPT SSgA Bond Index Service Class 4,584,010 4,668,408 Lincoln VIPT SSgA Developed International 150 Service Class (1,245,887) (1,227,660) Lincoln VIPT SSgA Emerging Markets 100 Service Class (1,274,885) (1,313,479) Lincoln VIPT SSgA International Index Service Class (1,492,100) (1,588,254) Lincoln VIPT SSgA Large Cap 100 Service Class (2,565,962) (2,938,422) Lincoln VIPT SSgA S&P 500 Index (147,015) (164,444) Lincoln VIPT SSgA S&P 500 Index Service Class (15,387,895) (15,807,005) Lincoln VIPT SSgA Small-Cap Index Service Class (6,433,069) (5,935,993) Lincoln VIPT SSgA Small-Mid Cap 200 Service Class (1,010,798) (1,149,992) Lincoln VIPT T. Rowe Price Growth Stock Service Class (4,427,637) (5,142,533) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth (1,109,581) (1,075,606) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class (8,563,548) (9,428,970) Lincoln VIPT Templeton Growth Service Class (32,776,014) (32,217,575) Lincoln VIPT Turner Mid-Cap Growth Service Class (9,682,868) (8,909,705) Lincoln VIPT UBS Global Asset Allocation (11,882,602) (9,716,447) Lincoln VIPT UBS Global Asset Allocation Service Class (27,104,014) (22,331,336) Lincoln VIPT Wilshire 2010 Profile Service Class (1,118,364) (1,357,154) Lincoln VIPT Wilshire 2020 Profile Service Class (1,963,209) (2,355,626) Lincoln VIPT Wilshire 2030 Profile Service Class (1,215,967) (1,475,665) Lincoln VIPT Wilshire 2040 Profile Service Class (836,406) (1,394,433) Lincoln VIPT Wilshire Aggressive Profile Service Class (46,287,942) (47,955,692) Lincoln VIPT Wilshire Conservative Profile Service Class (42,816,739) (44,179,859) Lincoln VIPT Wilshire Moderate Profile Service Class (239,365,028) (232,524,742) Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class (194,451,703) (200,073,192) Lord Abbett All Value Class VC 1,145 1,226 MFS VIT Core Equity Service Class (2,270,197) (2,227,674) MFS VIT Growth (1,653,009) (2,189,586) MFS VIT Growth Service Class (4,070,798) (3,746,703) MFS VIT Total Return (7,967,199) (6,183,565) MFS VIT Total Return Service Class (96,863,172) (80,569,501) MFS VIT Utilities (15,665,959) (10,562,617) MFS VIT Utilities Service Class (133,944,588) (109,748,915) NB AMT Mid-Cap Growth (47,982,186) (45,443,897) NB AMT Regency (46,851,122) (48,337,075) Oppenheimer Global Securities Service Class 366 364 Putnam VT Growth & Income Class IB (2,324,824) (1,997,510) Putnam VT Health Sciences Class IB (1,055,167) (1,047,705) Van Kampen Capital Growth Class II 234 232
N-9 STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2007 AND 2008
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, 2007 $ 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 Changes From Operations: - Net investment income (loss) (81,216) (49,449) 79,009 9,660 - Net realized gain (loss) on investments (246,130) (42,701) 148,817 39,102 - Net change in unrealized appreciation or depreciation on investments (2,665,933) (1,579,978) (5,818,753) (1,906,377) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,993,279) (1,672,128) (5,590,927) (1,857,615) Changes From Unit Transactions: Accumulation Units: - Contract purchases 13,953 31,219 43,946 46,473 - Contract withdrawals and transfers to annuity reserves (1,012,200) (569,892) (3,074,332) (900,285) - Contract transfers (514,733) (292,038) (1,156,027) (137,566) ----------- ----------- ----------- ----------- (1,512,980) (830,711) (4,186,413) (991,378) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (1,421) -- (13,597) -- - Receipt (reimbursement) of mortality guarantee adjustments 173 -- 84 -- ----------- ----------- ----------- ----------- (1,248) -- (13,513) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,514,228) (830,711) (4,199,926) (991,378) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (4,507,507) (2,502,839) (9,790,853) (2,848,993) ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 3,358,095 $ 1,996,280 $11,156,757 $ 3,828,214 =========== =========== =========== ===========
See accompanying notes. 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, 2007 $ 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 Changes From Operations: - Net investment income (loss) (69,644) (66,514) (433,902) 242,605 (1,142,556) - Net realized gain (loss) on investments 1,141,560 633,871 (2,180,070) 24,894,096 (8,550,239) - Net change in unrealized appreciation or depreciation on investments (4,517,485) (3,468,544) (13,660,503) (120,361,865) (87,990,600) ------------ ------------ ------------ ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (3,445,569) (2,901,187) (16,274,475) (95,225,164) (97,683,395) Changes From Unit Transactions: Accumulation Units: - Contract purchases 56,274 56,230 3,810,520 11,400,610 44,582,776 - Contract withdrawals and transfers to annuity reserves (1,331,057) (883,716) (2,373,082) (19,270,738) (11,641,485) - Contract transfers (1,431,762) (1,101,478) (1,935,883) (6,916,660) (17,621,170) ------------ ------------ ------------ ------------- ------------- (2,706,545) (1,928,964) (498,445) (14,786,788) 15,320,121 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- (5,724) -- 33,167 - Annuity Payments (3,323) -- (3,453) (44,387) (9,340) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- 740 (1) ------------ ------------ ------------ ------------- ------------- (3,323) -- (9,177) (43,647) 23,826 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,709,868) (1,928,964) (507,622) (14,830,435) 15,343,947 ------------ ------------ ------------ ------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (6,155,437) (4,830,151) (16,782,097) (110,055,599) (82,339,448) ------------ ------------ ------------ ------------- ------------- NET ASSETS AT DECEMBER 31, 2008 $ 4,158,730 $ 3,639,727 $ 16,985,544 $ 128,497,995 $ 87,885,870 ============ ============ ============ ============= ============= 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, 2007 $ 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 Changes From Operations: - Net investment income (loss) (335,810) (1,316,631) 6,428,637 823,517 - Net realized gain (loss) on investments (146,236) 5,214,559 (2,423,200) 16,394,571 - Net change in unrealized appreciation or depreciation on investments (10,242,171) (49,408,096) (15,677,986) (150,139,999) ------------ ------------ ------------ ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (10,724,217) (45,510,168) (11,672,549) (132,921,911) Changes From Unit Transactions: Accumulation Units: - Contract purchases 116,828 17,365,957 47,809,103 62,377,232 - Contract withdrawals and transfers to annuity reserves (3,087,329) (7,207,894) (18,576,463) (16,005,100) - Contract transfers (2,087,290) 10,106,220 74,797,534 24,925,119 ------------ ------------ ------------ ------------- (5,057,791) 20,264,283 104,030,174 71,297,251 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 4,520 -- - Annuity Payments (4,437) (4,654) (36,835) (13,811) - Receipt (reimbursement) of mortality guarantee adjustments 1 1 349 23 ------------ ------------ ------------ ------------- (4,436) (4,653) (31,966) (13,788) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (5,062,227) 20,259,630 103,998,208 71,283,463 ------------ ------------ ------------ ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (15,786,444) (25,250,538 92,325,659 (61,638,448) ------------ ------------ ------------ ------------- NET ASSETS AT DECEMBER 31, 2008 $ 13,536,124 $ 84,894,668 $237,085,710 $ 216,967,583 ============ ============ ============ =============
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, 2007 $ 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 Changes From Operations: - Net investment income (loss) (4,578,073) (12,410,662) 2,230,742 2,720,759 - Net realized gain (loss) on investments 31,726,046 162,165,377 89,285,043 98,076,608 - Net change in unrealized appreciation or depreciation on investments (226,522,034) (1,000,789,987) (837,753,220) (525,863,754) ------------- --------------- -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (199,374,061) (851,035,272) (746,237,435) (425,066,387) Changes From Unit Transactions: Accumulation Units: - Contract purchases 46,188,095 250,974,670 236,469,226 127,646,718 - Contract withdrawals and transfers to annuity reserves (22,113,053) (131,014,123) (143,044,830) (66,393,740) - Contract transfers (9,286,575) 55,232,587 29,633,866 27,025,504 ------------- --------------- -------------- ------------- 14,788,467 175,193,134 123,058,262 88,278,482 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 44,151 118,290 -- - Annuity Payments (14,527) (188,602) (336,138) (147,078) - Receipt (reimbursement) of mortality guarantee adjustments 821 926 (10,160) (9,151) ------------- --------------- -------------- ------------- (13,706) (143,525) (228,008) (156,229) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 14,774,761 175,049,609 122,830,254 88,122,253 ------------- --------------- -------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (184,599,300) (675,985,663) (623,407,181) (336,944,134) ------------- --------------- -------------- ------------- NET ASSETS AT DECEMBER 31, 2008 $ 174,409,032 $ 1,096,444,796 $1,213,955,684 $ 567,950,440 ============= =============== ============== =============
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, 2007 $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 Changes From Operations: - Net investment income (loss) 991,848 7,069,727 (932,483) 676,267 11,819,432 - Net realized gain (loss) on investments (283,418) 2,353,541 26,610,679 (420,474) (6,046,860) - Net change in unrealized appreciation or depreciation on investments (1,960,606) (38,437,202) (177,059,146) (2,533,472) (58,596,553) ----------- ------------ ------------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,252,176) (29,013,934) (151,380,950) (2,277,679) (52,823,981) Changes From Unit Transactions: Accumulation Units: - Contract purchases 20,406,664 81,154,178 51,638,779 31,834 30,757,113 - Contract withdrawals and transfers to annuity reserves (6,198,544) (38,020,869) (14,613,168) (2,277,144) (17,927,497) - Contract transfers 50,388,681 66,996,207 (1,322,627) (3,322,460) 3,915,373 ----------- ------------ ------------- ----------- ------------ 64,596,801 110,129,516 35,702,984 (5,567,770) 16,744,989 Annuity Reserves: - Transfer from accumulation units and between subaccounts 665 -- 2,475 (5,332) -- - Annuity Payments (165,947) (29,418) (1,181) 5,116 (60,963) - Receipt (reimbursement) of mortality guarantee adjustments 58 291 -- 16 363 ----------- ------------ ------------- ----------- ------------ (165,224) (29,127) 1,294 (200) (60,600) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 64,431,577 110,100,389 35,704,278 (5,567,970) 16,684,389 ----------- ------------ ------------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 63,179,401 81,086,455 (115,676,672) (7,845,649) (36,139,592) ----------- ------------ ------------- ----------- ------------ NET ASSETS AT DECEMBER 31, 2008 $81,388,856 $383,243,656 $ 141,037,891 $ 8,034,157 $166,499,584 =========== ============ ============= =========== ============ 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, 2007 $ 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 Changes From Operations: - Net investment income (loss) 15,629 118,762 752,376 (87,952) - Net realized gain (loss) on investments (290,105) 2,499,672 35,438,237 1,619,251 - Net change in unrealized appreciation or depreciation on investments (199,913) (6,352,515) (94,873,617) (6,406,374) ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (474,389) (3,734,081) (58,683,004) (4,875,075) Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,487 37,193 2,167,965 95,483 - Contract withdrawals and transfers to annuity reserves (644,974) (2,401,131) (14,103,275) (3,043,014) - Contract transfers (164,790) (1,644,334) (22,576,507) (2,945,601) ----------- ------------ ------------ ------------ (808,277) (4,008,272) (34,511,817) (5,893,132) Annuity Reserves: - Transfer from accumulation units and between subaccounts (7,301) (6,281) 42,805 -- - Annuity Payments (882) (10,753) (56,902) (931) - Receipt (reimbursement) of mortality guarantee adjustments -- 152 889 28 ----------- ------------ ------------ ------------ (8,183) (16,882) (13,208) (903) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (816,460) (4,025,154) (34,525,025) (5,894,035) ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (1,290,849) (7,759,235) (93,208,029) (10,769,110) ----------- ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 423,335 $ 5,881,815 $ 97,607,134 $ 9,651,885 =========== ============ ============ ============
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, 2007 $ 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 Changes From Operations: - Net investment income (loss) (3,593,147) (181,938) (1,395,683) (470,758) - Net realized gain (loss) on investments 11,715,472 2,167,735 16,071,600 1,139,514 - Net change in unrealized appreciation or depreciation on investments (111,254,918) (9,517,850) (65,019,379) (16,613,721) ------------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (103,132,593) (7,532,053) (50,343,462) (15,944,965) Changes From Unit Transactions: Accumulation Units: - Contract purchases 40,115,374 39,176 4,000,666 2,541,952 - Contract withdrawals and transfers to annuity reserves (22,797,277) (3,049,497) (9,008,451) (3,439,512) - Contract transfers (11,739,844) (1,520,085) (8,403,027) (613,624) ------------- ------------ ------------ ------------ 5,578,253 (4,530,406) (13,410,812) (1,511,184) Annuity Reserves: - Transfer from accumulation units and between subaccounts 45,988 7,568 -- -- - Annuity Payments (85,374) (19,172) (68,252) (8,703) - Receipt (reimbursement) of mortality guarantee adjustments 54 (7,371) 12 527 ------------- ------------ ------------ ------------ (39,332) (18,975) (68,240) (8,176) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 5,538,921 (4,549,381) (13,479,052) (1,519,360) ------------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (97,593,672) (12,081,434) (63,822,514) (17,464,325) ------------- ------------ ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 230,267,773 $ 7,010,663 $ 52,003,840 $ 21,229,340 ============= ============ ============ ============
See accompanying notes. N-14
DWS VIP DELAWARE DWS VIP EQUITY 500 DWS VIP DELAWARE VIPT VALUE EQUITY 500 INDEX SMALL CAP VIPT VALUE SERVICE CLASS INDEX SERVICE CLASS INDEX SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------- ------------- ------------- ------------- ----------- NET ASSETS AT JANUARY 1, 2007 $18,576,994 $129,017,666 $ 61,937,097 $ 42,703,560 $16,714,898 Changes From Operations: - Net investment income (loss) 41,656 (676,819) 12,115 (204,292) (103,378) - Net realized gain (loss) on investments 1,661,442 7,121,637 3,197,545 1,308,311 1,786,320 - Net change in unrealized appreciation or depreciation on investments (2,270,849) (15,069,686) (897,717) 323,569 (2,122,461) ----------- ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (567,751) (8,624,868) 2,311,943 1,427,588 (439,519) Changes From Unit Transactions: Accumulation Units: - Contract purchases 136,856 42,180,878 544,704 7,492,249 255,103 - Contract withdrawals and transfers to annuity reserves (3,390,987) (9,538,988) (8,710,005) (2,452,991) (1,611,352) - Contract transfers 176,176 5,834,353 (4,149,446) (1,914,531) (1,503,861) ----------- ------------ ------------ ------------ ----------- (3,077,955) 38,476,243 (12,314,747) 3,124,727 (2,860,110) 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) ----------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (3,652,998) 29,856,812 (10,061,071) 4,549,390 (3,309,623) ----------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 14,923,996 158,874,478 51,876,026 47,252,950 13,405,275 Changes From Operations: - Net investment income (loss) 180,449 1,090,834 384,777 175,089 7,303 - Net realized gain (loss) on investments 693,435 3,188,725 748,271 (185,820) 699,567 - Net change in unrealized appreciation or depreciation on investments (5,148,508) (56,261,001) (18,011,470) (16,953,948) (4,861,128) ----------- ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (4,274,624) (51,981,442) (16,878,422) (16,964,679) (4,154,258) Changes From Unit Transactions: Accumulation Units: - Contract purchases 194,595 12,357,240 207,161 718,589 186,745 - Contract withdrawals and transfers to annuity reserves (2,413,520) (8,768,904) (6,115,379) (3,061,148) (1,140,619) - Contract transfers (2,066,828) (17,843,147) (4,803,305) 1,448,319 (1,485,026) ----------- ------------ ------------ ------------ ----------- (4,285,753) (14,254,811) (10,711,523) (894,240) (2,438,900) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- (6,127) -- (2,603) - Annuity Payments (12,534) (5,701) (78,718) (2,315) (5,422) - Receipt (reimbursement) of mortality guarantee adjustments 1,067 219 (31,151) 16 1 ----------- ------------ ------------ ------------ ----------- (11,467) (5,482) (115,996) (2,299) (8,024) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (4,297,220) (14,260,293) (10,827,519) (896,539) (2,446,924) ----------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (8,571,844) (66,241,735) (27,705,941) (17,861,218) (6,601,182) ----------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2008 $ 6,352,152 $ 92,632,743 $ 24,170,085 $ 29,391,732 $ 6,804,093 =========== ============ ============ ============ =========== DWS VIP SMALL CAP FIDELITY VIP FIDELITY VIP INDEX CONTRAFUND FIDELITY VIP EQUITY-INCOME SERVICE CLASS SERVICE CLASS 2 EQUITY-INCOME SERVICE CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- --------------- ------------- --------------- NET ASSETS AT JANUARY 1, 2007 $ 32,947,863 $ 473,272,060 $ 26,097,151 $118,013,433 Changes From Operations: - Net investment income (loss) (415,137) (4,966,817) 42,366 (80,249) - Net realized gain (loss) on investments 2,875,694 177,764,522 2,788,386 11,698,029 - Net change in unrealized appreciation or depreciation on investments (4,151,136) (89,013,123) (2,554,099) (11,564,010) ------------ ------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,690,579) 83,784,582 276,653 53,770 Changes From Unit Transactions: Accumulation Units: - Contract purchases 5,639,486 171,852,579 114,662 1,935,778 - Contract withdrawals and transfers to annuity reserves (1,547,364) (37,817,234) (5,770,621) (9,823,162) - Contract transfers 2,120,807 32,959,236 (917,625) (5,270,262) ------------ ------------- ------------ ------------ 6,212,929 166,994,581 (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 6,212,929 167,026,237 (6,578,145) (13,198,794) ------------ ------------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 4,522,350 250,810,819 (6,301,492) (13,145,024) ------------ ------------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 37,470,213 724,082,879 19,795,659 104,868,409 Changes From Operations: - Net investment income (loss) (79,649) (5,144,151) 87,914 376,804 - Net realized gain (loss) on investments 647,163 (6,743,443) (1,403,906) (4,161,905) - Net change in unrealized appreciation or depreciation on investments (11,683,124) (343,104,284) (5,913,856) (36,883,533) ------------ ------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (11,115,610) (354,991,878) (7,229,848) (40,668,634) Changes From Unit Transactions: Accumulation Units: - Contract purchases 325,704 119,949,196 106,190 637,565 - Contract withdrawals and transfers to annuity reserves (2,047,675) (49,335,087) (3,228,760) (8,449,172) - Contract transfers (6,236,697) 60,579,499 (1,815,022) (8,881,407) ------------ ------------- ------------ ------------ (7,958,668) 131,193,608 (4,937,592) (16,693,014) Annuity Reserves: - Transfer from accumulation units and between subaccounts 43,653 -- (10,256) -- - Annuity Payments (9,429) (2,682) 6,603 (39,203) - Receipt (reimbursement) of mortality guarantee adjustments (1) 134 806 55 ------------ ------------- ------------ ------------ 34,223 (2,548) (2,847) (39,148) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (7,924,445) 131,191,060 (4,940,439) (16,732,162) ------------ ------------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (19,040,055) (223,800,818) (12,170,287) (57,400,796) ------------ ------------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 18,430,158 $ 500,282,061 $ 7,625,372 $ 47,467,613 ============ ============= ============ ============
N-15
FIDELITY VIP FIDELITY VIP FIDELITY VIP GROWTH MID CAP FIDELITY VIP GROWTH SERVICE CLASS 2 SERVICE CLASS 2 OVERSEAS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ --------------- --------------- ------------- NET ASSETS AT JANUARY 1, 2007 $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 Changes From Operations: - Net investment income (loss) (68,465) (761,581) (3,805,212) 40,631 - Net realized gain (loss) on investments (701,321) (1,207,775) 26,651,233 635,196 - Net change in unrealized appreciation or depreciation on investments (4,871,180) (40,457,396) (155,350,024) (3,216,855) ----------- ------------ ------------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (5,640,966) (42,426,752) (132,504,003) (2,541,028) Changes From Unit Transactions: Accumulation Units: - Contract purchases 46,588 16,948,404 67,703,028 9,673 - Contract withdrawals and transfers to annuity reserves (1,731,945) (4,410,836) (14,504,027) (990,361) - Contract transfers (1,138,630) (1,751,118) 24,676,508 (302,246) ----------- ------------ ------------- ----------- (2,823,987) 10,786,450 77,875,509 (1,282,934) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- 43,983 -- - Annuity Payments (24,723) (50,331) (12,392) (37,852) - Receipt (reimbursement) of mortality guarantee adjustments (15,354) 167 9 (27,948) ----------- ------------ ------------- ----------- (40,077) (50,164) 31,600 (65,800) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,864,064) 10,736,286 77,907,109 (1,348,734) ----------- ------------ ------------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (8,505,030) (31,690,466) (54,596,894) (3,889,762) ----------- ------------ ------------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 5,288,086 $ 46,897,614 $ 212,067,044 $ 2,693,356 =========== ============ ============= ===========
See accompanying notes. N-16
FTVIPT FTVIPT FRANKLIN FTVIPT FRANKLIN SMALL-MID CAP FTVIPT TEMPLETON FIDELITY VIP INCOME GROWTH MUTUAL SHARES GLOBAL INCOME OVERSEAS SECURITIES SECURITIES SECURITIES SECURITIES SERVICE CLASS 2 CLASS 2 CLASS 2 CLASS 2 CLASS 2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------- ------------- ------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $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 Changes From Operations: - Net investment income (loss) 815,454 14,630,748 (1,391,995) 4,085,801 6,007,846 - Net realized gain (loss) on investments 11,196,025 (4,086,054) 7,841,751 3,126,656 569,166 - Net change in unrealized appreciation or depreciation on investments (71,028,940) (157,550,496) (51,680,767) (121,281,552) 3,363,424 ------------ ------------- ------------ ------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (59,017,461) (147,005,802) (45,231,011) (114,069,095) 9,940,436 Changes From Unit Transactions: Accumulation Units: 10,551,736 119,211,256 11,626,849 70,340,192 126,043,775 - Contract purchases (8,558,863) (24,675,355) (7,301,307) (13,853,286) (23,279,659) - Contract withdrawals and transfers to annuity reserves (2,083,955) 61,419,408 2,320,024 63,846,794 112,540,900 ------------ ------------- ------------ ------------- ------------ - Contract transfers (91,082) 155,955,309 6,645,566 120,333,700 215,305,016 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 2,366 -- -- 10,013 - Annuity Payments (10,436) (3,270) (8,637) (1,112) (73) - Receipt (reimbursement) of mortality guarantee adjustments 355 2 77 1 -- ------------ ------------- ------------ ------------- ------------ (10,081) (902) (8,560) (1,111) 9,940 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (101,163) 155,954,407 6,637,006 120,332,589 215,314,956 ------------ ------------- ------------ ------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (59,118,624) 8,948,605 (38,594,005) 6,263,494 225,255,392 ------------ ------------- ------------ ------------- ------------ NET ASSETS AT DECEMBER 31, 2008 $ 72,016,219 $ 358,972,880 $ 61,007,232 $ 229,277,740 $398,547,664 ============ ============= ============ ============= ============ FTVIPT GOLDMAN JANUS TEMPLETON SACHS VIT JANUS ASPEN SERIES GROWTH GROWTH & ASPEN SERIES MID CAP SECURITIES INCOME BALANCED GROWTH CLASS 2 SERVICE CLASS SERVICE SHARES SERVICE SHARES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- -------------- -------------- NET ASSETS AT JANUARY 1, 2007 $ 157,168,558 $ -- $ 37,445,853 $ 15,346,221 Changes From Operations: - Net investment income (loss) (520,922) -- 241,206 (258,794) - Net realized gain (loss) on investments 12,498,284 -- 1,841,890 1,444,199 - Net change in unrealized appreciation or depreciation on investments (11,221,346) -- 1,021,091 1,821,964 ------------- ------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 756,016 -- 3,104,187 3,007,369 Changes From Unit Transactions: Accumulation Units: - Contract purchases 33,529,929 -- 444,501 304,874 - Contract withdrawals and transfers to annuity reserves (10,347,575) -- (3,820,479) (1,518,327) - Contract transfers 3,065,248 -- (1,586,163) 452,116 ------------- ------- ------------ ------------ 26,247,602 -- (4,962,141) (761,337) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (12,671) -- (65,249) -- - Receipt (reimbursement) of mortality guarantee adjustments 254 -- (7) -- ------------- ------- ------------ ------------ (12,417) -- (65,256) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 26,235,185 -- (5,027,397) (761,337) ------------- ------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 26,991,201 -- (1,923,210) 2,246,032 ------------- ------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 184,159,759 -- 35,522,643 17,592,253 Changes From Operations: - Net investment income (loss) 159,074 904 237,208 (201,574) - Net realized gain (loss) on investments 3,861,722 5 2,895,475 1,824,456 - Net change in unrealized appreciation or depreciation on investments (74,896,610) 230 (8,851,214) (8,384,603) ------------- ------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (70,875,814) 1,139 (5,718,531) (6,761,721) Changes From Unit Transactions: Accumulation Units: 1,371,585 37,890 322,969 127,354 - Contract purchases (10,925,642) -- (3,463,378) (1,769,942) - Contract withdrawals and transfers to annuity reserves (20,059,003) -- (1,695,644) (2,060,082) - Contract transfers (29,613,060) 37,890 (4,836,053) (3,702,670) ------------- ------- ------------ ------------ Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (9,542) -- (60,146) -- - Receipt (reimbursement) of mortality guarantee adjustments 183 -- 68 -- ------------- ------- ------------ ------------ (9,359) -- (60,078) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (29,622,419) 37,890 (4,896,131) (3,702,670) ------------- ------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (100,498,233) 39,029 (10,614,662 (10,464,391) ------------- ------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 83,661,526 $39,029 $ 24,907,981 $ 7,127,862 ============= ======= ============ ============
N-17
JANUS LINCOLN VIPT ASPEN SERIES LINCOLN VIPT COHEN & STEERS WORLDWIDE BARON GROWTH LINCOLN VIPT GLOBAL GROWTH OPPORTUNITIES CAPITAL GROWTH REAL ESTATE SERVICE SHARES SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------- ------------- -------------- -------------- NET ASSETS AT JANUARY 1, 2007 $ 4,616,538 $ 4,835,350 $ -- $ -- Changes From Operations: - Net investment income (loss) (47,538) (362,454) (5,874) (75,086) - Net realized gain (loss) on investments 552,948 1,693,818 26,861 (94,548) - Net change in unrealized appreciation or depreciation on investments (163,348) (2,212,221) 44,905 (3,119,975) ----------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 342,062 (880,857) 65,892 (3,289,609) Changes From Unit Transactions: Accumulation Units: - Contract purchases 14,973 19,049,911 1,341,504 21,372,854 - Contract withdrawals and transfers to annuity reserves (649,143) (727,798) (7,684) (391,595) - Contract transfers 49,123 14,255,165 (95,137) 14,277,886 ----------- ------------ ----------- ------------ (585,047) 32,577,278 1,238,683 35,259,145 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 13,806 -- -- - Annuity Payments (55,726) (628) -- -- - Receipt (reimbursement) of mortality guarantee adjustments (11) 96 -- -- ----------- ------------ ----------- ------------ (55,737) 13,274 -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (640,784) 32,590,552 1,238,683 35,259,145 ----------- ------------ ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (298,722) 31,709,695 1,304,575 31,969,536 ----------- ------------ ----------- ------------ NET ASSETS AT DECEMBER 31, 2007 4,317,816 36,545,045 1,304,575 31,969,536 Changes From Operations: - Net investment income (loss) (18,606) (710,060) (42,499) (169,551) - Net realized gain (loss) on investments 28,212 62,787 (123,940) (2,784,748) - Net change in unrealized appreciation or depreciation on investments (1,746,434) (20,658,819) (1,463,752) (22,019,517) ----------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,736,828) (21,306,092) (1,630,191) (24,973,816) Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,146 15,778,514 2,681,099 19,070,210 - Contract withdrawals and transfers to annuity reserves (422,857) (2,259,770) (81,606) (2,796,441) - Contract transfers (320,392) 12,663,332 5,446,943 15,650,989 ----------- ------------ ----------- ------------ (739,103) 26,182,076 8,046,436 31,924,758 Annuity Reserves: - Transfer from accumulation units and between subaccounts (3,883) -- -- -- - Annuity Payments (28,472) (753) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 2 14 -- -- ----------- ------------ ----------- ------------ (32,353) (739) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (771,456) 26,181,337 8,046,436 31,924,758 ----------- ------------ ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (2,508,284) 4,875,245 6,416,245 6,950,942 ----------- ------------ ----------- ------------ NET ASSETS AT DECEMBER 31, 2008 $ 1,809,532 $ 41,420,290 $ 7,720,820 $ 38,920,478 =========== ============ =========== ============
See accompanying notes. N-18
LINCOLN VIPT COLUMBIA VALUE LINCOLN VIPT LINCOLN VIPT OPPORTUNITIES LINCOLN VIPT CORE LINCOLN VIPT DELAWARE BOND SERVICE CLASS CORE SERVICE CLASS DELAWARE BOND SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------- ------------ ------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ 151,833 $ 3,613,476 $325,383,540 $428,938,186 Changes From Operations: - Net investment income (loss) (1,500) (1,325) (21,254) 9,601,521 15,779,347 - Net realized gain (loss) on investments 2,616 14,065 330,340 (415,139) (458,513) - Net change in unrealized appreciation or depreciation on investments (40,266) (15,944) (277,420) 1,997,972 1,214,489 ----------- --------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (39,150) (3,204) 31,666 11,184,354 16,535,323 Changes From Unit Transactions: Accumulation Units: - Contract purchases 659,019 840 629,775 3,309,219 101,286,354 - Contract withdrawals and transfers to annuity reserves (9,178) (1,026) (23,406) (46,461,121) (33,755,563) - Contract transfers 203,881 (148,443) (4,251,511) (967,410) 12,319,624 ----------- --------- ----------- ------------ ------------ 853,722 (148,629) (3,645,142) (44,119,312) 79,850,415 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- 13,816 11,677 - Annuity Payments -- -- -- (139,648) (23,855) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- 1,142 5,262 ----------- --------- ----------- ------------ ------------ -- -- -- (124,690) (6,916) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 853,722 (148,629) (3,645,142) (44,244,002) 79,843,499 ----------- --------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 814,572 (151,833) (3,613,476) (33,059,648) 96,378,822 ----------- --------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 814,572 -- -- 292,323,892 525,317,008 Changes From Operations: - Net investment income (loss) (27,621) -- -- 7,235,606 17,449,266 - Net realized gain (loss) on investments 316,123 -- -- (2,271,700) (4,195,586) - Net change in unrealized appreciation or depreciation on investments (1,557,973) -- -- (16,897,124) (42,956,750) ----------- --------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,269,471) -- -- (11,933,218) (29,703,070) Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,349,545 -- -- 2,058,588 124,324,970 - Contract withdrawals and transfers to annuity reserves (187,333) -- -- (40,880,467) (44,893,604) - Contract transfers 3,149,709 -- -- (16,659,484) 15,675,297 ----------- --------- ----------- ------------ ------------ 4,311,921 -- -- (55,481,363) 95,106,663 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- (9,921) - Annuity Payments -- -- -- (207,813) (14,975) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- 1,805 4,516 ----------- --------- ----------- ------------ ------------ -- -- -- (206,008) (20,380) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 4,311,921 -- -- (55,687,371) 95,086,283 ----------- --------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 3,042,450 -- -- (67,620,589) 65,383,213 ----------- --------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 3,857,022 $ -- $ -- $224,703,303 $590,700,221 =========== ========= =========== ============ ============ LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT DELAWARE LINCOLN VIPT DELAWARE DELAWARE GROWTH DELAWARE SOCIAL SPECIAL AND INCOME SOCIAL AWARENESS OPPORTUNITIES SERVICE CLASS AWARENESS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------ ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ 10,787,344 $ 27,934,321 $ 76,874,132 $ -- Changes From Operations: - Net investment income (loss) (78,350) (208,636) (768,767) 1,674 - Net realized gain (loss) on investments 198,893 1,469,068 2,698,443 68,498 - Net change in unrealized appreciation or depreciation on investments 213,752 (845,273) (1,100,388) (218,927) ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 334,295 415,159 829,288 (148,755) Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,396,980 275,590 6,727,043 1,776,715 - Contract withdrawals and transfers to annuity reserves (541,292) (2,739,674) (5,418,555) (29,080) - Contract transfers 4,472,513 (710,909) (3,605,335) 1,727,715 ------------ ------------ ------------ ----------- 11,328,201 (3,174,993) (2,296,847) 3,475,350 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (7,532) (4,338) -- - Receipt (reimbursement) of mortality guarantee adjustments -- (5) 1,701 -- ------------ ------------ ------------ ----------- -- (7,537) (2,637) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 11,328,201 (3,182,530) (2,299,484) 3,475,350 ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 11,662,496 (2,767,371) (1,470,196) 3,326,595 ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 22,449,840 25,166,950 75,403,936 3,326,595 Changes From Operations: - Net investment income (loss) (134,548) (152,731) (655,746) (29,902) - Net realized gain (loss) on investments 1,388,902 1,790,551 4,294,931 (50,854) - Net change in unrealized appreciation or depreciation on investments (11,057,023) (9,555,409) (28,529,259) (3,189,439) ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (9,802,669) (7,917,589) (24,890,074) (3,270,195) Changes From Unit Transactions: Accumulation Units: - Contract purchases 3,291,960 474,451 3,651,719 3,797,172 - Contract withdrawals and transfers to annuity reserves (1,755,949) (2,662,709) (5,284,767) (451,868) - Contract transfers 3,512,158 (2,124,603) (5,967,332) 4,904,838 ------------ ------------ ------------ ----------- 5,048,169 (4,312,861) (7,600,380) 8,250,142 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (6,117) (3,466) -- - Receipt (reimbursement) of mortality guarantee adjustments -- 2 977 -- ------------ ------------ ------------ ----------- -- (6,115) (2,489) -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 5,048,169 (4,318,976) (7,602,869) 8,250,142 ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (4,754,500) (12,236,565) (32,492,943) 4,979,947 ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2008 $ 17,695,340 $ 12,930,385 $ 42,910,993 $ 8,306,542 ============ ============ ============ ===========
N-19
LINCOLN LINCOLN VIPT VIPT FI LINCOLN VIPT GROWTH EQUITY-INCOME LINCOLN VIPT GROWTH OPPORTUNITIES SERVICE CLASS GROWTH SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------ ------------- -------------- NET ASSETS AT JANUARY 1, 2007 $ 15,800,547 $ 116,096 $ 7,655,941 $ 3,794,567 Changes From Operations: - Net investment income (loss) (112,964) (278) (41,701) (30,536) - Net realized gain (loss) on investments 2,033,455 14,677 942,550 296,067 - Net change in unrealized appreciation or depreciation on investments (1,674,791) (8,994) (392,026) (100,716) ------------ --------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 245,700 5,405 508,823 164,815 Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,341,410 -- 1,497,365 1,078,002 - Contract withdrawals and transfers to annuity reserves (973,038) (13,675) (115,702) (112,380) - Contract transfers 1,875,530 (107,826) (9,546,427) (4,925,004) ------------ --------- ----------- ----------- 7,243,902 (121,501) (8,164,764) (3,959,382) 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 7,243,902 (121,501) (8,164,764) (3,959,382) ------------ --------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 7,489,602 (116,096) (7,655,941) (3,794,567) ------------ --------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 23,290,149 -- -- -- Changes From Operations: - Net investment income (loss) (2,161) -- -- -- - Net realized gain (loss) on investments (61,336) -- -- -- - Net change in unrealized appreciation or depreciation on investments (11,657,664) -- -- -- ------------ --------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (11,721,161) -- -- -- Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,245,148 -- -- -- - Contract withdrawals and transfers to annuity reserves (1,183,307) -- -- -- - Contract transfers 5,062,126 -- -- -- ------------ --------- ----------- ----------- 10,123,967 -- -- -- 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 10,123,967 -- -- -- ------------ --------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,597,194) -- -- -- ------------ --------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 21,692,955 $ -- $ -- $ -- ============ ========= =========== ===========
See accompanying notes. N-20
LINCOLN VIPT LINCOLN VIPT MARSICO LINCOLN VIPT LINCOLN VIPT JANUS CAPITAL INTERNATIONAL LINCOLN VIPT MID-CAP JANUS CAPITAL APPRECIATION GROWTH MFS VALUE VALUE APPRECIATION SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ 4,267,592 $ 16,166,073 $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) (64,413) (398,160) (5,350) 12,604 (55,829) - Net realized gain (loss) on investments 472,605 818,493 210,688 (16,475) (104,253) - Net change in unrealized appreciation or depreciation on investments 376,791 3,640,243 439,786 (65,525) (1,211,196) ----------- ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 784,983 4,060,576 645,124 (69,396) (1,371,278) Changes From Unit Transactions: Accumulation Units: - Contract purchases 64,950 5,121,889 8,227,618 6,257,451 7,416,950 - Contract withdrawals and transfers to annuity reserves (609,111) (1,460,952) (227,019) (82,722) (153,587) - Contract transfers (14,650) 10,631,428 12,034,923 5,217,963 7,908,757 ----------- ------------ ------------ ------------ ----------- (558,811) 14,292,365 20,035,522 11,392,692 15,172,120 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 (559,197) 14,292,365 20,035,522 11,392,692 15,172,120 ----------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 225,786 18,352,941 20,680,646 11,323,296 13,800,842 ----------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 4,493,378 34,519,014 20,680,646 11,323,296 13,800,842 Changes From Operations: - Net investment income (loss) (34,698) (376,548) (201,338) 178,545 (246,946) - Net realized gain (loss) on investments 88,678 (157,122) (576,732) 159,319 (1,309,218) - Net change in unrealized appreciation or depreciation on investments (1,855,666) (15,493,442) (18,392,610) (17,543,357) (6,926,296) ----------- ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,801,686) (16,027,112) (19,170,680) (17,205,493) (8,482,460) Changes From Unit Transactions: Accumulation Units: - Contract purchases 45,897 7,140,030 15,785,230 24,693,908 6,029,432 - Contract withdrawals and transfers to annuity reserves (377,409) (2,078,036) (1,807,837) (2,248,248) (748,927) - Contract transfers 83,221 1,302,610 7,531,683 64,935,897 2,423,055 ----------- ------------ ------------ ------------ ----------- (248,291) 6,364,604 21,509,076 87,381,557 7,703,560 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 (248,291) 6,364,604 21,509,076 87,381,557 7,703,560 ----------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (2,049,977) (9,662,508) 2,338,396 70,176,064 (778,900) ----------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2008 $ 2,443,401 $ 24,856,506 $ 23,019,042 $ 81,499,360 $13,021,942 =========== ============ ============ ============ =========== LINCOLN VIPT LINCOLN VIPT MONDRIAN MONDRIAN INTERNATIONAL LINCOLN VIPT INTERNATIONAL VALUE LINCOLN VIPT MONEY MARKET VALUE SERVICE CLASS MONEY MARKET SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------ ------------- NET ASSETS AT JANUARY 1, 2007 $ 64,314,382 $164,122,807 $106,534,813 $ 165,087,589 Changes From Operations: - Net investment income (loss) 148,751 310,878 3,804,522 6,410,209 - Net realized gain (loss) on investments 7,094,743 11,627,857 -- -- - Net change in unrealized appreciation or depreciation on investments (1,298,205) 3,830,340 -- -- ------------ ------------ ------------ ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,945,289 15,769,075 3,804,522 6,410,209 Changes From Unit Transactions: Accumulation Units: - Contract purchases 473,909 26,024,940 6,245,700 166,093,451 - Contract withdrawals and transfers to annuity reserves (5,063,291) (10,170,214) (66,590,478) (64,453,135) - Contract transfers (5,573,014) (9,874,779) 74,264,459 452,718 ------------ ------------ ------------ ------------- (10,162,396) 5,979,947 13,919,681 102,093,034 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- 9,743 -- -- - Annuity Payments (14,461) (8,252) (46,915) (236,157) - Receipt (reimbursement) of mortality guarantee adjustments 238 2,079 23 2,883 ------------ ------------ ------------ ------------- (14,223) 3,570 (46,892) (233,274) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (10,176,619) 5,983,517 13,872,789 101,859,760 ------------ ------------ ------------ ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (4,231,330) 21,752,592 17,677,311 108,269,969 ------------ ------------ ------------ ------------- NET ASSETS AT DECEMBER 31, 2007 60,083,052 185,875,399 124,212,124 273,357,558 Changes From Operations: - Net investment income (loss) 1,203,173 4,127,331 986,977 809,092 - Net realized gain (loss) on investments 4,979,951 12,711,076 620 1,621 - Net change in unrealized appreciation or depreciation on investments (25,878,598) (83,222,840) 32 86 ------------ ------------ ------------ ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (19,695,474) (66,384,433) 987,629 810,799 Changes From Unit Transactions: Accumulation Units: - Contract purchases 153,764 11,465,273 5,182,644 215,182,745 - Contract withdrawals and transfers to annuity reserves (5,978,466) (11,645,771) (93,777,040) (110,620,038) - Contract transfers (6,202,250) (14,168,269) 141,869,830 240,557,916 ------------ ------------ ------------ ------------- (12,026,952) (14,348,767) 53,275,434 345,120,623 Annuity Reserves: - Transfer from accumulation units and between subaccounts 557 -- 189,575 55,899 - Annuity Payments (11,826) (7,487) (67,758) (245,792) - Receipt (reimbursement) of mortality guarantee adjustments 2 1,084 63 2,869 ------------ ------------ ------------ ------------- (11,267) (6,403) 121,880 (187,024) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (12,038,219) (14,355,170) 53,397,314 344,933,599 ------------ ------------ ------------ ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (31,733,693) (80,739,603) 54,384,943 345,744,398 ------------ ------------ ------------ ------------- NET ASSETS AT DECEMBER 31, 2008 $ 28,349,359 $105,135,796 $178,597,067 $ 619,101,956 ============ ============ ============ =============
N-21
LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT SSgA SSgA SSgA SSgA DEVELOPED EMERGING INTERNATIONAL BOND INDEX INTERNATIONAL 150 MARKETS 100 INDEX SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ----------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ -- $ -- $ -- 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, 2007 -- -- -- -- Changes From Operations: - Net investment income (loss) 15,055 88,100 27,704 66,181 - Net realized gain (loss) on investments 69,343 (69,873) (66,298) (162,335) - Net change in unrealized appreciation or depreciation on investments 4,584,010 (1,245,887) (1,274,885) (1,492,100) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 4,668,408 (1,227,660) (1,313,479) (1,588,254) Changes From Unit Transactions: Accumulation Units: - Contract purchases 58,677,833 9,359,094 7,785,437 13,030,212 - Contract withdrawals and transfers to annuity reserves (1,590,272) (171,077) (144,722) (241,763) - Contract transfers 64,768,390 9,161,657 7,852,612 11,032,394 ------------ ----------- ----------- ----------- 121,855,951 18,349,674 15,493,327 23,820,843 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 121,855,951 18,349,674 15,493,327 23,820,843 ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 126,524,359 17,122,014 14,179,848 22,232,589 ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $126,524,359 $17,122,014 $14,179,848 $22,232,589 ============ =========== =========== ===========
See accompanying notes. N-22
LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT SSgA LINCOLN VIPT SSgA LINCOLN VIPT SSgA SMALL-CAP SSgA LARGE CAP 100 SSGA S&P 500 INDEX INDEX SMALL-MID CAP 200 SERVICE CLASS S&P 500 INDEX SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ------------- ----------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ -- $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) -- 325 2,702 (4,857) -- - Net realized gain (loss) on investments -- 248 (152,089) (3,497) -- - Net change in unrealized appreciation or depreciation on investments -- (5,372) (358,828) (291,716) -- ----------- --------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS -- (4,799) (508,215) (300,070) -- Changes From Unit Transactions: Accumulation Units: - Contract purchases -- 420 13,908,189 4,962,567 -- - Contract withdrawals and transfers to annuity reserves -- (4,076) (232,444) (104,044) -- - Contract transfers -- 268,435 6,287,517 2,149,893 -- ----------- --------- ------------ ----------- ----------- -- 264,779 19,963,262 7,008,416 -- 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 -- 264,779 19,963,262 7,008,416 -- ----------- --------- ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- 259,980 19,455,047 6,708,346 -- ----------- --------- ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 -- 259,980 19,455,047 6,708,346 -- Changes From Operations: - Net investment income (loss) (9,596) 13,373 1,263,865 (50,713) 24,417 - Net realized gain (loss) on investments (362,864) (30,802) (1,682,975) 547,789 (163,611) - Net change in unrealized appreciation or depreciation on investments (2,565,962) (147,015) (15,387,895) (6,433,069) (1,010,798) ----------- --------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,938,422) (164,444) (15,807,005) (5,935,993) (1,149,992) Changes From Unit Transactions: Accumulation Units: - Contract purchases 18,122,525 941 37,360,399 11,411,652 5,383,888 - Contract withdrawals and transfers to annuity reserves (336,370) (17,623) (6,990,796) (734,700) (274,398) - Contract transfers 18,154,488 417,835 30,879,512 12,348,696 6,040,019 ----------- --------- ------------ ----------- ----------- 35,940,643 401,153 61,249,115 23,025,648 11,149,509 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- - Annuity Payments -- -- -- -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- -- ----------- --------- ------------ ----------- ----------- -- -- -- -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 35,940,643 401,153 61,249,115 23,025,648 11,149,509 ----------- --------- ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 33,002,221 236,709 45,442,110 17,089,655 9,999,517 ----------- --------- ------------ ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $33,002,221 $ 496,689 $ 64,897,157 $23,798,001 $ 9,999,517 =========== ========= ============ =========== =========== LINCOLN VIPT LINCOLN VIPT T. ROWE PRICE LINCOLN VIPT T. ROWE PRICE STRUCTURED LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP TEMPLETON GROWTH STOCK MID-CAP GROWTH GROWTH SERVICE CLASS GROWTH SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ 2,284,009 $11,235,624 $ -- Changes From Operations: - Net investment income (loss) (23,912) (41,580) (237,252) 328,728 - Net realized gain (loss) on investments 13,545 121,629 660,790 (38,228) - Net change in unrealized appreciation or depreciation on investments (40,879) 181,714 868,489 (809,786) ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (51,246) 261,763 1,292,027 (519,286) Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,594,700 12,795 5,498,894 36,632,607 - Contract withdrawals and transfers to annuity reserves (43,135) (59,184) (618,609) (433,735) - Contract transfers 2,225,750 246,539 3,320 9,877,215 ----------- ----------- ----------- ------------ 6,777,315 200,150 4,883,605 46,076,087 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 6,777,315 200,150 4,883,605 46,076,087 ----------- ----------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 6,726,069 461,913 6,175,632 45,556,801 ----------- ----------- ----------- ------------ NET ASSETS AT DECEMBER 31, 2007 6,726,069 2,745,922 17,411,256 45,556,801 Changes From Operations: - Net investment income (loss) (149,217) (33,936) (296,299) 430,642 - Net realized gain (loss) on investments (565,679) 67,911 (569,123) 127,797 - Net change in unrealized appreciation or depreciation on investments (4,427,637) (1,109,581) (8,563,548) (32,776,014) ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (5,142,533) (1,075,606) (9,428,970) (32,217,575) Changes From Unit Transactions: Accumulation Units: - Contract purchases 4,606,801 15,431 5,960,772 33,029,448 - Contract withdrawals and transfers to annuity reserves (355,187) (253,612) (972,898) (2,713,747) - Contract transfers 4,183,032 (42,002) 847,503 24,101,428 ----------- ----------- ----------- ------------ 8,434,646 (280,183) 5,835,377 54,417,129 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 8,434,646 (280,183) 5,835,377 54,417,129 ----------- ----------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 3,292,113 (1,355,789) (3,593,593) 22,199,554 ----------- ----------- ----------- ------------ NET ASSETS AT DECEMBER 31, 2008 $10,018,182 $ 1,390,133 $13,817,663 $ 67,756,355 =========== =========== =========== ============
N-23
LINCOLN VIPT LINCOLN VIPT TURNER LINCOLN VIPT UBS LINCOLN VIPT MID-CAP UBS GLOBAL ASSET WILSHIRE 2010 GROWTH GLOBAL ASSET ALLOCATION PROFILE SERVICE CLASS ALLOCATION SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------ ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ 39,013,663 $ 31,324,052 $ -- Changes From Operations: - Net investment income (loss) (55,225) (39,319) (80,189) (2,927) - Net realized gain (loss) on investments (124,145) 2,730,547 2,512,840 2,872 - Net change in unrealized appreciation or depreciation on investments 270,519 (1,023,294) (927,488) 23,314 ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 91,149 1,667,934 1,505,163 23,259 Changes From Unit Transactions: Accumulation Units: - Contract purchases 7,037,192 434,692 23,794,071 836,711 - Contract withdrawals and transfers to annuity reserves (143,471) (2,882,548) (2,320,050) (22,490) - Contract transfers 5,048,351 (2,037,038) 5,086,140 443,268 ----------- ------------ ------------ ----------- 11,942,072 (4,484,894) 26,560,161 1,257,489 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 11,942,072 (4,495,440) 26,560,161 1,257,489 ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 12,033,221 (2,827,506) 28,065,324 1,280,748 ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2007 12,033,221 36,186,157 59,389,376 1,280,748 Changes From Operations: - Net investment income (loss) (243,194) 1,032,850 2,581,405 20,571 - Net realized gain (loss) on investments 1,016,357 1,133,305 2,191,273 (259,361) - Net change in unrealized appreciation or depreciation on investments (9,682,868) (11,882,602) (27,104,014) (1,118,364) ----------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (8,909,705) (9,716,447) (22,331,336) (1,357,154) Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,178,335 209,455 10,883,453 3,014,218 - Contract withdrawals and transfers to annuity reserves (737,467) (2,459,155) (4,307,106) (933,265) - Contract transfers 1,688,300 (8,884,123) (1,711,934) 3,870,629 ----------- ------------ ------------ ----------- 7,129,168 (11,133,823) 4,864,413 5,951,582 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (6,181) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- 12 -- -- ----------- ------------ ------------ ----------- -- (6,169) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 7,129,168 (11,139,992) 4,864,413 5,951,582 ----------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,780,537) (20,856,439) (17,466,923) 4,594,428 ----------- ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 2008 $10,252,684 $ 15,329,718 $ 41,922,453 $ 5,875,176 =========== ============ ============ ===========
See accompanying notes. N-24
LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT WILSHIRE WILSHIRE WILSHIRE 2020 WILSHIRE 2030 WILSHIRE 2040 AGGRESSIVE CONSERVATIVE PROFILE PROFILE PROFILE PROFILE PROFILE SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ------------- ------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ -- $ -- $ 58,537,754 $ 78,175,548 Changes From Operations: - Net investment income (loss) (4,284) (3,040) (30) (844,135) 211,595 - Net realized gain (loss) on investments (2,146) 162 22 3,530,945 2,545,698 - Net change in unrealized appreciation or depreciation on investments 27,482 15,491 (5,328) 3,392,713 2,903,120 ----------- ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,052 12,613 (5,336) 6,079,523 5,660,413 Changes From Unit Transactions: Accumulation Units: - Contract purchases 1,288,525 811,235 393,881 50,186,340 56,570,256 - Contract withdrawals and transfers to annuity reserves (21,304) (19,660) (16,876) (5,525,089) (9,589,045) - Contract transfers 879,681 129,934 25,510 3,947,931 23,138,701 ----------- ----------- ----------- ------------ ------------ 2,146,902 921,509 402,515 48,609,182 70,119,912 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- - Annuity Payments -- -- -- -- (561,293) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- (392) ----------- ----------- ----------- ------------ ------------ -- -- -- -- (561,685) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 2,146,902 921,509 402,515 48,609,182 69,558,227 ----------- ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 2,167,954 934,122 397,179 54,688,705 75,218,640 ----------- ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 2,167,954 934,122 397,179 113,226,459 153,394,188 Changes From Operations: - Net investment income (loss) (4,638) (23,282) (43,669) (1,335,270) 541,368 - Net realized gain (loss) on investments (387,779) (236,416) (514,358) (332,480) (1,904,488) - Net change in unrealized appreciation or depreciation on investments (1,963,209) (1,215,967) (836,406) (46,287,942) (42,816,739) ----------- ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,355,626) (1,475,665) (1,394,433) (47,955,692) (44,179,859) Changes From Unit Transactions: Accumulation Units: - Contract purchases 6,327,127 3,417,178 2,534,416 17,712,994 55,779,105 - Contract withdrawals and transfers to annuity reserves (231,353) (146,023) (108,638) (13,344,366) (15,037,161) - Contract transfers 3,576,618 1,832,099 1,897,776 652,018 49,721,183 ----------- ----------- ----------- ------------ ------------ 9,672,392 5,103,254 4,323,554 5,020,646 90,463,127 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- -- - Annuity Payments -- -- -- -- (479,560) - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- 146 ----------- ----------- ----------- ------------ ------------ -- -- -- -- (479,414) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 9,672,392 5,103,254 4,323,554 5,020,646 89,983,713 ----------- ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 7,316,766 3,627,589 2,929,121 (42,935,046) 45,803,854 ----------- ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 9,484,720 $ 4,561,711 $ 3,326,300 $ 70,291,413 $199,198,042 =========== =========== =========== ============ ============ LINCOLN VIPT LINCOLN VIPT WILSHIRE WILSHIRE MODERATELY MODERATE AGGRESSIVE LORD ABBETT MFS VIT PROFILE PROFILE ALL VALUE CORE EQUITY SERVICE CLASS SERVICE CLASS CLASS VC SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ----------- ------------- NET ASSETS AT JANUARY 1, 2007 $ 367,914,736 $ 246,977,890 $ -- $ 6,464,047 Changes From Operations: - Net investment income (loss) (2,454,920) (648,637) -- (99,789) - Net realized gain (loss) on investments 8,039,253 7,179,953 -- 390,630 - Net change in unrealized appreciation or depreciation on investments 25,707,114 16,061,556 -- 281,063 ------------- ------------- ------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 31,291,447 22,592,872 -- 571,904 Changes From Unit Transactions: Accumulation Units: - Contract purchases 213,170,146 175,593,651 -- 70,960 - Contract withdrawals and transfers to annuity reserves (29,610,958) (14,021,762) -- (610,399) - Contract transfers 59,345,033 37,928,739 -- (421,536) ------------- ------------- ------- ----------- 242,904,221 199,500,628 -- (960,975) Annuity Reserves: - Transfer from accumulation units and between subaccounts 272,484 -- -- -- - Annuity Payments (51,018) (48,672) -- -- - Receipt (reimbursement) of mortality guarantee adjustments (338) (37) -- -- ------------- ------------- ------- ----------- 221,128 (48,709) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 243,125,349 199,451,919 -- (960,975) ------------- ------------- ------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 274,416,796 222,044,791 -- (389,071) ------------- ------------- ------- ----------- NET ASSETS AT DECEMBER 31, 2007 642,331,532 469,022,681 -- 6,074,976 Changes From Operations: - Net investment income (loss) 730,852 (4,269,388) 35 (55,986) - Net realized gain (loss) on investments 6,109,434 (1,352,101) 46 98,509 - Net change in unrealized appreciation or depreciation on investments (239,365,028) (194,451,703) 1,145 (2,270,197) ------------- ------------- ------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (232,524,742) (200,073,192) 1,226 (2,227,674) Changes From Unit Transactions: Accumulation Units: - Contract purchases 205,373,356 146,004,570 31,239 28,544 - Contract withdrawals and transfers to annuity reserves (46,086,485) (38,193,909) -- (472,131) - Contract transfers 84,966,932 31,891,301 -- (361,363) ------------- ------------- ------- ----------- 244,253,803 139,701,962 31,239 (804,950) Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (53,320) (41,309) -- -- - Receipt (reimbursement) of mortality guarantee adjustments 540 9 -- -- ------------- ------------- ------- ----------- (52,780) (41,300) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 244,201,023 139,660,662 31,239 (804,950) ------------- ------------- ------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 11,676,281 (60,412,530) 32,465 (3,032,624) ------------- ------------- ------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 654,007,813 $ 408,610,151 $32,465 $ 3,042,352 ============= ============= ======= ===========
N-25
MFS VIT MFS VIT MFS VIT GROWTH MFS VIT TOTAL RETURN GROWTH SERVICE CLASS TOTAL RETURN SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------- ------------- ------------ ------------- NET ASSETS AT JANUARY 1, 2007 $ 7,517,503 $10,083,571 $ 40,422,820 $322,763,764 Changes From Operations: - Net investment income (loss) (101,033) (173,687) 453,109 2,179,089 - Net realized gain (loss) on investments (470,617) 991,847 2,653,151 12,458,039 - Net change in unrealized appreciation or depreciation on investments 1,833,003 996,122 (1,948,416) (7,457,600) ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,261,353 1,814,282 1,157,844 7,179,528 Changes From Unit Transactions: Accumulation Units: - Contract purchases 28,133 169,801 513,856 44,289,076 - Contract withdrawals and transfers to annuity reserves (1,411,659) (1,195,660) (7,425,686) (26,742,541) - Contract transfers (619,503) (44,744) (3,413,223) (797,851) ----------- ----------- ------------ ------------ (2,003,029) (1,070,603) (10,325,053) 16,748,684 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments (3,806) (4,582) (23,603) (30,148) - Receipt (reimbursement) of mortality guarantee adjustments 2,604 (3) (300) 455 ----------- ----------- ------------ ------------ (1,202) (4,585) (23,903) (29,693) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,004,231) (1,075,188) (10,348,956) 16,718,991 ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (742,878) 739,094 (9,191,112) 23,898,519 ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2007 6,774,625 10,822,665 31,231,708 346,662,283 Changes From Operations: - Net investment income (loss) (59,635) (131,579) 449,997 3,660,186 - Net realized gain (loss) on investments (476,942) 455,674 1,333,637 12,633,485 - Net change in unrealized appreciation or depreciation on investments (1,653,009) (4,070,798) (7,967,199) (96,863,172) ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,189,586) (3,746,703) (6,183,565) (80,569,501) Changes From Unit Transactions: Accumulation Units: - Contract purchases 9,459 536,442 118,456 21,968,399 - Contract withdrawals and transfers to annuity reserves (1,152,498) (910,285) (4,680,244) (30,245,625) - Contract transfers (364,253) (655,651) (3,183,026) (1,249,231) ----------- ----------- ------------ ------------ (1,507,292) (1,029,494) (7,744,814) (9,526,457) Annuity Reserves: - Transfer from accumulation units and between subaccounts (4,853) -- -- -- - Annuity Payments (1,252) (7,943) (14,812) (22,544) - Receipt (reimbursement) of mortality guarantee adjustments (5,120) -- 53 464 ----------- ----------- ------------ ------------ (11,225) (7,943) (14,759) (22,080) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,518,517) (1,037,437) (7,759,573) (9,548,537) ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (3,708,103) (4,784,140) (13,943,138) (90,118,038) ----------- ----------- ------------ ------------ NET ASSETS AT DECEMBER 31, 2008 $ 3,066,522 $ 6,038,525 $ 17,288,570 $256,544,245 =========== =========== ============ ============
See accompanying notes. N-26
MFS VIT NB AMT MFS VIT UTILITIES MID-CAP NB AMT UTILITIES SERVICE CLASS GROWTH REGENCY SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------- ------------- ------------ NET ASSETS AT JANUARY 1, 2007 $ 34,300,683 $ 137,578,687 $ 90,256,338 $132,629,385 Changes From Operations: - Net investment income (loss) (141,284) (1,877,734) (1,800,592) (1,615,516) - Net realized gain (loss) on investments 6,254,135 19,199,561 6,430,815 7,520,286 - Net change in unrealized appreciation or depreciation on investments 1,895,815 25,228,694 14,951,317 (3,699,995) ------------ ------------- ------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 8,008,666 42,550,521 19,581,540 2,204,775 Changes From Unit Transactions: Accumulation Units: - Contract purchases 169,134 60,599,558 10,178,399 7,846,684 - Contract withdrawals and transfers to annuity reserves (8,619,160) (12,952,541) (8,151,499) (10,376,473) - Contract transfers (1,123,251) 38,727,874 2,769,649 (10,129,046) ------------ ------------- ------------- ------------ (9,573,277) 86,374,891 4,796,549 (12,658,835) Annuity Reserves: - Transfer from accumulation units and between subaccounts 105,457 9,743 -- -- - Annuity Payments (38,027) (14,954) (11,442) (9,749) - Receipt (reimbursement) of mortality guarantee adjustments 2,071 246 708 22 ------------ ------------- ------------- ------------ 69,501 (4,965) (10,734) (9,727) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (9,503,776) 86,369,926 4,785,815 (12,668,562) ------------ ------------- ------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (1,495,110) 128,920,447 24,367,355 (10,463,787) ------------ ------------- ------------- ------------ NET ASSETS AT DECEMBER 31, 2007 32,805,573 266,499,134 114,623,693 122,165,598 Changes From Operations: - Net investment income (loss) 42,109 (888,243) (1,374,903) (444,130) - Net realized gain (loss) on investments 5,061,233 25,083,916 3,913,192 (1,041,823) - Net change in unrealized appreciation or depreciation on investments (15,665,959) (133,944,588) (47,982,186) (46,851,122) ------------ ------------- ------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (10,562,617) (109,748,915) (45,443,897) (48,337,075) Changes From Unit Transactions: Accumulation Units: - Contract purchases 44,700 38,620,980 1,002,401 941,253 - Contract withdrawals and transfers to annuity reserves (4,826,548) (18,145,949) (7,721,070) (8,568,846) - Contract transfers (1,683,316) (18,117,014) (11,087,658) (14,032,890) ------------ ------------- ------------- ------------ (6,465,164) 2,358,017 (17,806,327) (21,660,483) Annuity Reserves: - Transfer from accumulation units and between subaccounts 319 40,399 -- 44,570 - Annuity Payments (12,625) (22,991) (9,265) (17,120) - Receipt (reimbursement) of mortality guarantee adjustments 1,675 218 359 17 ------------ ------------- ------------- ------------ (10,631) 17,626 (8,906) 27,467 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (6,475,795) 2,375,643 (17,815,233) (21,633,016) ------------ ------------- ------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (17,038,412) (107,373,272) (63,259,130) (69,970,091) ------------ ------------- ------------- ------------ NET ASSETS AT DECEMBER 31, 2008 $ 15,767,161 $ 159,125,862 $ 51,364,563 $ 52,195,507 ============ ============= ============= ============
OPPENHEIMER PUTNAM VT PUTNAM VT VAN KAMPEN GLOBAL GROWTH & HEALTH CAPITAL SECURITIES INCOME SCIENCES GROWTH SERVICE CLASS CLASS IB CLASS IB CLASS II SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ----------- ----------- ---------- NET ASSETS AT JANUARY 1, 2007 $ -- $ 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 -- Changes From Operations: - Net investment income (loss) (2) 25,979 (79,089) (2) - Net realized gain (loss) on investments -- 301,335 86,551 -- - Net change in unrealized appreciation or depreciation on investments 366 (2,324,824) (1,055,167) 234 ------- ----------- ----------- ------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 364 (1,997,510) (1,047,705) 232 Changes From Unit Transactions: Accumulation Units: - Contract purchases 9,802 49,588 6,536 8,503 - Contract withdrawals and transfers to annuity reserves -- (687,606) (828,630) -- - Contract transfers -- (402,741) 1,560,574 -- ------- ----------- ----------- ------ 9,802 (1,040,759) 738,480 8,503 Annuity Reserves: - Transfer from accumulation units and between subaccounts -- -- -- -- - Annuity Payments -- (1,503) -- -- - Receipt (reimbursement) of mortality guarantee adjustments -- -- -- -- ------- ----------- ----------- ------ -- (1,503) -- -- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 9,802 (1,042,262) 738,480 8,503 ------- ----------- ----------- ------ TOTAL INCREASE (DECREASE) IN NET ASSETS 10,166 (3,039,772) (309,225) 8,735 ------- ----------- ----------- ------ NET ASSETS AT DECEMBER 31, 2008 $10,166 $ 2,633,726 $ 5,006,622 $8,735 ======= =========== =========== ======
N-27 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 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 fifteen 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 Design - Lincoln ChoicePlus Assurance A Share - Lincoln ChoicePlus Assurance B Share - Lincoln ChoicePlus Assurance Bonus - Lincoln ChoicePlus Assurance C Share - Lincoln ChoicePlus Assurance L Share - Lincoln ChoicePlus Assurance A Class - Lincoln ChoicePlus Assurance B Class The assets of the Variable Account are owned by the Company. The Variable Account's assets support the annuity contracts and may not be used to satisfy liabilities arising from any other business of the Company. BASIS OF PRESENTATION: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for unit investment trusts. INVESTMENTS: The assets of the Variable Account are divided into variable subaccounts, each of which may be invested in shares of one hundred eleven available mutual funds (the Funds) of seventeen diversified open-end manage- ment 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 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 N-28 Goldman Sachs Variable Insurance Trust (Goldman Sachs VIT): Goldman Sachs VIT Growth & Income Service Class 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 Columbia Value Opportunities 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 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 SSgA Bond Index Service Class Fund Lincoln VIPT SSgA Developed International 150 Service Class Fund Lincoln VIPT SSgA Emerging Markets 100 Service Class Fund Lincoln VIPT SSgA International Index Service Class Fund Lincoln VIPT SSgA Large Cap 100 Service Class Fund Lincoln VIPT SSgA S&P 500 Index Fund Lincoln VIPT SSgA S&P 500 Index Service Class Fund Lincoln VIPT SSgA Small-Cap Index Service Class Fund Lincoln VIPT SSgA Small-Mid Cap 200 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 Turner Mid-Cap Growth Service Class Fund Lincoln VIPT UBS Global Asset Allocation Fund Lincoln VIPT UBS Global Asset Allocation 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 Lord Abbett Securities Trust (Lord Abbett): Lord Abbett All Value Class VC Fund MFS Variable Insurance Trust (MFS VIT): MFS VIT Core Equity Service Class Series MFS VIT Growth Series MFS VIT 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 Oppenheimer Variable Account Funds (Oppenheimer): Oppenheimer Global Securities Service Class Fund/VA Putnam Variable Trust (Putnam VT): Putnam VT Growth & Income Class IB Fund Putnam VT Health Sciences Class IB Fund Van Kampen Universal Institutional Funds (Van Kampen): Van Kampen Capital Growth Class II Portfolio * Denotes an affiliate of The Lincoln National Life Insurance Company N-29 Investments in the Funds are stated at the closing net asset value per share on December 31, 2008, which approximates fair value. The difference between cost and net asset value is reflected as unrealized appreciation or depreciation of investments. Effective January 1, 2008, the Variable Account adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value as the price that the Variable Account would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assessment regarding the assumptions market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The Variable Account's investments in the Funds are assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below. Level 1 - inputs to the valuation methodology are quoted prices in active markets Level 2 - inputs to the valuation methodology are observable, directly or indirectly Level 3 - inputs to the valuation methodology are unobservable and reflect assumptions on the part of the reporting entity The Separate Account's investments in the Funds are valued within the above FAS 157 fair value hierarchy as Level 2. Net asset value is quoted by the Funds as derived by the fair value of the Funds underlying investments. The Funds are not considered Level 1 as they are not traded in the open market; rather the Company sells and redeems shares at net asset value with the Funds. Adoption of FAS 157 had no effect on the recorded amounts of the Funds in the Variable Account. 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 exdividend 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 com- pany" under the Internal Revenue Code. The Variable Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended. Under current federal income tax law, no federal income taxes are payable 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 3%, 4%, 5% or 6%. Reserves on contracts involving life contingencies are calculated using a modification of the 1971 Individual Annuitant Mortality Table and an assumed investment rate of 3%, 4%, 5% or 6%. INVESTMENT FUND CHANGES: 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 state- ment 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 opera- tions to December 31, 2007. N-30 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
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. During 2008, the Goldman Sachs VIT Growth & Income Service Class Fund, the Lincoln VIPT SSgA Bond Index Service Class Fund, the Lincoln VIPT SSgA Developed International 150 Service Class Fund, the Lincoln VIPT SSgA Emerging Markets 100 Service Class Fund, the Lincoln VIPT SSgA International Index Service Class Fund, the Lincoln VIPT SSgA Large Cap 100 Service Class Fund, the Lincoln VIPT SSgA Small-Mid Cap 200 Service Class Fund, the Lord Abbett All Value Class VC Fund, the Oppenheimer Global Securities Service Class Fund/VA and the Van Kampen Capital Growth Class II Portfolio became available as investment options for Account Contract owners. Accordingly, the 2008 statements of operations and changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2008. During 2008, the Lincoln VIPT Value Opportunities Service Class Fund changed its name to the Lincoln VIPT Columbia Value Opportunities Service Class Fund, the Lincoln VIPT S&P 500 Index Fund changed its name to the Lincoln VIPT SSgA S&P 500 Index Fund, the Lincoln VIPT S&P 500 Index Service Class Fund changed its name to the Lincoln VIPT SSgA S&P 500 Index Service Class Fund, the Lincoln VIPT Small-Cap Index Service Class Fund changed its name to the Lincoln VIPT SSgA Small-Cap Index Service Class Fund, the Lincoln VIPT Mid-Cap Growth Service Class Fund changed its name to the Lincoln VIPT Turner Mid-Cap Growth Service Class Fund, the MFS VIT Emerging Growth Series changed its name to the MFS VIT Growth Series and the MFS VIT Emerging Growth Service Class Series changed its name to the MFS VIT Growth Service Class Series. 2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES Amounts are paid to the Company for mortality and expense guarantees at a percentage of each portfolio's average daily net assets within the Variable Account. The rates are as follows for the fifteen products: - Lincoln ChoicePlus at a daily rate of .0038356% to .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) N-31 - 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 Design at a daily rate of .0030137% to .0075342% (1.10% to 2.75% 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 Assurance A Class at a daily rate of .0016438% to .0049315% (.60% to 1.80% on an annual basis) - Lincoln ChoicePlus Assurance B Class at a daily rate of .0034247% to .0067123% (1.25% to 2.45% on an annual basis) In addition, $14,342,458 and $9,724,817 was retained by the Company for contract charges and surrender charges during 2008 and 2007, respectively. For the Assurance A Share and Assurance A Class products, a front-end load or sales charge is applied as a percentage (5.75% maximum) to all gross purchase payments. The sales charge percentage decreases as the value accumulated under certain of the owner's investment increases. For the year ending December 31, 2008, sales charges amounted to $4,940,361. There were no sales charges for the year ended December 31, 2007. 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, 2008 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 2008 1.40% 2.35% $ 3.06 $ 9.56 748,284 $ 3,358,095 -43.83% -43.29% 0.00% 2007 1.40% 2.35% 5.41 16.98 996,399 7,865,603 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 2008 1.30% 2.35% 6.92 9.29 273,162 1,996,280 -43.96% -43.37% 0.00% 2007 1.30% 2.35% 12.29 16.57 348,396 4,499,118 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 2008 1.40% 2.35% 5.45 11.08 1,568,047 11,156,757 -31.77% -31.11% 1.95% 2007 1.40% 2.35% 7.94 16.21 2,005,117 20,947,610 5.61% 6.61% 1.01% 2006 4/28/06 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 2008 1.30% 2.55% 8.23 11.12 430,419 3,828,214 -32.08% -31.22% 1.74% 2007 1.30% 2.55% 12.04 15.84 519,086 6,677,208 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 2008 1.40% 2.35% 7.43 15.32 420,693 4,158,730 -41.76% -41.21% 0.47% 2007 1.40% 2.35% 12.69 26.25 605,909 10,314,167 12.28% 13.12% 0.37% 2006 1.40% 2.55% 11.26 23.48 786,249 11,887,911 25.51% 26.45% 0.96% 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%
N-32
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 2008 1.30% 2.60% $12.68 $15.07 271,812 $ 3,639,727 -42.05% -41.32% 0.41% 2007 1.30% 2.55% 21.74 25.55 371,367 8,469,879 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% ABVPSF GLOBAL TECHNOLOGY CLASS B 2008 0.65% 2.85% 2.67 10.52 3,262,920 16,985,544 -48.92% -48.07% 0.00% 2007 1.15% 2.80% 5.17 20.19 3,842,419 33,767,643 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% ABVPSF GROWTH AND INCOME CLASS B 2008 0.65% 2.85% 6.73 10.72 14,925,347 128,497,995 -42.34% -41.37% 1.77% 2007 1.15% 2.80% 11.89 18.42 15,940,246 238,553,321 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% ABVPSF INTERNATIONAL VALUE CLASS B 2008 0.65% 2.85% 5.44 5.71 15,725,322 87,885,870 -54.60% -53.79% 0.88% 2007 1.10% 2.85% 11.78 12.38 13,859,734 170,225,318 2.63% 4.38% 0.99% 2006 6/6/06 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 2008 1.30% 2.65% 3.99 9.12 2,586,486 13,536,124 -41.40% -40.60% 0.00% 2007 1.30% 2.65% 6.74 15.39 3,281,465 29,322,568 10.65% 12.15% 0.00% 2006 1.30% 2.65% 6.04 13.87 3,981,992 31,699,870 -3.24% -1.92% 0.00% 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% ABVPSF SMALL/MID CAP VALUE CLASS B 2008 0.65% 2.85% 6.98 13.79 7,758,456 84,894,668 -37.55% -36.45% 0.43% 2007 1.10% 2.85% 11.03 21.87 5,982,290 110,145,205 -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% AMERICAN CENTURY VP INFLATION PROTECTION CLASS 2 2008 0.65% 2.85% 9.86 11.00 22,134,456 237,085,710 -4.37% -2.73% 4.69% 2007 1.15% 2.85% 10.31 11.33 13,044,498 144,760,052 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 2008 0.65% 2.85% 7.32 10.42 22,029,895 216,967,583 -40.12% -39.06% 2.00% 2007 1.10% 2.85% 12.48 17.13 16,765,804 278,606,031 11.62% 13.59% 3.00% 2006 1.10% 2.85% 13.27 15.11 10,355,625 153,145,467 17.10% 18.93% 0.85% 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 2008 0.65% 2.85% 6.29 15.40 16,178,894 174,409,032 -54.83% -54.03% 0.00% 2007 1.10% 2.85% 13.68 33.76 14,813,916 359,008,331 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% AMERICAN FUNDS GROWTH CLASS 2 2008 0.65% 2.85% 5.96 11.80 126,204,408 1,096,444,796 -45.55% -44.58% 0.87% 2007 1.10% 2.85% 10.82 21.45 114,062,671 1,772,430,459 9.19% 11.12% 0.83% 2006 1.10% 2.85% 9.81 19.45 102,526,103 1,392,831,743 7.12% 8.85% 0.87% 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%
N-33
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- AMERICAN FUNDS GROWTH-INCOME CLASS 2 2008 0.65% 2.85% $ 6.69 $11.32 133,043,914 $1,213,955,684 -39.60% -38.53% 1.82% 2007 1.10% 2.85% 11.31 18.55 119,952,131 1,837,362,865 2.09% 3.89% 1.59% 2006 1.10% 2.85% 11.75 17.99 106,178,440 1,580,788,507 11.97% 13.77% 1.68% 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% AMERICAN FUNDS INTERNATIONAL CLASS 2 2008 0.65% 2.85% 6.75 15.74 52,149,321 567,950,440 -43.75% -42.76% 2.03% 2007 1.10% 2.85% 11.82 27.70 48,317,076 904,894,575 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% DELAWARE VIPT CAPITAL RESERVES SERVICE CLASS 2008 0.65% 2.80% 9.79 10.35 7,989,474 81,388,856 -3.39% -1.78% 4.10% 2007 1.15% 2.80% 10.14 10.55 1,745,444 18,209,459 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 2008 0.65% 2.85% 9.84 11.30 35,059,220 383,243,656 -7.57% -5.94% 3.55% 2007 1.10% 2.85% 10.65 12.04 25,769,243 302,157,201 4.40% 6.08% 2.59% 2006 1.25% 2.85% 10.20 11.35 16,777,113 186,983,777 4.55% 6.23% 1.25% 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 2008 0.65% 2.85% 5.69 25.76 12,841,316 141,037,891 -53.04% -52.22% 1.28% 2007 1.10% 2.85% 18.56 54.30 10,582,568 256,714,563 34.62% 36.79% 1.24% 2006 1.25% 2.85% 14.74 39.94 6,958,755 129,919,378 23.31% 25.24% 0.94% 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 2008 1.40% 2.35% 9.21 13.02 862,558 8,034,157 -25.94% -25.23% 8.20% 2007 1.40% 2.35% 12.32 17.54 1,277,232 15,879,807 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% DELAWARE VIPT HIGH YIELD SERVICE CLASS 2008 0.65% 2.85% 8.01 13.09 15,955,990 166,499,584 -26.55% -25.25% 8.03% 2007 1.10% 2.85% 10.72 17.64 14,288,786 202,639,176 -0.34% 1.37% 6.15% 2006 1.15% 2.85% 11.09 17.52 13,057,671 186,729,667 9.04% 10.80% 6.15% 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% DELAWARE VIPT INTERNATIONAL VALUE EQUITY 2008 1.40% 2.15% 11.83 13.64 35,587 423,335 -43.65% -43.22% 2.98% 2007 1.40% 2.15% 20.84 22.81 81,729 1,714,184 3.51% 3.77% 2.21% 2006 1.40% 1.65% 20.08 22.04 136,295 2,737,672 21.56% 21.87% 2.83% 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% DELAWARE VIPT REIT 2008 1.40% 2.35% 13.01 17.89 337,494 5,881,815 -36.57% -35.97% 2.60% 2007 1.40% 2.35% 20.51 27.95 497,495 13,641,050 -15.94% -15.14% 1.50% 2006 1.40% 2.35% 24.60 32.93 745,569 24,391,247 29.81% 30.79% 1.93% 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% DELAWARE VIPT REIT SERVICE CLASS 2008 1.10% 2.85% 6.20 14.96 8,564,358 97,607,134 -37.11% -35.99% 2.14% 2007 1.10% 2.85% 9.68 23.45 10,520,517 190,815,163 -16.59% -15.16% 1.15% 2006 1.15% 2.85% 13.30 27.70 11,378,212 251,608,279 28.67% 30.68% 1.54% 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%
N-34
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 SMALL CAP VALUE 2008 1.40% 2.35% $13.30 $15.54 624,210 $ 9,651,885 -31.51% -30.85% 0.83% 2007 1.40% 2.35% 19.30 22.48 911,687 20,420,995 -8.79% -7.92% 0.54% 2006 1.40% 2.35% 21.00 24.41 1,259,195 30,657,532 13.49% 14.57% 0.26% 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% DELAWARE VIPT SMALL CAP VALUE SERVICE CLASS 2008 0.65% 2.85% 7.20 15.78 21,006,014 230,267,773 -32.04% -30.94% 0.46% 2007 1.25% 2.85% 10.53 22.89 19,715,307 327,861,446 -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% DELAWARE VIPT TREND 2008 1.40% 2.35% 8.30 10.37 677,030 7,010,663 -47.98% -47.48% 0.00% 2007 1.40% 2.35% 15.84 19.75 967,792 19,092,097 8.18% 9.21% 0.00% 2006 1.40% 2.35% 14.53 18.09 1,376,772 24,889,509 5.30% 6.10% 0.00% 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% DELAWARE VIPT TREND SERVICE CLASS 2008 0.65% 2.80% 4.57 9.81 7,395,820 52,003,840 -48.33% -47.47% 0.00% 2007 1.15% 2.80% 8.76 18.84 8,624,685 115,826,355 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% DELAWARE VIPT U.S. GROWTH SERVICE CLASS 2008 0.65% 2.85% 6.32 8.67 2,886,087 21,229,340 -44.44% -43.57% 0.00% 2007 1.25% 2.80% 11.37 15.46 2,918,817 38,693,665 9.27% 10.98% 0.00% 2006 1.25% 2.80% 11.08 14.02 2,954,477 35,560,878 -0.61% 0.74% 0.00% 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% DELAWARE VIPT VALUE 2008 1.40% 2.35% 9.23 11.78 682,623 6,352,152 -34.97% -34.35% 3.16% 2007 1.40% 2.35% 14.07 18.08 1,057,669 14,923,996 -4.79% -4.08% 1.64% 2006 1.40% 2.15% 14.66 18.99 1,264,708 18,576,994 21.46% 22.38% 1.59% 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% DELAWARE VIPT VALUE SERVICE CLASS 2008 0.75% 2.85% 6.77 11.69 9,940,337 92,632,743 -35.44% -34.33% 2.59% 2007 1.15% 2.85% 10.71 17.96 11,006,428 158,874,478 -5.67% -4.10% 1.26% 2006 1.15% 2.80% 12.38 19.06 8,374,330 129,017,666 20.38% 22.26% 1.17% 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% 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% 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% DWS VIP EQUITY 500 INDEX 2008 1.30% 2.65% 6.02 10.41 3,279,387 24,170,085 -38.80% -37.96% 2.55% 2007 1.30% 2.65% 9.75 16.93 4,338,906 51,876,026 2.54% 3.94% 1.54% 2006 1.30% 2.65% 9.43 16.43 5,354,369 61,937,097 12.50% 14.03% 1.20% 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% DWS VIP EQUITY 500 INDEX SERVICE CLASS 2008 1.15% 2.80% 7.03 9.84 3,323,686 29,391,732 -39.07% -38.06% 2.13% 2007 1.15% 2.85% 11.78 15.92 3,221,316 47,252,950 2.08% 3.73% 1.22% 2006 1.25% 2.85% 11.59 15.36 2,969,805 42,703,560 12.06% 13.81% 0.88% 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%
N-35
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 2008 1.30% 2.65% $11.45 $13.27 575,785 $ 6,804,093 -35.85% -34.98% 1.65% 2007 1.30% 2.65% 17.72 20.69 735,210 13,405,274 -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% DWS VIP SMALL CAP INDEX SERVICE CLASS 2008 1.10% 2.80% 6.99 11.65 1,941,075 18,430,158 -36.14% -35.05% 1.35% 2007 1.10% 2.85% 11.16 17.98 2,539,796 37,470,213 -4.91% -3.38% 0.61% 2006 1.25% 2.85% 12.19 18.63 2,088,524 32,947,863 13.95% 15.73% 0.34% 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% FIDELITY VIP CONTRAFUND SERVICE CLASS 2 2008 0.65% 2.85% 6.78 11.58 48,230,649 500,282,061 -44.30% -43.32% 0.90% 2007 1.10% 2.85% 12.42 20.48 38,112,592 724,082,879 14.01% 15.96% 0.85% 2006 1.15% 2.85% 12.08 17.71 28,310,996 473,272,060 8.30% 10.05% 1.07% 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% FIDELITY VIP EQUITY-INCOME 2008 1.40% 2.15% 8.24 10.19 885,428 7,625,372 -43.88% -43.45% 2.06% 2007 1.40% 2.15% 14.60 18.16 1,299,142 19,795,659 -0.63% 0.12% 1.59% 2006 1.40% 2.15% 14.61 18.28 1,717,020 26,097,151 17.64% 18.52% 3.32% 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% FIDELITY VIP EQUITY-INCOME SERVICE CLASS 2 2008 1.30% 2.65% 6.61 10.22 5,495,296 47,467,613 -44.31% -43.55% 2.10% 2007 1.30% 2.65% 11.84 18.21 6,845,010 104,868,410 -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% FIDELITY VIP GROWTH 2008 1.40% 2.35% 6.75 9.41 777,690 5,288,086 -48.40% -47.90% 0.71% 2007 1.40% 2.35% 12.97 18.20 1,060,215 13,793,117 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% FIDELITY VIP GROWTH SERVICE CLASS 2 2008 0.65% 2.85% 4.25 9.44 6,858,292 46,897,614 -48.79% -47.91% 0.61% 2007 1.15% 2.85% 8.21 18.06 6,111,259 78,588,079 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% FIDELITY VIP MID CAP SERVICE CLASS 2 2008 0.65% 2.85% 6.91 8.74 24,760,020 212,067,044 -41.31% -40.27% 0.24% 2007 1.10% 2.85% 12.02 14.66 18,422,757 266,663,938 12.10% 14.02% 0.50% 2006 1.15% 2.85% 12.55 12.87 10,522,063 134,453,898 9.24% 11.01% 0.09% 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 2008 1.40% 2.15% 9.61 13.76 278,109 2,693,356 -45.00% -44.59% 2.30% 2007 1.40% 2.35% 17.35 25.02 377,037 6,583,119 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% FIDELITY VIP OVERSEAS SERVICE CLASS 2 2008 0.65% 2.85% 6.94 13.85 7,199,120 72,016,219 -45.51% -44.60% 2.44% 2007 1.15% 2.80% 12.61 25.03 7,192,637 131,134,842 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%
N-36
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- FTVIPT FRANKLIN INCOME SECURITIES CLASS 2 2008 0.65% 2.85% $ 7.37 $ 8.01 45,663,538 $ 358,972,880 -31.63% -30.43% 5.51% 2007 1.10% 2.85% 11.00 11.53 30,630,668 350,024,276 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 2008 0.65% 2.80% 4.54 11.50 8,416,602 61,007,232 -44.09% -43.13% 0.00% 2007 1.10% 2.80% 8.01 20.38 8,116,799 99,601,237 8.17% 9.97% 0.00% 2006 1.15% 2.80% 7.30 18.66 7,258,566 75,574,109 5.69% 7.34% 0.00% 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% FTVIPT MUTUAL SHARES SECURITIES CLASS 2 2008 0.65% 2.85% 6.69 7.17 32,812,982 229,277,740 -38.88% -37.80% 3.40% 2007 1.10% 2.85% 11.18 11.54 19,477,930 223,014,247 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 2008 0.65% 2.85% 11.97 12.67 32,135,561 398,547,664 3.22% 5.04% 3.61% 2007 1.10% 2.85% 11.44 12.08 14,537,470 173,292,272 7.94% 9.73% 2.53% 2006 1.15% 2.80% 10.76 11.02 5,794,344 63,394,259 9.66% 11.37% 2.84% 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 2008 1.10% 2.80% 6.41 11.37 8,941,572 83,661,526 -43.92% -42.95% 1.79% 2007 1.10% 2.80% 11.25 20.08 11,165,734 184,159,763 -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% GOLDMAN SACHS VIT GROWTH & INCOME SERVICE CLASS 2008 12/18/08 1.30% 1.55% 10.39 10.39 3,757 39,029 2.82% 4.56% 2.59% JANUS ASPEN SERIES BALANCED SERVICE SHARES 2008 1.30% 2.65% 9.81 12.23 2,066,947 24,907,981 -18.26% -17.14% 2.36% 2007 1.30% 2.65% 14.05 14.78 2,436,050 35,522,643 7.40% 8.86% 2.22% 2006 1.30% 2.65% 13.02 13.77 2,786,799 37,445,853 7.53% 8.99% 1.89% 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% JANUS ASPEN SERIES MID CAP GROWTH SERVICE SHARES 2008 1.30% 2.65% 7.57 12.73 664,109 7,127,862 -45.27% -44.58% 0.05% 2007 1.30% 2.55% 13.82 23.14 904,616 17,592,251 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% JANUS ASPEN SERIES WORLDWIDE GROWTH SERVICE SHARES 2008 1.30% 2.45% 7.24 9.00 237,488 1,809,532 -46.15% -45.52% 0.96% 2007 1.30% 2.45% 13.38 16.52 305,686 4,317,816 6.72% 7.95% 0.56% 2006 1.30% 2.45% 12.47 15.30 353,919 4,616,538 15.08% 16.41% 1.61% 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% LINCOLN VIPT BARON GROWTH OPPORTUNITIES SERVICE CLASS 2008 0.65% 2.85% 6.27 6.92 6,418,205 41,420,290 -40.85% -39.80% 0.00% 2007 1.10% 2.85% 10.60 11.49 3,386,775 36,545,045 0.56% 2.24% 0.00% 2006 6/2/06 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 2008 0.65% 2.80% 6.06 6.19 1,248,367 7,720,820 -43.12% -42.37% 0.00% 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 CLASSS 2008 0.65% 2.85% 4.58 4.72 8,333,923 38,920,478 -43.80% -42.81% 1.32% 2007 6/1/07 1.10% 2.85% 8.16 8.25 3,891,548 31,969,537 -18.94% -7.02% 0.59% LINCOLN VIPT COLUMBIA VALUE OPPORTUNITIES SERVICE CLASS 2008 0.65% 2.80% 5.95 6.11 636,739 3,857,022 -35.96% -34.89% 0.33% 2007 6/1/07 1.15% 2.80% 9.29 9.38 87,108 814,572 -8.28% 2.76% 0.67%
N-37
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 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 2008 1.30% 2.65% 9.88 14.07 17,222,416 224,703,303 -5.46% -4.18% 4.36% 2007 1.30% 2.65% 10.44 14.70 21,356,530 292,323,892 2.69% 4.08% 4.72% 2006 1.30% 2.65% 10.15 14.13 24,595,170 325,383,540 1.98% 3.36% 4.24% 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% LINCOLN VIPT DELAWARE BOND SERVICE CLASS 2008 0.65% 2.85% 9.57 10.72 57,669,586 590,700,221 -5.98% -4.32% 4.75% 2007 1.10% 2.85% 10.18 11.23 48,409,964 525,317,007 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% LINCOLN VIPT DELAWARE GROWTH AND INCOME SERVICE CLASS 2008 0.75% 2.80% 7.19 7.60 2,365,920 17,695,340 -37.76% -36.73% 1.06% 2007 1.15% 2.80% 11.55 12.02 1,889,411 22,449,840 2.93% 4.54% 1.19% 2006 1.25% 2.80% 11.28 11.50 944,449 10,787,344 9.32% 10.69% 1.43% 2005 6/27/05 1.25% 2.50% 10.31 10.39 293,771 3,043,012 -1.56% 4.48% 1.65% LINCOLN VIPT DELAWARE SOCIAL AWARENESS 2008 1.30% 2.65% 7.31 11.72 1,260,321 12,930,385 -36.13% -35.26% 0.83% 2007 1.30% 2.65% 11.43 18.23 1,584,462 25,166,950 0.27% 1.64% 0.84% 2006 1.30% 2.65% 15.19 18.07 1,777,660 27,934,321 9.37% 10.86% 0.85% 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% LINCOLN VIPT DELAWARE SOCIAL AWARENESS SERVICE CLASS 2008 0.65% 2.70% 7.31 10.85 4,384,397 42,910,993 -36.38% -35.45% 0.55% 2007 1.25% 2.80% 11.43 16.82 4,848,658 75,403,935 -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% LINCOLN VIPT DELAWARE SPECIAL OPPORTUNITIES SERVICE CLASS 2008 0.65% 2.80% 5.59 5.71 1,463,515 8,306,542 -38.51% -37.64% 1.24% 2007 6/12/07 1.25% 2.65% 9.08 9.16 364,016 3,326,596 -9.80% 2.13% 0.99% LINCOLN VIPT FI EQUITY-INCOME SERVICE CLASS 2008 0.65% 2.80% 6.70 7.19 3,076,733 21,692,955 -40.18% -39.18% 1.67% 2007 1.15% 2.80% 11.02 11.83 1,991,296 23,290,149 1.22% 2.90% 1.11% 2006 1.15% 2.80% 11.23 11.50 1,382,666 15,800,547 7.93% 9.61% 1.35% 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 2008 1.30% 2.55% 7.46 10.13 278,559 2,443,401 -42.31% -41.59% 0.68% 2007 1.30% 2.55% 12.92 17.31 298,124 4,491,107 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%
N-38
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- LINCOLN VIPT JANUS CAPITAL APPRECIATION SERVICE CLASS 2008 0.75% 2.80% $ 7.41 $ 9.66 2,805,952 $ 24,856,506 -42.60% -41.64% 0.51% 2007 1.15% 2.80% 12.91 16.59 2,223,674 34,501,820 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% LINCOLN VIPT MARSICO INTERNATIONAL GROWTH SERVICE CLASS 2008 0.65% 2.85% 5.48 5.63 4,128,581 23,019,042 -50.50% -49.65% 1.05% 2007 6/1/07 1.15% 2.85% 11.06 11.18 1,856,720 20,680,645 -4.83% 14.91% 0.98% LINCOLN VIPT MFS VALUE SERVICE CLASS 2008 0.65% 2.85% 6.33 6.50 12,586,764 81,499,360 -34.33% -33.23% 1.97% 2007 6/5/07 1.15% 2.80% 9.64 9.74 1,167,639 11,323,295 -4.50% 5.67% 1.27% LINCOLN VIPT MID-CAP VALUE SERVICE CLASS 2008 0.65% 2.85% 4.93 5.07 2,592,831 13,021,942 -42.52% -41.50% 0.09% 2007 6/5/07 1.10% 2.85% 8.57 8.66 1,598,830 13,800,843 -15.89% -7.65% 0.28% LINCOLN VIPT MONDRIAN INTERNATIONAL VALUE 2008 1.30% 2.65% 8.92 16.45 1,825,281 28,349,359 -38.31% -37.47% 4.45% 2007 1.30% 2.65% 14.45 26.50 2,434,134 60,083,049 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% LINCOLN VIPT MONDRIAN INTERNATIONAL VALUE SERVICE CLASS 2008 0.65% 2.85% 7.59 15.17 8,454,702 105,135,796 -38.59% -37.54% 4.54% 2007 1.15% 2.85% 14.45 24.34 9,014,480 185,875,398 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% LINCOLN VIPT MONEY MARKET 2008 1.30% 2.65% 9.98 12.00 16,028,543 178,597,067 -0.33% 1.02% 2.26% 2007 1.30% 2.65% 10.02 11.89 11,203,496 124,212,123 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% LINCOLN VIPT MONEY MARKET SERVICE CLASS 2008 0.65% 2.85% 9.94 10.85 58,655,759 619,101,956 -0.78% 0.92% 1.91% 2007 1.15% 2.85% 10.00 10.77 26,010,828 273,357,559 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% LINCOLN VIPT SSgA BOND INDEX SERVICE CLASS 2008 6/24/08 0.65% 2.85% 10.39 10.51 12,107,364 126,524,359 2.17% 6.13% 0.95% LINCOLN VIPT SSgA DEVELOPED INTERNATIONAL 150 SERVICE CLASSS 2008 6/26/08 0.65% 2.85% 6.22 6.29 2,737,409 17,122,014 -36.36% 20.35% 2.37% LINCOLN VIPT SSgA EMERGING MARKETS 100 SERVICE CLASS 2008 6/26/08 0.65% 2.85% 6.01 6.08 2,345,082 14,179,848 -38.84% 21.08% 1.46% LINCOLN VIPT SSGA INTERNATIONAL INDEX SERVICE CLASS 2008 6/26/08 0.65% 2.85% 6.36 6.43 3,478,166 22,232,589 -35.72% 18.05% 1.74% LINCOLN VIPT SSgA LARGE CAP 100 SERVICE CLASS 2008 6/26/08 0.65% 2.85% 6.93 7.01 4,737,060 33,002,221 -31.01% 9.87% 0.83% LINCOLN VIPT SSgA S&P 500 INDEX 2008 1.40% 1.80% 7.05 7.10 70,013 496,689 -38.19% -38.07% 6.15% 2007 4/27/07 1.40% 1.60% 11.41 11.47 22,682 259,980 -1.64% -1.51% 1.11% LINCOLN VIPT SSgA S&P 500 INDEX SERVICE CLASS 2008 0.65% 2.85% 6.68 7.08 9,350,393 64,897,157 -39.08% -38.06% 5.62% 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 SSgA SMALL-CAP INDEX SERVICE CLASS 2008 0.65% 2.85% 5.81 5.98 4,021,344 23,798,001 -35.96% -34.86% 1.31% 2007 6/5/07 1.10% 2.80% 9.08 9.18 733,570 6,708,346 -10.14% -0.28% 0.79%
N-39
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- LINCOLN VIPT SSgA SMALL-MID CAP 200 SERVICE CLASS 2008 6/26/08 0.65% 2.85% $ 7.18 $ 7.26 1,385,280 $ 9,999,517 -34.57% 11.96% 1.49% LINCOLN VIPT T. ROWE PRICE GROWTH STOCK SERVICE CLASS 2008 0.65% 2.80% 5.56 5.70 1,771,051 10,018,182 -43.59% -42.71% 0.00% 2007 6/1/07 1.25% 2.80% 9.85 9.94 678,322 6,726,070 -4.45% 2.43% 0.20% LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP GROWTH 2008 1.30% 2.65% 6.94 10.71 149,632 1,390,133 -44.28% -43.52% 0.00% 2007 1.30% 2.65% 15.81 19.12 166,583 2,745,922 10.62% 12.12% 0.00% 2006 1.30% 2.65% 14.19 17.02 154,402 2,284,009 6.41% 7.86% 0.00% 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% LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP GROWTH SERVICCE CLASS 2008 0.65% 2.85% 6.90 10.10 1,579,142 13,817,663 -44.53% -43.57% 0.00% 2007 1.15% 2.85% 12.22 17.94 1,103,701 17,411,255 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% LINCOLN VIPT TEMPLETON GROWTH SERVICE CLASS 2008 0.65% 2.85% 5.87 6.03 11,336,582 67,756,355 -39.61% -38.58% 2.42% 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 TURNER MID-CAP GROWTH SERVICE CLASS 2008 0.65% 2.80% 5.31 5.49 1,899,168 10,252,684 -50.83% -49.99% 0.00% 2007 6/4/07 1.10% 2.80% 10.78 10.98 1,108,808 12,033,220 1.67% 9.71% 0.00% LINCOLN VIPT UBS GLOBAL ASSET ALLOCATION 2008 1.30% 2.65% 7.73 10.81 1,511,001 15,329,718 -34.97% -34.09% 5.79% 2007 1.30% 2.65% 11.87 16.54 2,317,237 36,186,157 3.59% 5.00% 1.67% 2006 1.30% 2.65% 11.45 15.89 2,597,901 39,013,663 11.63% 13.03% 1.39% 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% LINCOLN VIPT UBS GLOBAL ASSET ALLOCATION SERVICE CLASS 2008 0.65% 2.85% 7.43 10.35 4,435,530 41,922,453 -35.26% -34.15% 6.46% 2007 1.15% 2.85% 11.28 15.75 4,099,903 59,389,377 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% LINCOLN VIPT WILSHIRE 2010 PROFILE SERVICE CLASS 2008 0.75% 2.70% 7.66 7.85 754,985 5,875,176 -26.12% -24.97% 2.27% 2007 7/11/07 1.15% 2.70% 10.37 10.47 122,994 1,280,749 0.02% 6.47% 0.41% LINCOLN VIPT WILSHIRE 2020 PROFILE SERVICE CLASS 2008 0.75% 2.80% 7.25 7.43 1,286,969 9,484,720 -29.01% -27.90% 1.65% 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 2008 0.75% 2.85% 6.94 7.09 646,887 4,561,711 -32.79% -31.84% 0.93% 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 2008 1.30% 2.85% 6.35 6.49 517,107 3,326,300 -37.43% -36.54% 0.24% 2007 7/16/07 1.30% 2.70% 10.15 10.23 39,057 397,180 -2.92% 4.57% 1.08% LINCOLN VIPT WILSHIRE AGGRESSIVE PROFILE SERVICE CLASS 2008 0.75% 2.85% 7.13 8.03 8,907,561 70,291,413 -42.29% -41.27% 0.30% 2007 1.10% 2.85% 13.16 13.69 8,376,524 113,226,460 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 2008 0.75% 2.85% 8.92 9.44 21,489,015 199,198,042 -20.94% -19.58% 2.03% 2007 1.15% 2.85% 11.23 11.75 13,219,924 153,394,187 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%
N-40
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- LINCOLN VIPT WILSHIRE MODERATE PROFILE SERVICE CLASS 2008 0.65% 2.85% $ 8.39 $ 9.01 73,977,108 $ 654,007,813 -28.87% -27.61% 1.88% 2007 1.10% 2.85% 11.98 12.47 52,232,085 642,331,531 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 SERVICEE CLASS 2008 0.65% 2.85% 7.77 8.51 48,840,768 408,610,151 -35.45% -34.31% 0.83% 2007 1.10% 2.85% 12.46 12.98 36,610,548 469,022,682 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% LORD ABBETT ALL VALUE CLASS VC 2008 12/18/08 0.75% 1.15% 10.75 10.75 3,019 32,465 1.80% 3.60% 0.41% MFS VIT CORE EQUITY SERVICE CLASS 2008 1.30% 2.65% 7.10 10.39 353,475 3,042,352 -40.91% -40.11% 0.42% 2007 1.30% 2.65% 13.49 17.47 424,313 6,074,975 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% MFS VIT GROWTH 2008 1.40% 2.35% 8.03 11.79 378,142 3,066,522 -38.87% -38.29% 0.24% 2007 1.40% 2.35% 13.00 19.24 517,426 6,774,626 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% MFS VIT GROWTH SERVICE CLASS 2008 1.15% 2.65% 4.02 11.82 934,809 6,038,525 -39.18% -38.35% 0.00% 2007 1.30% 2.65% 6.56 18.98 1,044,638 10,822,663 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% MFS VIT TOTAL RETURN 2008 1.40% 2.35% 10.55 12.11 1,434,962 17,288,570 -23.95% -23.22% 3.27% 2007 1.40% 2.35% 13.76 15.77 1,988,068 31,231,708 1.79% 2.77% 2.67% 2006 1.40% 2.35% 13.42 15.35 2,647,641 40,422,820 9.30% 10.34% 2.40% 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% MFS VIT TOTAL RETURN SERVICE CLASS 2008 0.65% 2.85% 8.32 11.24 25,474,232 256,544,245 -24.51% -23.17% 2.88% 2007 1.10% 2.85% 11.02 14.67 25,882,431 346,662,283 1.01% 2.75% 2.31% 2006 1.15% 2.85% 10.91 14.31 24,265,011 322,763,764 8.49% 10.24% 2.04% 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% MFS VIT UTILITIES 2008 1.40% 2.35% 14.01 21.62 995,022 15,767,161 -39.12% -38.54% 1.59% 2007 1.40% 2.35% 22.83 35.45 1,272,814 32,805,573 25.18% 26.12% 1.00% 2006 1.40% 2.15% 18.14 28.32 1,684,550 34,300,683 28.47% 29.44% 2.06% 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% MFS VIT UTILITIES SERVICE CLASS 2008 0.65% 2.85% 8.88 21.44 12,430,632 159,125,862 -39.56% -38.49% 1.28% 2007 1.10% 2.85% 14.44 35.18 12,469,463 266,499,135 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% NB AMT MID-CAP GROWTH 2008 1.15% 2.80% 7.52 12.00 4,977,879 51,364,563 -44.94% -44.02% 0.00% 2007 1.15% 2.80% 14.26 21.59 6,187,385 114,623,693 19.15% 21.01% 0.00% 2006 1.25% 2.80% 12.42 17.95 5,831,644 90,256,338 11.64% 13.27% 0.00% 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%
N-41
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5) ---------- ---- ------------ ------- ------- -------- -------- ----------- -------------- --------- --------- ---------- NB AMT REGENCY 2008 1.15% 2.85% $ 6.01 $10.69 5,282,840 $ 52,195,507 -47.35% -46.44% 1.13% 2007 1.15% 2.85% 11.29 20.14 6,588,064 122,165,596 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% OPPENHEIMER GLOBAL SECURITIES SERVICE CLASS 2008 12/26/08 1.65% 1.65% 11.10 11.10 916 10,166 3.71% 3.71% 0.00% PUTNAM VT GROWTH & INCOME CLASS IB 2008 1.30% 2.35% 7.63 9.43 332,327 2,633,726 -40.12% -39.49% 2.24% 2007 1.30% 2.35% 12.68 15.72 432,588 5,673,498 -8.22% -7.25% 1.33% 2006 1.30% 2.35% 13.77 17.31 518,444 7,357,174 13.39% 14.41% 1.54% 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% PUTNAM VT HEALTH SCIENCES CLASS IB 2008 1.30% 2.65% 8.92 10.59 537,709 5,006,622 -19.24% -18.15% 0.00% 2007 1.30% 2.65% 10.97 12.94 465,168 5,315,846 -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% VAN KAMPEN CAPITAL GROWTH CLASS II 2008 12/22/08 0.75% 0.75% 10.34 10.34 845 8,735 2.74% 2.74% 0.00%
(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-42 4. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2008.
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ------------------------------------------------------------------ ------------ ------------ AIM V.I. Capital Appreciation $ 286,956 $ 1,895,173 AIM V.I. Capital Appreciation Class II 68,719 949,143 AIM V.I. Core Equity 509,164 4,720,116 AIM V.I. Core Equity Class II 484,518 1,484,395 AIM V.I. International Growth 299,889 3,005,799 AIM V.I. International Growth Class II 526,821 2,448,254 ABVPSF Global Technology Class B 19,961,635 20,883,342 ABVPSF Growth and Income Class B 65,813,426 47,369,870 ABVPSF International Value Class B 89,325,443 66,232,280 ABVPSF Large Cap Growth Class B 1,398,693 6,801,739 ABVPSF Small/Mid Cap Value Class B 65,207,930 35,400,889 American Century VP Inflation Protection Class 2 210,473,015 99,811,197 American Funds Global Growth Class 2 149,371,794 53,615,395 American Funds Global Small Capitalization Class 2 125,001,904 75,218,232 American Funds Growth Class 2 567,091,631 229,045,425 American Funds Growth-Income Class 2 502,122,392 270,805,470 American Funds International Class 2 348,341,667 148,288,407 Delaware VIPT Capital Reserves Service Class 90,619,235 25,323,344 Delaware VIPT Diversified Income Service Class 228,605,716 105,355,631 Delaware VIPT Emerging Markets Service Class 150,789,011 81,374,910 Delaware VIPT High Yield 7,442,663 12,337,175 Delaware VIPT High Yield Service Class 91,081,686 63,448,173 Delaware VIPT International Value Equity 320,511 1,090,318 Delaware VIPT REIT 5,263,370 5,042,751 Delaware VIPT REIT Service Class 81,858,102 57,115,895 Delaware VIPT Small Cap Value 1,741,142 6,642,881 Delaware VIPT Small Cap Value Service Class 88,486,569 67,188,628 Delaware VIPT Trend 2,953,776 4,915,784 Delaware VIPT Trend Service Class 33,555,977 30,642,899 Delaware VIPT U.S. Growth Service Class 8,562,435 9,714,103 Delaware VIPT Value 1,734,313 4,962,423 Delaware VIPT Value Service Class 41,290,347 43,681,280 DWS VIP Equity 500 Index 1,987,605 12,447,259 DWS VIP Equity 500 Index Service Class 8,918,919 9,619,234 DWS VIP Small Cap Index 2,432,714 3,822,862 DWS VIP Small Cap Index Service Class 6,744,236 12,016,169 Fidelity VIP Contrafund Service Class 2 247,288,626 103,460,708 Fidelity VIP Equity-Income 847,737 5,677,389 Fidelity VIP Equity-Income Service Class 2 5,166,631 21,421,639 Fidelity VIP Growth 371,817 3,322,604 Fidelity VIP Growth Service Class 2 35,646,997 25,440,208 Fidelity VIP Mid Cap Service Class 2 162,550,401 50,611,404 Fidelity VIP Overseas 884,192 1,653,207 Fidelity VIP Overseas Service Class 2 42,265,429 28,543,965 FTVIPT Franklin Income Securities Class 2 261,431,313 81,011,119 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 37,183,461 21,269,776 FTVIPT Mutual Shares Securities Class 2 186,331,429 50,561,932 FTVIPT Templeton Global Income Securities Class 2 345,617,224 124,412,189 FTVIPT Templeton Growth Securities Class 2 20,250,199 40,490,460 Goldman Sachs VIT Growth & Income Service Class 38,810 9 Janus Aspen Series Balanced Service Shares 5,730,626 8,326,803 Janus Aspen Series Mid Cap Growth Service Shares 4,234,150 7,356,434 Janus Aspen Series Worldwide Growth Service Shares 235,212 1,025,782 Lincoln VIPT Baron Growth Opportunities Service Class 40,617,501 12,406,292 Lincoln VIPT Capital Growth Service Class 9,165,024 1,195,929 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 45,577,940 13,557,138 Lincoln VIPT Columbia Value Opportunities Service Class 6,684,416 1,558,234 Lincoln VIPT Delaware Bond 27,194,901 75,706,662 Lincoln VIPT Delaware Bond Service Class 264,129,437 151,375,034
N-43
AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ------------------------------------------------------------------ ------------ ------------ Lincoln VIPT Delaware Growth and Income Service Class $ 13,313,753 $ 5,388,062 Lincoln VIPT Delaware Social Awareness 2,257,008 5,628,790 Lincoln VIPT Delaware Social Awareness Service Class 14,481,022 19,062,735 Lincoln VIPT Delaware Special Opportunities Service Class 13,785,166 4,859,866 Lincoln VIPT FI Equity-Income Service Class 18,979,013 6,695,207 Lincoln VIPT Janus Capital Appreciation 684,460 1,049,053 Lincoln VIPT Janus Capital Appreciation Service Class 21,351,595 15,267,683 Lincoln VIPT Marsico International Growth Service Class 44,140,422 19,715,934 Lincoln VIPT MFS Value Service Class 97,936,529 9,421,156 Lincoln VIPT Mid-Cap Value Service Class 16,799,833 8,086,257 Lincoln VIPT Mondrian International Value 7,146,849 15,036,687 Lincoln VIPT Mondrian International Value Service Class 43,964,094 44,506,945 Lincoln VIPT Money Market 170,144,419 116,055,006 Lincoln VIPT Money Market Service Class 738,954,154 390,036,739 Lincoln VIPT SSgA Bond Index Service Class 132,545,957 11,392,406 Lincoln VIPT SSgA Developed International 150 Service Class 19,373,275 1,059,923 Lincoln VIPT SSgA Emerging Markets 100 Service Class 16,343,940 913,970 Lincoln VIPT SSgA International Index Service Class 25,329,593 1,716,906 Lincoln VIPT SSgA Large Cap 100 Service Class 38,956,958 3,236,685 Lincoln VIPT SSgA S&P 500 Index 579,727 146,082 Lincoln VIPT SSgA S&P 500 Index Service Class 75,824,453 13,474,541 Lincoln VIPT SSgA Small-Cap Index Service Class 29,117,799 4,931,826 Lincoln VIPT SSgA Small-Mid Cap 200 Service Class 13,314,574 2,215,607 Lincoln VIPT T. Rowe Price Growth Stock Service Class 11,636,758 3,301,119 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 416,725 729,781 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 13,379,392 7,917,000 Lincoln VIPT Templeton Growth Service Class 75,238,452 17,310,015 Lincoln VIPT Turner Mid-Cap Growth Service Class 22,299,926 12,661,077 Lincoln VIPT UBS Global Asset Allocation 6,157,262 14,101,268 Lincoln VIPT UBS Global Asset Allocation Service Class 33,589,054 20,323,238 Lincoln VIPT Wilshire 2010 Profile Service Class 9,467,712 3,491,213 Lincoln VIPT Wilshire 2020 Profile Service Class 13,585,692 3,847,649 Lincoln VIPT Wilshire 2030 Profile Service Class 6,417,850 1,334,415 Lincoln VIPT Wilshire 2040 Profile Service Class 6,856,748 2,574,415 Lincoln VIPT Wilshire Aggressive Profile Service Class 37,003,808 29,721,453 Lincoln VIPT Wilshire Conservative Profile Service Class 164,250,239 71,784,852 Lincoln VIPT Wilshire Moderate Profile Service Class 396,302,827 132,691,589 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 252,683,074 104,825,735 Lord Abbett All Value Class VC 31,324 3 MFS VIT Core Equity Service Class 276,651 1,138,325 MFS VIT Growth 116,246 1,701,192 MFS VIT Growth Service Class 1,827,996 3,004,411 MFS VIT Total Return 2,924,048 8,671,104 MFS VIT Total Return Service Class 83,996,775 70,537,711 MFS VIT Utilities 7,184,354 9,594,633 MFS VIT Utilities Service Class 136,354,282 97,565,258 NB AMT Mid-Cap Growth 6,750,547 26,059,971 NB AMT Regency 6,651,930 28,516,838 Oppenheimer Global Securities Service Class 9,800 -- Putnam VT Growth & Income Class IB 1,061,481 1,289,203 Putnam VT Health Sciences Class IB 3,026,494 2,329,267 Van Kampen Capital Growth Class II 8,501 --
5. INVESTMENTS The following is a summary of investments owned at December 31, 2008.
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ------------------------------------------------------------------ ---------- ------ -------------- -------------- AIM V.I. Capital Appreciation 198,811 $16.89 $ 3,357,912 $ 5,184,268 AIM V.I. Capital Appreciation Class II 120,191 16.61 1,996,367 3,139,203 AIM V.I. Core Equity 564,400 19.75 11,146,909 14,102,349
N-44
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ------------------------------------------------------------------ ---------- ------ -------------- -------------- AIM V.I. Core Equity Class II 194,241 $19.62 $ 3,811,000 $ 4,838,029 AIM V.I. International Growth 213,387 19.49 4,158,904 3,927,536 AIM V.I. International Growth Class II 189,595 19.23 3,645,908 3,941,337 ABVPSF Global Technology Class B 1,592,932 10.67 16,996,589 27,820,830 ABVPSF Growth and Income Class B 9,907,965 12.97 128,506,302 215,738,819 ABVPSF International Value Class B 8,038,272 10.93 87,858,313 176,737,939 ABVPSF Large Cap Growth Class B 750,795 18.03 13,536,831 18,336,679 ABVPSF Small/Mid Cap Value Class B 8,614,992 9.87 85,029,974 135,348,292 American Century VP Inflation Protection Class 2 23,962,119 9.90 237,224,978 249,261,615 American Funds Global Growth Class 2 15,631,337 13.88 216,962,962 331,381,893 American Funds Global Small Capitalization Class 2 15,794,828 11.03 174,216,948 324,979,399 American Funds Growth Class 2 32,960,150 33.27 1,096,584,189 1,770,078,095 American Funds Growth-Income Class 2 50,356,909 24.11 1,214,105,082 1,799,169,908 American Funds International Class 2 46,610,968 12.19 568,187,704 842,507,207 Delaware VIPT Capital Reserves Service Class 8,905,168 9.13 81,304,180 83,272,874 Delaware VIPT Diversified Income Service Class 41,712,090 9.20 383,751,231 403,122,112 Delaware VIPT Emerging Markets Service Class 12,561,843 11.24 141,195,119 255,120,756 Delaware VIPT High Yield 1,940,720 4.14 8,034,580 10,063,176 Delaware VIPT High Yield Service Class 40,097,771 4.13 165,603,794 219,250,271 Delaware VIPT International Value Equity 55,412 7.64 423,351 810,545 Delaware VIPT REIT 885,851 6.64 5,882,054 11,896,253 Delaware VIPT REIT Service Class 14,747,485 6.62 97,628,352 218,469,257 Delaware VIPT Small Cap Value 517,825 18.64 9,652,264 12,023,323 Delaware VIPT Small Cap Value Service Class 12,384,477 18.59 230,227,431 348,113,556 Delaware VIPT Trend 422,173 16.61 7,012,292 12,424,371 Delaware VIPT Trend Service Class 3,202,880 16.24 52,014,774 89,725,793 Delaware VIPT U.S. Growth Service Class 4,284,448 4.96 21,250,864 28,605,266 Delaware VIPT Value 495,202 12.83 6,353,437 8,546,141 Delaware VIPT Value Service Class 7,267,593 12.81 93,097,869 141,963,718 DWS VIP Equity 500 Index 2,531,087 9.55 24,171,883 30,544,475 DWS VIP Equity 500 Index Service Class 3,081,174 9.54 29,394,402 39,460,995 DWS VIP Small Cap Index 788,467 8.63 6,804,470 9,927,846 DWS VIP Small Cap Index Service Class 2,139,403 8.62 18,441,657 30,076,013 Fidelity VIP Contrafund Service Class 2 33,032,655 15.14 500,114,395 893,616,112 Fidelity VIP Equity-Income 579,412 13.18 7,636,644 13,306,121 Fidelity VIP Equity-Income Service Class 2 3,652,095 13.00 47,477,240 82,867,575 Fidelity VIP Growth 224,799 23.53 5,289,525 9,797,720 Fidelity VIP Growth Service Class 2 2,013,007 23.31 46,923,182 73,547,499 Fidelity VIP Mid Cap Service Class 2 11,698,517 18.12 211,977,130 353,016,688 Fidelity VIP Overseas 221,320 12.17 2,693,470 3,967,115 Fidelity VIP Overseas Service Class 2 5,969,355 12.07 72,050,111 110,577,650 FTVIPT Franklin Income Securities Class 2 31,645,881 11.34 358,864,287 519,269,646 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 5,190,628 11.75 60,989,875 101,358,463 FTVIPT Mutual Shares Securities Class 2 19,421,584 11.78 228,786,260 355,062,872 FTVIPT Templeton Global Income Securities Class 2 23,278,741 17.10 398,066,469 384,263,368 FTVIPT Templeton Growth Securities Class 2 10,203,032 8.20 83,664,864 139,122,950 Goldman Sachs VIT Growth & Income Service Class 4,885 7.99 39,031 38,801 Janus Aspen Series Balanced Service Shares 1,048,435 23.75 24,900,340 26,225,426 Janus Aspen Series Mid Cap Growth Service Shares 344,362 20.70 7,128,299 9,499,433 Janus Aspen Series Worldwide Growth Service Shares 94,744 19.10 1,809,609 2,572,190 Lincoln VIPT Baron Growth Opportunities Service Class 2,399,647 17.32 41,549,881 64,173,274 Lincoln VIPT Capital Growth Service Class 478,681 16.02 7,668,473 9,087,320 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 8,491,542 4.60 39,027,129 64,166,621 Lincoln VIPT Columbia Value Opportunities Service Class 560,571 6.82 3,824,214 5,422,453 Lincoln VIPT Delaware Bond 19,262,484 11.68 224,947,292 246,660,711 Lincoln VIPT Delaware Bond Service Class 50,538,418 11.68 590,440,334 641,494,927 Lincoln VIPT Delaware Growth and Income Service Class 859,343 20.96 18,014,409 28,044,271 Lincoln VIPT Delaware Social Awareness 577,103 22.41 12,931,146 15,674,160 Lincoln VIPT Delaware Social Awareness Service Class 1,917,354 22.39 42,927,639 56,247,873 Lincoln VIPT Delaware Special Opportunities Service Class 343,858 24.09 8,284,223 11,692,589 Lincoln VIPT FI Equity-Income Service Class 2,314,620 9.37 21,692,614 34,607,551
N-45
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ------------------------------------------------------------------ ---------- ------ -------------- -------------- Lincoln VIPT Janus Capital Appreciation 172,687 $14.15 $ 2,443,524 $ 3,156,951 Lincoln VIPT Janus Capital Appreciation Service Class 1,765,656 14.09 24,874,567 34,798,574 Lincoln VIPT Marsico International Growth Service Class 2,780,374 8.28 23,015,936 40,968,760 Lincoln VIPT MFS Value Service Class 4,705,678 17.33 81,535,290 99,144,172 Lincoln VIPT Mid-Cap Value Service Class 1,606,317 8.10 13,004,745 21,142,237 Lincoln VIPT Mondrian International Value 2,145,798 13.34 28,631,389 35,684,527 Lincoln VIPT Mondrian International Value Service Class 7,879,108 13.35 105,146,702 140,391,631 Lincoln VIPT Money Market 17,878,421 10.00 178,784,205 178,784,173 Lincoln VIPT Money Market Service Class 62,194,904 10.00 621,949,043 621,948,957 Lincoln VIPT SSgA Bond Index Service Class 12,251,135 10.27 125,806,904 121,222,894 Lincoln VIPT SSgA Developed International 150 Service Class 3,006,295 5.65 16,997,592 18,243,479 Lincoln VIPT SSgA Emerging Markets 100 Service Class 2,396,867 5.88 14,088,787 15,363,672 Lincoln VIPT SSgA International Index Service Class 3,682,417 5.96 21,958,252 23,450,352 Lincoln VIPT SSgA Large Cap 100 Service Class 4,995,650 6.56 32,791,447 35,357,409 Lincoln VIPT SSgA S&P 500 Index 79,639 6.24 496,710 649,097 Lincoln VIPT SSgA S&P 500 Index Service Class 10,324,366 6.24 64,455,019 80,201,742 Lincoln VIPT SSgA Small-Cap Index Service Class 2,071,542 11.42 23,663,226 30,388,011 Lincoln VIPT SSgA Small-Mid Cap 200 Service Class 1,450,535 6.84 9,924,558 10,935,356 Lincoln VIPT T. Rowe Price Growth Stock Service Class 945,158 10.62 10,040,418 14,508,934 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 180,828 7.69 1,390,208 1,895,429 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 1,822,775 7.58 13,818,458 20,337,389 Lincoln VIPT Templeton Growth Service Class 3,489,051 19.37 67,579,428 101,165,228 Lincoln VIPT Turner Mid-Cap Growth Service Class 1,724,909 5.95 10,259,759 19,672,108 Lincoln VIPT UBS Global Asset Allocation 1,763,393 8.69 15,330,941 24,253,026 Lincoln VIPT UBS Global Asset Allocation Service Class 4,865,121 8.70 42,307,096 68,103,835 Lincoln VIPT Wilshire 2010 Profile Service Class 743,446 7.90 5,875,450 6,970,500 Lincoln VIPT Wilshire 2020 Profile Service Class 1,255,979 7.55 9,485,155 11,420,882 Lincoln VIPT Wilshire 2030 Profile Service Class 624,664 7.30 4,561,919 5,762,395 Lincoln VIPT Wilshire 2040 Profile Service Class 494,348 6.73 3,326,470 4,168,204 Lincoln VIPT Wilshire Aggressive Profile Service Class 8,641,645 8.23 71,146,662 107,908,276 Lincoln VIPT Wilshire Conservative Profile Service Class 21,064,808 9.47 199,567,995 234,789,849 Lincoln VIPT Wilshire Moderate Profile Service Class 72,074,650 9.07 654,005,375 839,732,498 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 47,402,039 8.64 409,506,217 566,374,367 Lord Abbett All Value Class VC 2,744 11.83 32,466 31,321 MFS VIT Core Equity Service Class 294,815 10.32 3,042,488 3,624,686 MFS VIT Growth 196,377 15.62 3,067,402 5,303,152 MFS VIT Growth Service Class 392,503 15.37 6,032,769 6,793,273 MFS VIT Total Return 1,121,288 15.42 17,290,258 21,020,430 MFS VIT Total Return Service Class 16,843,256 15.24 256,691,217 331,068,695 MFS VIT Utilities 864,515 18.24 15,768,762 19,488,088 MFS VIT Utilities Service Class 8,841,661 18.01 159,238,310 231,756,542 NB AMT Mid-Cap Growth 3,182,587 16.14 51,366,953 61,281,790 NB AMT Regency 6,071,842 8.60 52,217,842 84,932,632 Oppenheimer Global Securities Service Class 508 20.02 10,166 9,800 Putnam VT Growth & Income Class IB 229,629 11.47 2,633,844 4,761,322 Putnam VT Health Sciences Class IB 453,816 11.02 5,001,055 5,419,184 Van Kampen Capital Growth Class II 867 10.07 8,735 8,501
6. CHANGES IN UNITS OUTSTANDING The change in units outstanding for the year ended December 31, 2008 is as follows:
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) --------- ---------- ------------ AIM V.I. Capital Appreciation 48,816 (296,931) (248,115) AIM V.I. Capital Appreciation Class II 6,505 (81,739) (75,234) AIM V.I. Core Equity 28,846 (465,916) (437,070) AIM V.I. Core Equity Class II 37,714 (126,381) (88,667) AIM V.I. International Growth 20,588 (205,804) (185,216) AIM V.I. International Growth Class II 25,450 (125,005) (99,555) ABVPSF Global Technology Class B 2,166,931 (2,746,430) (579,499)
N-46
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ---------- ----------- ------------ ABVPSF Growth and Income Class B 3,537,908 (4,552,807) (1,014,899) ABVPSF International Value Class B 10,668,626 (8,803,038) 1,865,588 ABVPSF Large Cap Growth Class B 218,499 (913,478) (694,979) ABVPSF Small/Mid Cap Value Class B 4,446,503 (2,670,337) 1,776,166 American Century VP Inflation Protection Class 2 20,831,729 (11,741,771) 9,089,958 American Funds Global Growth Class 2 10,988,780 (5,724,689) 5,264,091 American Funds Global Small Capitalization Class 2 6,791,766 (5,426,788) 1,364,978 American Funds Growth Class 2 39,795,079 (27,653,342) 12,141,737 American Funds Growth-Income Class 2 44,223,420 (31,131,637) 13,091,783 American Funds International Class 2 18,381,410 (14,549,165) 3,832,245 Delaware VIPT Capital Reserves Service Class 9,100,718 (2,856,688) 6,244,030 Delaware VIPT Diversified Income Service Class 22,626,845 (13,336,868) 9,289,977 Delaware VIPT Emerging Markets Service Class 7,592,149 (5,333,401) 2,258,748 Delaware VIPT High Yield 628,277 (1,042,951) (414,674) Delaware VIPT High Yield Service Class 7,547,952 (5,880,748) 1,667,204 Delaware VIPT International Value Equity 10,589 (56,731) (46,142) Delaware VIPT REIT 45,208 (205,209) (160,001) Delaware VIPT REIT Service Class 1,606,990 (3,563,149) (1,956,159) Delaware VIPT Small Cap Value 45,002 (332,479) (287,477) Delaware VIPT Small Cap Value Service Class 7,169,680 (5,878,973) 1,290,707 Delaware VIPT Trend 24,265 (315,027) (290,762) Delaware VIPT Trend Service Class 1,705,655 (2,934,520) (1,228,865) Delaware VIPT U.S. Growth Service Class 927,737 (960,467) (32,730) Delaware VIPT Value 44,195 (419,241) (375,046) Delaware VIPT Value Service Class 2,998,174 (4,064,265) (1,066,091) DWS VIP Equity 500 Index 166,691 (1,226,210) (1,059,519) DWS VIP Equity 500 Index Service Class 893,658 (791,288) 102,370 DWS VIP Small Cap Index 86,326 (245,751) (159,425) DWS VIP Small Cap Index Service Class 345,098 (943,819) (598,721) Fidelity VIP Contrafund Service Class 2 20,920,312 (10,802,255) 10,118,057 Fidelity VIP Equity-Income 71,497 (485,211) (413,714) Fidelity VIP Equity-Income Service Class 2 451,480 (1,801,194) (1,349,714) Fidelity VIP Growth 40,577 (323,102) (282,525) Fidelity VIP Growth Service Class 2 3,539,258 (2,792,225) 747,033 Fidelity VIP Mid Cap Service Class 2 12,896,841 (6,559,578) 6,337,263 Fidelity VIP Overseas 17,255 (116,183) (98,928) Fidelity VIP Overseas Service Class 2 2,223,646 (2,217,163) 6,483 FTVIPT Franklin Income Securities Class 2 28,062,414 (13,029,544) 15,032,870 FTVIPT Franklin Small-Mid Cap Growth Securities Class 2 2,830,323 (2,530,520) 299,803 FTVIPT Mutual Shares Securities Class 2 21,488,432 (8,153,380) 13,335,052 FTVIPT Templeton Global Income Securities Class 2 32,198,682 (14,600,591) 17,598,091 FTVIPT Templeton Growth Securities Class 2 900,528 (3,124,690) (2,224,162) Goldman Sachs VIT Growth & Income Service Class 3,757 -- 3,757 Janus Aspen Series Balanced Service Shares 238,727 (607,830) (369,103) Janus Aspen Series Mid Cap Growth Service Shares 206,594 (447,101) (240,507) Janus Aspen Series Worldwide Growth Service Shares 18,682 (86,880) (68,198) Lincoln VIPT Baron Growth Opportunities Service Class 4,862,878 (1,831,448) 3,031,430 Lincoln VIPT Capital Growth Service Class 1,301,578 (175,099) 1,126,479 Lincoln VIPT Cohen & Steers Global Real Estate Service Class 7,120,040 (2,677,665) 4,442,375 Lincoln VIPT Columbia Value Opportunities Service Class 793,160 (243,529) 549,631 Lincoln VIPT Delaware Bond 1,948,398 (6,082,512) (4,134,114) Lincoln VIPT Delaware Bond Service Class 28,198,428 (18,938,806) 9,259,622 Lincoln VIPT Delaware Growth and Income Service Class 1,126,223 (649,714) 476,509 Lincoln VIPT Delaware Social Awareness 98,340 (422,481) (324,141) Lincoln VIPT Delaware Social Awareness Service Class 1,077,882 (1,542,143) (464,261) Lincoln VIPT Delaware Special Opportunities Service Class 1,775,576 (676,077) 1,099,499 Lincoln VIPT FI Equity-Income Service Class 1,925,369 (839,932) 1,085,437 Lincoln VIPT Janus Capital Appreciation 56,671 (76,236) (19,565) Lincoln VIPT Janus Capital Appreciation Service Class 1,857,192 (1,274,914) 582,278 Lincoln VIPT Marsico International Growth Service Class 4,845,811 (2,573,950) 2,271,861 Lincoln VIPT MFS Value Service Class 13,193,798 (1,774,673) 11,419,125 Lincoln VIPT Mid-Cap Value Service Class 2,341,952 (1,347,951) 994,001
N-47
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ---------- ----------- ------------ Lincoln VIPT Mondrian International Value 166,355 (775,208) (608,853) Lincoln VIPT Mondrian International Value Service Class 2,391,836 (2,951,614) (559,778) Lincoln VIPT Money Market 18,321,960 (13,496,913) 4,825,047 Lincoln VIPT Money Market Service Class 79,563,380 (46,918,449) 32,644,931 Lincoln VIPT SSgA Bond Index Service Class 13,977,577 (1,870,213) 12,107,364 Lincoln VIPT SSgA Developed International 150 Service Class 2,964,715 (227,306) 2,737,409 Lincoln VIPT SSgA Emerging Markets 100 Service Class 2,541,299 (196,217) 2,345,082 Lincoln VIPT SSgA International Index Service Class 3,866,572 (388,406) 3,478,166 Lincoln VIPT SSgA Large Cap 100 Service Class 5,316,414 (579,354) 4,737,060 Lincoln VIPT SSgA S&P 500 Index 64,197 (16,866) 47,331 Lincoln VIPT SSgA S&P 500 Index Service Class 9,488,623 (1,862,482) 7,626,141 Lincoln VIPT SSgA Small-Cap Index Service Class 4,186,582 (898,808) 3,287,774 Lincoln VIPT SSgA Small-Mid Cap 200 Service Class 1,681,052 (295,772) 1,385,280 Lincoln VIPT T. Rowe Price Growth Stock Service Class 1,558,514 (465,785) 1,092,729 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 31,870 (48,821) (16,951) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Service Class 1,136,281 (660,840) 475,441 Lincoln VIPT Templeton Growth Service Class 9,694,515 (3,012,986) 6,681,529 Lincoln VIPT Turner Mid-Cap Growth Service Class 2,316,641 (1,526,281) 790,360 Lincoln VIPT UBS Global Asset Allocation 217,332 (1,023,568) (806,236) Lincoln VIPT UBS Global Asset Allocation Service Class 2,165,647 (1,830,020) 335,627 Lincoln VIPT Wilshire 2010 Profile Service Class 1,016,982 (384,991) 631,991 Lincoln VIPT Wilshire 2020 Profile Service Class 1,518,172 (442,139) 1,076,033 Lincoln VIPT Wilshire 2030 Profile Service Class 739,971 (183,182) 556,789 Lincoln VIPT Wilshire 2040 Profile Service Class 834,718 (356,668) 478,050 Lincoln VIPT Wilshire Aggressive Profile Service Class 3,256,414 (2,725,377) 531,037 Lincoln VIPT Wilshire Conservative Profile Service Class 16,026,276 (7,757,185) 8,269,091 Lincoln VIPT Wilshire Moderate Profile Service Class 38,976,568 (17,231,545) 21,745,023 Lincoln VIPT Wilshire Moderately Aggressive Profile Service Class 24,513,514 (12,283,294) 12,230,220 Lord Abbett All Value Class VC 5,266 (2,247) 3,019 MFS VIT Core Equity Service Class 25,765 (96,603) (70,838) MFS VIT Growth 13,053 (152,337) (139,284) MFS VIT Growth Service Class 239,676 (349,505) (109,829) MFS VIT Total Return 67,078 (620,184) (553,106) MFS VIT Total Return Service Class 6,439,764 (6,847,963) (408,199) MFS VIT Utilities 183,527 (461,319) (277,792) MFS VIT Utilities Service Class 6,824,308 (6,863,139) (38,831) NB AMT Mid-Cap Growth 571,914 (1,781,420) (1,209,506) NB AMT Regency 623,345 (1,928,569) (1,305,224) Oppenheimer Global Securities Service Class 916 -- 916 Putnam VT Growth & Income Class IB 20,835 (121,096) (100,261) Putnam VT Health Sciences Class IB 290,614 (218,073) 72,541 Van Kampen Capital Growth Class II 845 -- 845
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
N-48
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ---------- ----------- ------------ 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 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 Turner 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
N-49
UNITS UNITS NET INCREASE ISSUED REDEEMED (DECREASE) ---------- ----------- ------------ Lincoln VIPT SSgA S&P 500 Index 24,882 (2,200) 22,682 Lincoln VIPT SSgA S&P 500 Index Service Class 2,440,264 (716,012) 1,724,252 Lincoln VIPT SSgA 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 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 Columbia 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 Growth 27,636 (197,720) (170,084) MFS VIT 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)
N-50 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, 2008, the related statement of operations for the year or period then ended, and the related statements of changes in net assets for each of the two years in the period then ended, or for those sub-accounts operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Variable Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of in- vestments owned as of December 31, 2008, by correspondence with the fund companies, or their transfer agent, as applicable. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting Lincoln Life Variable Annuity Account N at December 31, 2008, the results of their operations for the year or period then ended, and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 13, 2009 N-51 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, 2008 Statement of Operations - Year ended December 31, 2008 Statements of Changes in Net Assets - Years ended December 31, 2008 and 2007 Notes to Financial Statements - December 31, 2008 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, 2008 and 2007 Consolidated Statements of Income - Years ended December 31, 2008, 2007, and 2006 Consolidated Statements of Shareholder's Equity - Years ended December 31, 2008, 2007, and 2006 Consolidated Statements of Cash Flows - Years ended December 31, 2008, 2007, and 2006 Notes to Consolidated Financial Statements - December 31, 2008 Report of Independent Registered Public Accounting Firm (b) List of Exhibits (1) Resolution of Board of Directors and Memorandum from the President of The Lincoln National Life Insurance Company authorizing establishment of the Variable Account are incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-40937) filed on November 24, 1997. (2) Not Applicable. (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) Wholesaling Agreement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (c) Amendment to Selling Group Agreement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (d) 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. (e) Form of Amendment to Wholesaling Agreement between Lincoln National Life Insurance Company and Lincoln Financial Distributors, Inc. incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-40937) filed on April 12, 2001. (f) Selling Group Agreement for ChoicePlus Assurance incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2004. (g) ChoicePlus Selling Agreement with Affiliates (11/03) incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2004. (h) 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 Variable Annuity Contract incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-40937) filed on September 3, 1998. (b) ChoicePlus Settlement Contract Rider incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 19, 2000. (c) ChoicePlus Form of Income Contract Rider incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-40937) filed on September 3, 1998. (d) ChoicePlus Nursing Care Waiver of Surrender/Withdrawal Charges Rider incorporated herein by reference to Post-Effective Amendment No.3 (File No. 333-40937) filed on April 29, 1999. (e) ChoicePlus Section 403(b) Annuity Endorsement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (f) ChoicePlus Section 457 Government Deferred Compensation Plan Endorsement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (g) ChoicePlus IRA Contract Amendment incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (h) ChoicePlus Roth IRA Endorsement incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (i) ChoicePlus Contract Amendment incorporated herein by reference to Post-Effective Amendment No. 3 (File No. 333-40937) filed on April 29, 1999. (j) ChoicePlus Contract Amendment (Definitions) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 19, 2000. (k) ChoicePlus Contract Amendment (Death Benefit) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 1, 2000. (l) ChoicePlus Contract Amendment (CRT) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 19, 2000. (m) ChoicePlus Contract Amendment (AG) incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-40937) filed on April 19, 2000. (n) ChoicePlus Estate Enhancement Benefit Rider incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-40937) filed on April 12, 2001. (o) ChoicePlus and ChoicePlus II Income4Life Solution (IRA) Rider incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-40937) filed on April 19, 2002. (p) ChoicePlus and ChoicePlus II Income4Life Solution (NQ) Rider incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-40937) filed on April 19, 2002. (q) ChoicePlus II Annuity Contract incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (r) ChoicePlus II Annuity Payment Option Rider incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (s) ChoicePlus II Interest Adjusted Fixed Account Rider incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (t) ChoicePlus II 1% Step-up Death Benefit Rider incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (u) ChoicePlus II Estate Enhancement Death Benefit Rider incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (v) ChoicePlus II 1% Estate Enhancement Death Benefit Rider incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. B-2 (w) Variable Annuity Income Rider (I4LA-NQ) incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-40937) filed on October 11, 2002. (x) Accumulation Benefit Enhancement (ABE) incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-40937) filed on April 19, 2002. (y) Estate Enhancement Benefit Rider w/5% Step-Up Death Benefit incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-40937) filed on April 19, 2002. (z) Variable Annuity Income Rider (I4LA-Q) incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-40937) filed on October 11, 2002. (aa) 28877-E IRA Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (bb) 28877 IRA Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (cc) 5305 IRA Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (dd) Contract Benefit Data (I4LA-CB 8/02) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (ee) Contract Benefit Data (I4LA-CB-PR) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (ff) Variable Annuity Income Rider (I4LA-Q) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (gg) Variable Annuity Income Rider (I4LA-NQ) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (hh) Variable Annuity Income Rider (I4LA-NQ) Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (ii) Variable Annuity Income Rider (I4LA-Q-PR) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (jj) Variable Annuity Income Rider (I4LA-NQ-PR) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (kk) 32793 GMWB Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (ll) ABE prorate Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (mm) 1% stepup and EEB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (nn) EEB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (oo) 1% stepup and DB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (pp) EGMDB prorate Rider incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (qq) GOP prorate incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-40937) filed on April 24, 2003. (rr) Variable Annuity Income Rider (I4L-NQ-PR 8/03) incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2004. (ss) Variable Annuity Income Rider (I4L-NQ 8/03) incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2004. (tt) Variable Annuity Income Rider (I4L-Q-PR 8/03) incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2003. B-3 (uu) (Variable Annuity Income Rider (I4L-Q 8/03) incorporated herein by reference to Post-Effective Amendment No. 17 (File No. 333-40937) filed on April 15, 2003. (vv) Variable Annuity Rider (32793 HWM 4/04) incorporated herein by reference to Post-Effective Amendment No. 15 (File No. 333-18419) filed on May 28, 2004. (ww) 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. (xx) 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. (yy) 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. (zz) 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. (aaa) 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. (bbb) Guaranteed Income Benefit Rider (GIB 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 19, 2006. (ccc) Guaranteed Income Benefit Rider (IGIB 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 19, 2006. (ddd) Contract Benefit Data (CBD 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 19, 2006. (eee) Allocation Amendment (AR503 1/06) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-40937) filed on April 19, 2006. (fff) 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 19, 2006. (ggg) 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 19, 2006. (hhh) Variable Annuity Rider (32793 7/06) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on December 21, 2006. (iii) Variable Annuity Payment Option Rider (I4LA-Q 1/07) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on April 13, 2007. (jjj) Variable Annuity Death Benefit Rider (DB-3 1/06) incorporated herein by reference to Post-Effective Amendment No. 25 (File No. 333-40937) filed on April 13, 2007. (kkk) 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. (jjj) Variable Annuity Living Benefits Rider (AR-512 1/09) incorporated herein by reference to Post-Effective Amendment No. 26 (File No. 333-63505) filed on April 3, 2009. (kkk) Variable Annuity Living Benefits Rider (AR-512P 1/09) incorporated herein by reference to Post-Effective Amendment No. 26 (File No. 333-63505) filed on April 3, 2009. (lll) Guaranteed Income Benefit Rider (AGIB 6/08) incorporated herein by reference to Post-Effective Amendment No. 26 (File No. 333-63505) filed on April 3, 2009. (mmm) Section 403(b) Annuity Endorsement (32481-I-12/08) incorporated herein by reference to Post-Effective Amendment No. 26 (File No. 333-63505) filed on April 3, 2009. (5) (a) ChoicePlus Application incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-40937) filed on November 25, 1997. (b) ChoicePlus II Application incorporated herein by reference to Post-Effective Amendment No. 9 (File No. 333-40937) filed on August 8, 2001. (c) ChoicePlus Assurance (B Share) Application (CPAB 1/08) incorporated herein by reference to Post-Effective Amendment No. 28 (File No. 333-40937) filed on April 10, 2008. B-4 (6) (a) Articles of Incorporation of The Lincoln National Life Insurance Company incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-04999) filed on September 24, 1996. (b) By-Laws of The Lincoln National Life Insurance Company incorporated herein by reference to Post-Effective Amendment No. 3 on Form N-6 (File No. 333-118478) filed on April 5, 2007. (7) (a) Automatic Indemnity Reinsurance Agreement Amended and Restated as of 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 Investment VIT Funds incorporated herein by reference to Post-Effective Amendment No. 21 (File No. 333-68842) filed on April 3, 2009. (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. 21 (File No. 333-68842) filed on April 3, 2009. (v) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 21 (File No. 333-68842) filed on April 3, 2009. (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. 26 (File No. 333-63505) filed on April 3, 2009. (ix) AllianceBernstein Variable Products Series Fund incorporated herein by reference to Post-Effective Amendment No. 21 (File No. 333-68842) filed on April 3, 2009. (x) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 21 (File No. 333-68842) filed on April 3, 2009. (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. (xiv) DWS Variable Series Funds II (To Be Filed by Amendment) (xv) BlackRock Variable Series Funds, Inc. (To Be filed by Amendment) (xvi) PIMCO Variable Insurance Trust (To Be Filed by Amendment) (b) Rule 22c-2 Agreements between The Lincoln National Life Insurance Company and: (i) AIM Variable Insurance Funds incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (ii) American Century Investments Variable Products incorporated herein by reference to Post-Effective Amendment No. 29 (File No. 333-61554) filed on March 16, 2009. (iii) American Funds Insurance Series incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. B-5 (iv) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 29 (File No. 333-61554) filed on March 16, 2009. (v) Fidelity Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (vi) Franklin Templeton Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (vii) Janus Aspen Series incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (viii) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (ix) MFS Variable Insurance Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (x) Neuberger Berman Advisers Management Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (xi) Putnam Variable Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008. (c) Accounting and Financial Administration Services Agreement among Mellon Bank, N.A., The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-147673) filed on November 28, 2007. (9) (a) Opinion and Consent of Jeremy Sachs, Senior Counsel of The Lincoln National Life Insurance Company as to the legality of securities being issued incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-40937) filed on September 3, 1998. (b) Opinion and Consent of Mary Jo Ardington, Counsel of The Lincoln National Life Insurance Company as to the legality of securities being issued incorporated herein by reference to Post-Effective Amendment No. 8 (File No. 333-40937) 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. 14 (File No. 333-40937) filed April 24, 2003. (10) (a) Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (b) Power of Attorney - Principal Officers and Directors of The Lincoln National Life Insurance Company (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. 20 (File No. 333-61554) filed on March 16, 2009. Item 25. Directors and Officers of the Depositor The following list contains the officers and directors of The Lincoln National Life Insurance Company who are engaged directly or indirectly in activities relating to Lincoln Life Variable Annuity Account N as well as the contracts. The list also shows The Lincoln National Life Insurance Company's executive officers. B-6
Name Positions and Offices with Depositor ------------------------- --------------------------------------------------------------- Dennis R. Glass** President and Director Chuck C. Cornelio** Executive Vice President, Chief Administrative Officer Frederick J. Crawford** Executive Vice President, Chief Financial Officer and Director Larry A. Samplatsky*** Vice President and Chief Compliance Officer 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* Vice President and Treasurer C. Suzanne Womack** Second Vice President and Secretary
* 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 28, 2009 there were 123,801 contract owners under Account N. Item 28. Indemnification (a) Brief description of indemnification provisions. In general, Article VII of the By-Laws of The Lincoln National Life Insurance Company (Lincoln Life) provides that Lincoln Life will indemnify certain persons against expenses, judgments and certain other specified costs incurred by any such person if he/she is made a party or is threatened to be made a party to a suit or proceeding because he/she was a director, officer, or employee of Lincoln Life, as long as he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of, or act opposed to the best interests of, Lincoln Life. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officers, and employees of Lincoln Life in connection with suits by, or in the right of, Lincoln Life. Please refer to Article VII of the By-Laws of Lincoln Life (Exhibit no. 6(b) hereto) for the full text of the indemnification provisions. Indemnification is permitted by, and is subject to the requirements of, Indiana law. (b) Undertaking pursuant to Rule 484 of Regulation C under the Securities Act of 1933: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 28(a) above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 29. Principal Underwriter (a) Lincoln Financial Distributors, Inc. ("LFD") currently serves as Principal Underwriter for: Lincoln National Variable Annuity Fund A (Group & Individual); Lincoln National Variable Annuity Account C; Lincoln National Flexible Premium Variable Life B-7 Account D; Lincoln National Variable Annuity Account E; Lincoln National Flexible Premium Variable Life Account F; Lincoln National Flexible Premium Variable Life Account G; Lincoln National Variable Annuity Account H; Lincoln Life & Annuity Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life Account J; Lincoln Life Flexible Premium Variable Life Account K; Lincoln National Variable Annuity Account L; Lincoln Life & Annuity Variable Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M; Lincoln Life & Annuity Flexible Premium Variable Life Account M; Lincoln Life Variable Annuity Account N; Lincoln New York Account N for Variable Annuities; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible Premium Variable Life Account R; LLANY Separate Account R for Flexible Premium Variable Life Insurance; Lincoln Life Flexible Premium Variable Life Account S; LLANY Separate Account S for Flexible Premium Variable Life Insurance; Lincoln Life Variable Annuity Account T; Lincoln Life Variable Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account Y and Lincoln Life & Annuity Flexible Premium Variable Life Account Y. (b) Officers and Directors of Lincoln Financial Distributors, Inc.:
Name Positions and Offices with Underwriter ------------------------ ------------------------------------------------ Wilford H. Fuller* President, Chief Executive Officer and Director David M. Kittredge* Senior Vice President Randal J. Freitag* Vice President and Treasurer Patrick J. Caulfield** Vice President and Chief Compliance Officer Joel Schwartz* Vice President and Director James Ryan* Vice President and Director Keith J. Ryan*** Vice President and Chief Financial Officer Linda E. Woodward*** Secretary
* Principal Business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087 ** Principal Business address is 350 Church Street, Hartford, CT 06103 *** Principal Business address is 1300 S. Clinton Street, Ft. Wayne, IN 46802 (c) N/A Item 30. Location of Accounts and Records All accounts, books, and other documents, except accounting records, required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by The Lincoln National Life Insurance Company, 1300 South Clinton Street, Fort Wayne, Indiana 46802. The accounting records are maintained by The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258. Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) Registrant undertakes that it will include either (1) as part of any application to purchase a Certificate or an Individual Contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or a similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to Lincoln Life at the address or phone number listed in the Prospectus. (d) Lincoln Life hereby represents that the fees and charges deducted under the contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Lincoln Life. (e) Registrant hereby represents that it is relying on the American Council of Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to Contracts used in connection with retirement plans meeting the requirements of Section 403(b) of the Internal Revenue Code, and represents further that it will comply with the provisions of paragraphs (1) through (4) set forth in that no-action letter. B-8 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. 31 to the Registration Statement to be signed on its behalf, in the City of Fort Wayne, and State of Indiana on this 14th day of April, 2009. Lincoln Life Variable Annuity Account N (Registrant) Lincoln ChoicePlus, Lincoln ChoicePlus II, and Lincoln ChoicePlus Assurance (B Share) By: /s/ Delson R. Campbell ------------------------------------ Delson R. Campbell Assistant Vice President, The Lincoln National Life Insurance Company (Title) THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Depositor) By: /s/ Brian A. Kroll ------------------------------------ Brian A. Kroll (Signature-Officer of Depositor) Vice President, The Lincoln National Life Insurance Company (Title)
(b) As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in their capacities indicated on April 14, 2009. Signature Title * President and Director (Principal Executive Officer) ------------------------------ Dennis R. Glass * Executive Vice President, Chief Financial Officer and Director ------------------------------ (Principal Financial Officer) Frederick J. Crawford * Executive Vice President and Chief Adminstrative Officer ------------------------------ Charles C. Cornelio * 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 *By:/s/ Delson R. Campbell Pursuant to a Power of Attorney --------------------------- Delson R. Campbell
B-9